Practice Exercise I. Spring 2024 – Corporate Finance for MSGB students
Suggestion: For the first round, cover the solution with a paper as you try do the exercise without referring to note first. In the second round, you can do it with notes. Finally, uncover the solution and compare your answers.
Solution in red shows the calculation steps, not necessarily the final answers. This practice is not meant to reflect midterm content, but to sharpen your financial skills.
Exercise
1. A firm has ROE of 18% with 60M in Asset and 20M in Equity. What would its ROE be if it has no debt? Assume profit margin stays the same.
2. Calculate the fixed charge coverage ratio if interest expense is 100, lease is 40, and EBIT is 300. And tax is 20%.
3. How much would the individual receive after all taxes if a corporation earns $100 and pay all out to dividend when the corporate tax is 30% and the individual tax is 40%?
4. What does a high asset turnover suggest?
5. What is ROE if EBIT is 120 and interest expense is 20? Assume tax is 30% and asset is 800 and liability is 200?
6. The following is selected data for a firm for 2019
Revenue =100M
Operating cost =40M
Percent of operating cost being variable = .7
Fixed cost that required cash payment = 10M
Interest expense =20M
a) Compute the required or critical level of revenue or minimum level of revenue needed to generate sufficient earnings to pay interest.
b) How many percent can revenue decline before hitting the required or critical level?
c) In general, a firm with a stronger or higher interest coverage will also have a higher critical sales decline percentage. Give one possible reason that makes a firm to have a low critical sales decline percentage.
7. Calculate the book value of the stock if the Asset of Corporation is 200M and Liability 50 M, and there are 30M common shares outstanding. Will the market value be normally higher? Why?
8. Give two examples of action or event that can cause operating margin to rise?
9. Calculate the amount of the monthly installments (payable at end of each month) to pay off a $100,000 loan in 60 months. The Annual Percentage Rate of the loan is 6%.
Formula:
10. Consider the following two projects
|
Project
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Discount Rate
|
|
A
|
-100
|
40
|
50
|
60
|
N/A
|
.15
|
|
B
|
-73
|
30
|
30
|
30
|
30
|
.15
|
a. Calculate the NPV of project A. Negative means paying and positive means receiving.
b. If the discount rate is 12% instead, would that make the NPV higher or lower?
11. If the Cash flow Statement for 2019 highlights the followings:
CF from peration =20M,
CF from Investment Activities = -3M and
CF from Financing Activities = 5M.
If the Cash Balance for 2019 in Balance Sheet is 38M, what was the cash balance for 2018?
12. What is the after tax return earned from a corporate bond yielding 18% for a person with 20% average tax rate but 30% marginal tax rate?
13. Bond Valuation. Assume the following information for an existing bond that provides annual coupon payments:
Par value = $1,000
Coupon rate = 11%
Maturity = 4 years
Required rate of return by investors = 11%
a. What is the present value of the bond?
b. If the required rate of return by investors were 14 percent instead of 11 percent, what would be the present value of the bond?
c. If the required rate of return by investors were 9 percent, what would be the present value of the bond?
14. Valuing a Zero-Coupon Bond. A zero coupon bond pays no coupon. It only pays $1,000 par at maturity.
Assume that you require a 14 percent return on a zero-coupon bond with a par value of $1,000 and six years to maturity. What is the price you should be willing to pay for this bond?
15. Epiphany Industries has the following data for the last three years:
|
Year
|
0
|
1
|
2
|
3
|
|
Sales (Revenues)
|
|
100,000
|
100,000
|
100,000
|
|
- Cost of Goods Sold (50% of Sales)
|
|
50,000
|
50,000
|
50,000
|
|
- Depreciation
|
|
30,000
|
30,000
|
30,000
|
|
= EBIT
|
|
20,000
|
20,000
|
20,000
|
|
Taxes (35%)
|
|
7000
|
7000
|
7000
|
|
|
|
|
|
|
Assume interest expense is zero.
How much is the operating margin and profit margin in Year 1?
16 . Corporation ABC has 100,000 Equity and 50,000 Debt. What is the equity multiplier?
17. What does a high profit margin suggest?
18. What is BEP if EBIT is 120 and liabilities totaled 400 and equity totaled 600. Assume tax is 30%?
19. Estimate the yield of a 3 year 10% coupon bond selling at 1051 using trial and error with Excel.
20.
|
|
Firm Statistics
|
|
Asset
|
400M
|
|
Liability
|
120M
|
|
EBIT
|
100M
|
|
Interest expense
|
12M
|
|
Tax rate
|
.2
|
|
Share price
|
24
|
|
Shares outstanding
|
28M
|
|
Interest rate
|
8%
|
Based on the data for the firm in the above table, calculate earnings per share EPS