Answer only 18 of the first 27 questions

1. XYZ's operating margin is 15%, 14%, 12%, 8% for years 1,2,3,4 respectively. Where would you look to see if this is being cause by external factors or by internal factors? Be specific.

2. ABC's capital turnover ratio 1.5x's; 1.6x's, 1.7x's, 1.8x's for years 1,2,3,4 respectively. How could you tell if this trend will continue in the future? What does this trend in the capital turnover indicate to the analyst? Be specific.

3. When projecting future years, how should (or even should) the analyst project revenue growth from currency effects?

4. Company A and Company B are equal in every way and have equal competitive positions, projects, and starting positions. Management of Company A use a five year forecasting period and Company B uses a 10 year forecasting period. Which should have a higher net present value of future free cash flows (if any)?

5. Company A and Company B are equal in every way and have equal competitive positions, projects, and starting positions. The only difference is Company A has a lower weighted average cost of capital than Company B. Which company should have the higher intrinsic value?

6. What variable(s) determine how long the competitive advantage period is for a company or product?

7. What rate of return on new invested capital would you use if you believe the company's competitive advantage has expired and the company's products (including new projects) are commoditized (and equal with others in the industry)?

8. In the section on naïve base year extrapolation the authors make the point that the increase in working capital should be what?

9. If you are using a multiples approach to estimate continuing value should you use the multiple for the company today or at the end of the forecasting period? What could account for a change in the two multiples?

10. When could you make the case to use liquidation values?

11. What are the weaknesses of using replacement cost?

12. What are the two most common sources of capital to most firms?

13. How can you improve the predictive ability of beta?

14. Most researchers use what index when measuring betas?

15. Using the Fama and French three factor model should big companies (in market capitalization) or small companies have higher equity returns? Why might this be the case?

16. Company A has a market value per share of $20 and a book value of $4 per share. Company B has a market value of $10 per share and a book value of $10 per share. Using the Fama and French three factor model, which company should have higher equity returns? Why might this be the case?

17. Should AAA rated bonds or BBB rated bonds have higher yield spreads?

18. In simple terms, what is an interest tax shield?

19. What non-financial attribute is important in predicting a company's target capital structure?

20. Why do companies use a mid-year adjustment when discounting future free cash flows?

21. If you agree with the company's warranty liability estimates, do you need to do any additional adjustments to the projections or deductions from the value of the company? Or nothing at all.

22. What do you do with "in the money" executive stock options when calculating the value of a company?

23. What types of companies would have less exposure to broad economic conditions?

24. Where would you look on the financial statements to determine if your company currently has a competitive advantage?

25. How can you tell if your company has the internal capabilities necessary to achieve your projections?

26. How would you assess if your company has the financial capabilities necessary to achieve your projections?

27. What is the difference between scenario analysis and sensitivity analysis?

Please answer all of the following problems:

1. Hannibal Corp. has a cost of equity of 11%, and an after tax cost of debt of 6%. Using market values, Hannibal's debt is 30% of the value of the firm and its equity is 70% of the value of the firm. What is the weighted average cost of capital?

2. Dexter Corp. can borrow at 7% and is has a 39% marginal tax rate. What is the after tax cost of debt?

3. Columbia Corporation has a beta of 1.8, the risk free rate is expected to be 4.5% and the market risk premium is expected to be 5%. Using the Capital Asset Pricing Model, what is the after tax cost of equity?

4. Quincy Corp. expects NOPLAT of $2,800,000 in the first year after the forecast period (or the first year of continuing value period. In addition Bo expects growth of 2% during the continuing value period, return on new invested capital of 10%, and a weighted average cost of capital of 8%. Using the formula on page 214 of the text, please calculate the continuing value.

5. St Louis Corp. expects free cash flows of $2,000,000, $1,200,000, $1,400,000, $1,800,000, $1,500,000, in years 1,2 3,4, 5 respectively. In addition, Go has a continuing value of $2,000,000 at the end of year 5 and a cost of capital of 8%. Assuming year end cash flows, please bring these cash flows to present discounting at the weighted average cost of capital and place the answer below as the enterprise value.

6. Perryville Corp. has an enterprise value of $5,000,000, long term debt of $800,000, and an under-funded pension obligation of $600,000. If Lo has 180,000 shares outstanding (and no shares under option), please compute the intrinsic value per common share.

7. Assume the same information as the prior problem. In addition, Perryville Corp. has 60,000 shares under option and "in the money". Please use the denominator method or exercise value approach on pages 289-290 in the book, and assume that all 60,000 option will be exercise (with no proceeds - because future grant will offset the proceeds). In addition, Perryville issued an additional 10,000 shares and the $1,000,000 in cash from the sale is added to the $5,000,000 enterprise value for a new enterprise value of $6,000,000. What is the new intrinsic value per common share?

For each of the following, what should happen to the equity value of a company if the following takes place? (hold all other variables constant):

8. The competitive advantage period increases for 5 years to 8 years - the equity value would increase / decrease (underline one)

9. General market rates of interest increase due to greater risk aversion - the equity value would increase / decrease (underline one)

10. The company moves to a production method that requires more working capital -- the equity value would increase / decrease

11. The company awards an increasing level of stock options to executives (without a commensurate increase in share price) -- the equity value would increase / decrease

12. The company moves to a delivery system that requires additional investment in plant property and equipment -- the equity value would increase / decrease

13. The company matures to a safer company and a lower cost of capital -- the equity value would increase / decrease

14. The company product and industry is expected to enjoy above normal growth rates due to a shift in consumer tastes and preferences -- the equity value would increase / decrease