Practice Questions - Eqty2
Practice Questions - Eqty2
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Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $322,570
B. $307,895
C. $311,010
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Daniel Hernandez
Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $487,378
B. $404,878
C. $475,868
Daniel Hernandez
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EBITDA = $1,550,950
Interest expense = $375,200
Fixed capital expenditures = $985,185
Depreciation expense = $350,400
Working capital investment = $220,650
Net borrowing = $195,280
Cra 64 #38 100
Given a tax rate of 35%, free cash flow available to holders of common equity is closest to:
A. $120,203
B. -$123,680
C. $419,155
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Daniel Hernandez
Daniel Hernandez
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EBITDA = $1,248,950
Interest expense = $285,250
Fixed capital expenditures = $675,285
Depreciation expense = $250,455
Working capital investment = $180,655
Cra 64 #38 100
Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $206,333
B. $43,537
C. $228,950
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Daniel Hernandez
Daniel Hernandez
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9. The weighted average cost of capital (WACC) that Ashley should use is closest to:
A. 8.72%
B. 6.53%
C. 9.38%
10. The value of the firm at the end of 2010 is closest to:
A. $17,631 million
B. $32,869 million
C. $16,954 million
11. The intrinsic value per share of the companys stock at the end of 2010 is closest to:
A. $32.66
B. $30.91
C. $32.26
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Daniel Hernandez
Daniel Hernandez
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13. The value per share of the companys stock at the end of 2011 is closest to:
A. $33.36
B. $27.93
C. $31.47
14. An analyst wants to estimate the value of Simco Inc and gathers the following information:
Current year FCFF = $3.5 million
Expected growth rate in FCFF for the next 4 years = 12%
Long-term constant growth rate from Year 5 onwards = 5%
WACC during the high-growth phase = 15%
WACC during the mature phase = 11%
The value of the firm today is closest to:
A. $48.63 million
B. $77.81 million
C. $68.21 million
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Daniel Hernandez
15. Shamrock Ltds most recent FCFE per share amounted to $0.6. An analyst has the following
expectations regarding the companys growth in FCFE:
FCFE will grow at a rate of 40% for the next three years, during which investors
required rate of return will be 20%.
During the following two years, FCFE growth will decline by 15% per year towards
its stable long-term growth rate. During this time, investors required rate of return
will be 16%.
From Year 6 onwards, FCFE will grow at a stable long-term growth rate of 10%,
during which investors required rate of return will be 12%.
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A. $59
B. $58
C. $56
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16. An analyst gathers the following information regarding Monaco Capital Inc:
Value obtained from FCFF model = $800 million
Market value of cash and short-term investments = $90 million
Book value of land held as an investment = $80 million
Market value of land held as an investment = $120 million
Bonds and notes outstanding = $325 million
Number of shares outstanding = 200 million
The value per share of Monacos stock is closest to:
A. $3.23
B. $3.43
C. $4
17. In which of the following situations would an analyst most likely prefer using the FCFE
approach over the FCFF approach to valuing a company?
A. When the companys capital structure is relatively stable.
B. When the company is leveraged and its capital structure is changing.
C. When the company is leveraged and FCFE is negative.
18. Which of the following is most likely subtracted from net income to compute FCFF?
A. Impairment of intangible assets.
B. Amortization of long term bond premiums.
C. Restructuring expenses.
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Daniel Hernandez
19. Given that a company follows U.S. GAAP, which of the following items must be added to
CFO to compute FCFF?
A. After-tax interest expense.
B. Dividends paid.
C. Dividends received.
20. Assuming IFRS applies, in which of the following cases is an adjustment to CFO least likely
required in computing FCFF from CFO.
Daniel Hernandez
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Daniel Hernandez
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24. Assuming a tax rate of 40%, a $100 increase in which of the following would increase FCFF
and FCFE by $60 each?
A. Cash operating expenses
B. EBIT
C. Accounts payable
25. Assuming a tax rate of 40%, a $100 increase in which of the following would not impact
FCFF and decrease FCFE by $60?
A. Notes payable
B. Interest expense
C. Accounts payable
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Daniel Hernandez
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Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $322,570
B. $307,895
C. $311,010
Answer: C
FCFF = NI + NCC + Int (1 Tax rate) FCInv WCInv
FCFF = 378,000 + (28,100 + 11,250 5,780) + [15,575 (1 0.4)] 78,625 31,280
FCFF = $311,010
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Daniel Hernandez
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Given a tax rate of 35%, free cash flow to the firm is closest to:
Cra 64 #38 100
A. $487,378
B. $404,878
C. $475,868
Answer: A
FCFF = NI + NCC + Int (1 Tax rate) FCInv WCInv
Fixed capital expenditure = 250,670 82,500 = $168,170
FCFF = 650,000 + (32,500 + 24,280 + 6,255) + [21,250 (1 0.35)] 168,170 71,300
FCFF = $487,377.5
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Daniel Hernandez
Daniel Hernandez
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Given a tax rate of 40%, free cash flow to the firm is closest to:
A. $1,637,745
B. $1,371,375
C. $1,460,375
Answer: C
FCFF = CFO + Int (1 Tax rate) FCInv
FCFF = 1,822,970 + [148,375 (1 0.4)] 451,620
FCFF = $1,460,375
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Daniel Hernandez
Daniel Hernandez
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EBITDA = $1,248,950
Interest expense = $285,250
Fixed capital expenditures = $675,285
Depreciation expense = $250,455
Working capital investment = $180,655
Cra 64 #38 100
Given a tax rate of 35%, free cash flow to the firm is closest to:
A. $206,333
B. $43,537
C. $228,950
Answer: B
FCFF = EBITDA (1 Tax rate) + Depreciation (Tax rate) FCInv WCInv
FCFF = [1,248,950 (1 0.35)] + (250,455 0.35) 675,285 180,655
FCFF = $43,536.75
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Daniel Hernandez
FCFE = $174,835
Daniel Hernandez
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9. The weighted average cost of capital (WACC) that Ashley should use is closest to:
A. 8.72%
B. 6.53%
C. 9.38%
Answer: A
WACC = {0.6/1.6 [0.05 (1 0.35)]} + (1/1.6 0.12) = 8.7188%
10. The value of the firm at the end of 2010 is closest to:
A. $17,631 million
B. $32,869 million
C. $16,954 million
Answer: A
Value of the firm = FCFF 2011 / (r g) = ($800m 1.04) / (0.0872 0.04) = $17,631.79m
11. The intrinsic value per share of the companys stock at the end of 2010 is closest to:
A. $32.66
B. $30.91
C. $32.26
Answer: C
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Daniel Hernandez
Daniel Hernandez
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13. The value per share of the companys stock at the end of 2011 is closest to:
A. $33.36
B. $27.93
C. $31.47
Answer: A
Required rate of return on equity = 0.05 + (0.07 1.1) = 12.70%
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Daniel Hernandez
14. An analyst wants to estimate the value of Simco Inc and gathers the following information:
Current year FCFF = $3.5 million
Expected growth rate in FCFF for the next 4 years = 12%
Long-term constant growth rate from Year 5 onwards = 5%
WACC during the high-growth phase = 15%
WACC during the mature phase = 11%
The value of the firm today is closest to:
Daniel Hernandez
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A. $48.63 million
B. $77.81 million
C. $68.21 million
Answer: C
FCFF 1
FCFF 2
FCFF 3
FCFF 4
FCFF 5
Terminal value at the end of Year 4 = $5.7827 / (0.11 0.05) = $96.3783 million
Value of the firm today can be calculated as:
[CF] [2ND] [CE|C]
[ENTER] []
3.92 [ENTER] [] []
4.3904 [ENTER] [] []
4.9172 [ENTER] [] []
101.8856 [ENTER] [NPV]
15 [ENTER] [] [CPT]
NPV = $68.21 million
15. Shamrock Ltds most recent FCFE per share amounted to $0.6. An analyst has the following
expectations regarding the companys growth in FCFE:
FCFE will grow at a rate of 40% for the next three years, during which investors
required rate of return will be 20%.
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Daniel Hernandez
During the following two years, FCFE growth will decline by 15% per year towards
its stable long-term growth rate. During this time, investors required rate of return
will be 16%.
From Year 6 onwards, FCFE will grow at a stable long-term growth rate of 10%,
during which investors required rate of return will be 12%.
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Years
FCFE ($)
Transitional period
Stable
growth
g = 40%
g = 10%
0.60
0.84
1.18
1.65
2.06
2.26
2.49
Terminal value
in Year 5
124.51
Discount factors
Present values
Sum of present
values
0.8333
0.6944
0.5787
0.4989
0.4301
0.70
0.82
0.95
1.03
54.52
58.02
16. An analyst gathers the following information regarding Monaco Capital Inc:
Value obtained from FCFF model = $800 million
Market value of cash and short-term investments = $90 million
Book value of land held as an investment = $80 million
Market value of land held as an investment = $120 million
Bonds and notes outstanding = $325 million
Number of shares outstanding = 200 million
The value per share of Monacos stock is closest to:
A. $3.23
B. $3.43
C. $4
Answer: B
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Daniel Hernandez
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18. Which of the following is most likely subtracted from net income to compute FCFF?
A. Impairment of intangible assets.
B. Amortization of long term bond premiums.
C. Restructuring expenses.
Answer: B
Impairment charges on intangible assets and restructuring expenses are added back to net
income to compute FCFF. Amortization of any bond premium is subtracted.
19. Given that a company follows U.S. GAAP, which of the following items must be added to
CFO to compute FCFF?
A. After-tax interest expense.
B. Dividends paid.
C. Dividends received.
Answer: A
Dividends received are classified as CFO. Since they are available to the firms providers of
capital, no related adjusted to CFO is required to compute FCFF.
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Daniel Hernandez
Dividends paid are classified as CFF. Since they have not been deducted from CFO, no
related adjusted to CFO is required to compute FCFF.
After-tax interest expense is deducted in computing CFO. Therefore, it must be added back to
CFO to compute cash available to all providers of capital.
20. Assuming IFRS applies, in which of the following cases is an adjustment to CFO least likely
required in computing FCFF from CFO.
A. If interest received is classified as an operating activity.
B. If interest paid is classified as an operating activity.
C. If dividends paid is classified as an operating activity.
Daniel Hernandez
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Answer: A
Interest received can be classified as CFO or CFI. Only if it is classified as CFI should it be
added to CFO to compute FCFF.
Interest paid can be classified as CFO or CFF. Only if it is classified as CFO should after-tax
interest paid be added back to CFO to compute FCFF.
If dividends paid are classified as CFO, they must be added back to CFO to compute cash
available to all providers of capital.
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Daniel Hernandez
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FCFE = Increases in cash balances + Cash dividends + Share repurchases New equity
issues
FCFE = ($268,550 $228,900) + 0 + $340,450 0 = $380,100
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Daniel Hernandez
TCPDF and FPDI
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25. Assuming a tax rate of 40%, a $100 increase in which of the following would not impact
FCFF and decrease FCFE by $60?
A. Notes payable
B. Interest expense
C. Accounts payable
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Answer: B
A $100 increase in notes payable will have no impact on FCFF but increase FCFE by $100.
A $100 increase in interest expense will have no impact on FCFF but decrease FCFE by $60.
A $100 increase in accounts payable will increase FCFF and FCFE by $100.
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