Q.No.

1: The following data are pertinent for Companies A and B:

Company A Company B
Present Earnings (in millions) $ 20 $ 4
Number of Shares (in millions) 10 1
Price / earnings ratio 18 10
a) If the two companies were to merge and the share exchange ratio were 1 share of Company A for each
share of Company B, what would be the initial impact on earnings per share of the two companies?
What is the market value exchange ratio? Is a merger likely to take place?
b) If the share exchange ratio were 2 shares of Company A for each share of Company B, what would
happen with respect to Part (a)?
c) If the exchange ratio were 1.5 shares of Company A for each share of Company B, what would happen?
d) What exchange ratio would you suggest?

Q.No. 2: A $1,000-face-value bond has a current market price of $935, an 8 percent coupon rate, and 10 years
remaining until maturity. Interest payments are made semi-annually. Before you do any calculations, decide
whether the yield to maturity is above or below the coupon rate. Why?
a. What is the implied market-determined semi-annual discount rate (i.e., semi-annual yield to maturity) on
this bond?
b. Using your answer to Part (a), what is the bonds (i) (nominal annual) yield to maturity? (ii) (Effective
annual) yield to maturity?

Q.No. 3: Delphi Products Corporation currently pays a dividend of $2 per share, and this dividend is expected
to grow at a 15 percent annual rate for three years, and then at a 10 percent rate for the next three years, after
which it is expected to grow at a 5 percent rate forever. What value would you place on the stock if an 18
percent rate of return was required?

Q.No. 4: Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would
increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years.
Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the
merger is undertaken. The cash price of Benson is $125,000.
a) Would you recommend the merger?
b) Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return
cash inflows of $40,000 per year for each of the next 10 years?
c) If the cost of capital did not change with the merger, would your decision in part b be different? Explain.

Q.No. 5: See, I told you things would work out, said Barry Kresmier, president of Lomax Company. We
expanded sales from $1.6 million to $2.0 million in 2009, nearly doubled our warehouse space, and ended the
year with more cash in the bank than we started with. A few more years of expansion like this and well be the
industry leaders.
Yes, Ill admit our statements look pretty good, replied Sheri Colson, the companys vice president. But
were doing business with a lot of companies we dont know much about and that worries me. Ill admit,
though, that were certainly moving a lot of merchandise; our inventory is actually down from last year.
A comparative balance sheet for Lomax Company containing data for the last two years follows:

Lomex Company
Comparative Balance Sheet as on December 31, 2009 and 2008
2009 2008
Assets
Current Assets:
Cash $ 42,000 $ 27,000
Marketable Securities 19,000 13,000
 Accounts Receivable 710,000 530,000
Inventory 848,000 860,000
Prepaid Expenses 10,000 5,000
Total Current Assets 1,629,000 1,435,000
Long-term Investments 60,000 110,000
Loans to Subsidiaries 130,000 80,000
Plant and Equipment 3,170,000 2,600,000
Less Accumulated Depreciation 810,000 755,000
Net Plant and Equipment 2,360,000 1,845,000
Patents 84,000 90,000
Total Assets $ 4,263,000 $ 3,560,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 970,000 $ 670,000
Accrued Liabilities 65,000 82,000
Total Current Liabilities 1,035,000 752,000
Long-Term Notes 820,000 600,000
Deferred Income Taxes 95,000 80,000
Total Liabilities 1,950,000 1,432,000
Stockholders' Equity:
Common Stock 1,740,000 1,650,000
Retained Earnings 573,000 478,000
Total Stockholder' Equity 2,313,000 2,128,000
Total Liabilities and Stockholders' Equity $ 4,263,000 $ 3,560,000
The following additional information is available about the companys activities during 2009:
a) Cash dividends declared and paid to the common stockholders totalled $75,000.
b) Long-term notes with a value of $380,000 were repaid during the year.
c) Equipment was sold during the year for $70,000. The equipment had cost $130,000 and had $40,000 in
accumulated depreciation on the date of sale.
d) Long-term investments were sold during the year for $110,000. These investments had cost $50,000
when purchased several years ago.
e) The companys income statement for 2009 follows:
Sales $ 2,000,000
Cost of goods sold 1,300,000
Gross Margin 700,000
Selling and administrative expenses 490,000
Net Operating Income 210,000
Non-Operating Items:
Gain on sale on investments $ 60,000
Loss on sale of equipment 20,000 40,000
Income before taxes 250,000
Income Taxes 80,000
Net Income $ 170,000
Required:
a) Using the indirect method, prepare a statement of cash flows for the year 2009.
b) Compute free cash flow for 2009.