FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 1

Instructions: Put your name on the Scantron form and on your exam sheet. Select the best answer for
each question and record that answer on your Scantron form. When finished, sign the honor pledge,
slip the Scantron form inside this exam, and turn in both the form and the exam. Scantron forms
without a printed exam will not be graded. You may use your financial calculator and your notes sheet
for reference. You must put away any phones, tablets, or computers. You may use space on this exam
for scratch paper but note that I will not grade any of your scratch work. There will be no partial credit.
Each question is worth the same amount.

I pledge that I have neither given nor received unauthorized help on this exam. Furthermore, I realize
that giving or receiving unauthorized help on this exam could result in failure of this course or dismissal
from the University.

Signed _________________________________ Date: ________________________

1. You are trying to determine how much you need in order to retire comfortably. You would like a
monthly retirement income that has the same purchasing power on your retirement date that $6,000
per month has today. You recognize that inflation will continue during your retirement, but to make
you calculations simple, all you require is that you have this purchasing power on the day you retire.
Your retirement checks will be constant during your retirement. You anticipate that inflation will
average 2.0% per year with annual compounding between now and when you retire. You anticipate
living for 30 years in retirement. The first retirement check will come at the end of your first month of
retirement. You expect to earn 9.0% on your investments. You have 40 years until you retire. You have
already saved $15,000. How much must you save at the end of each month between now and the day
you retire, with your first savings deposit in one month, in order to fund your retirement?
a. $222.49
b. $226.94
c. $236.02
d. $252.54
e. $283.22

2. You have just finished your senior year in college and are starting work immediately. You borrowed
$15,000, $17,000, $20,000 and $22,000 at the beginning of each of your 4 years of college and have
made no payments on your loans. Your rich uncle has promised to pay down your college loans a total
of $50,000 at the end of your first year of employment if you find a good job and keep it. Based on
your job, you figure your uncle will come through with the payment and that you can also pay $500 per
month toward your college loans, with the first payment occuring at the end of this first month of
work. If the interest rate on your loans is 6% per year with monthly compounding, how much will you
owe two years from today? Hint: use monthly compounding for all calculations.
a. $25,290
b. $30,348
c. $36,418
d. $43,701
e. $52,441
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 2

3. HCB, Inc. just had free cash flows of $20.00 million (FCF0). Free cash flows are expected to grow at a
rate of 5.0% forever. It also has the following financial information:
Market value of HCB Debt = $200.00 million
Short-term investments = $150.00 million
Book value of equity = $600.00 million
Total Assets = $1,100.00 million
Shares outstanding = 25.00 million
Required return on stock = 11.0%
WACC = 9.0%
Using the corporate valuation model, calculate HCB's intrinsic value per share."
a. $17.67
b. $18.24
c. $19.00
d. $19.57
e. $20.52

Use this information for the next 2 questions: Consider the following information for HCB, Inc. (in
millions, except for per share items)
Financial Statement Information:
Sales $1,000
Net Income $50
Total Assets $2,000
Shareholder equity $750
Tax rate 40.0%

Bond Issue: 3.0 million bonds that are $1,000 par value 20-year 7.0% coupon bonds with semiannual
payments with a yield to maturity of 5.0%.
100.0 million shares of stock outstanding
Market price per share $25.00
4.0 million shares of $12.00 per share dividend preferred stock
Market price per share of preferred stock $225.00
Percentage flotation costs per share for prefered stock 3.0%
HSB's stock's beta 1.3
Risk free rate 3.0%
Market risk premium 6.5%
Recent dividend on common stock $2.00 per share
Expected growth rate in common stock dividends 6.0%."

4. Calculate the percentage of debt in HSB's market value capital structure

a. 47.22%
b. 52.47%
c. 59.29%
d. 46.88%
e. 150.00%
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 3

5. Assuming you use the CAPM for the required return on stock, calculate the WACC.
a. 5.70%
b. 6.15%
c. 6.65%
d. 7.18%
e. 7.75%

6. Calculate the Equivalent Annual Annuity (EAA) of the following project

Year 0 1 2 3 4
Cash Flow -1500 500 200 900 1800
WACC 8%
a. 318.45
b. 475.00
c. 353.83
d. 389.21
e. 424.60

Use this information for the next 2 questions: HCB is considering upgrading its manufacturing line. The
cash flows are shown below.
Year 0 1 2 3 4
Cash Flow -2500 1900 1300 -1100 900
WACC 9%
7. Calculate the project's NPV.
a. 115.12
b. 120.46
c. 125.48
d. 138.03
e. 500.00

8. Calculate the project's MIRR.

a. 9.01%
b. 10.01%
c. 11.01%
d. 12.01%
e. 12.66%
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 4

9. Which of the following statements is FALSE?

a. Investors will always agree on a company's book value.
b. In the free cash flow valuation model, the value of a firm's operations is calculated as the
present value of its future free cash flows discounted at the firm's weighted average cost of capital.
c. The corporate valuation model cannot be applied to companies that have zero free cash flow
d. The preemptive right prevents the firm from transferring wealth from existing to new
shareholders
e. Stock prices are mostly sensitive to cash flows that occur more than 5 years in the future.

10. Which of the following statements is TRUE?

a. Only one class of shares may have votes attached to them
b. In the constant growth model, the growth rate must be greater than the required return.
c. Return on invested capital (ROIC) measures the return to the total invested equity capital in the
firm
d. Voting rights don't impact the price of a share of stock
e. The value of a perpetuity can be calculated using the constant growth model by setting the
growth rate to zero.

11. Haslam Hamburgers is considering opening a new location. It will cost $400,000 to build out the
new location and the resulting cash flows will be either 4 years of $500,000 cash flows (probability =
40% ) or 4 years of $200,000 cash flows (probability = 60%). HH's WACC is 10%. Calculate the expected
NPV of the project.
a. $468,689.97
b. $501,498.27
c. $536,603.15
d. $574,165.37
e. $614,356.94
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 5

Tennessee Tuners is considering introducing a new automatic guitar tuner. It will cost $75,000 and take
1 year to develop and test the equipment in concerts. If the test marketing isn't successful, then TT
will abandon the idea (probability 40% ). If the test marketing is successful (probablity 60%) then 1 year
from now TT will invest another $225,000 in upgrading its distribution network. This upgrade will take
a year to complete. If TT decides to continue marketing the tuners then if it is well-accepted by the
market, cash flows will be $90,000 per year for 5 years (probablity = 65%). These cash flows will start in
Year 2. If the new tuner is not well-accepted, the cash flows will only be $13,000 per year for 5 years,
starting in Year 2. However if after the first year of poor sales TT doesn't want to continue selling the
new product, it can sell the patent to its competitor for $75,000 and no longer sell the tuners. The cash
flow from this sale would occur at the end of Year 2. TT's cost of capital is 10.0%.

12. What is the joint probability that TT will end up receiving $90,000 per year for its sales?
a. 39.0%
b. 41.0%
c. 43.0%
d. 45.1%
e. 47.4%

13. What is the NPV of the branch of the decision tree in which TT starts selling tuners, finds out they
aren't successful and then sells the patent if it is optimal to do so?
a. -$189,268
b. -$194,946
c. -$200,794
d. -$206,818
e. -$213,023

14. ESPN, Inc. is doing a capital budgeting analysis for a new type of PortaPotty. Revenues are expected
to be $1,500,000 per year, manufacturing costs will be $950,000 per year. ESPN spent $500,000 last
year on marketing to determine if a new type of PortaPotty was needed. The manufacturing
equipment costs $1,000,000 and it is depreciated using 3 year MACRS depreciation with depreciation
rates of 33.33%, 44.45%, 14.81% and 7.41%. ESPN will have to borrow the money for the project and
interest on the debt will be $75,000. ESPN's tax rate is 40%. Calculate the cash flow for capital
budgeting purposes for Year 2.
a. 462,800
b. 507,800
c. 510,800
d. 514,800
e. 516,800
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15. From the previous ESPN example, suppose that ESPN were to sell the manufacturing equipment
after Year 2 for $600,000. What would be the after-tax salvage value? ESPN's tax rate is 40%.
a. $226,680.00
b. $408,072.73
c. $448,880.00
d. $471,324.00
e. $485,463.72

HCB, Inc. is considering investing in a new 'We're # 1' foam hand cutting facility. If UT wins the SEC
Championship, the cash flows will be $400,000 per year for 5 years. If UT does not win, then the cash
flows will be $100,000 per year for 5 years. The probability of UT winning the SEC championship is 20%
and the probability of not winning is 80%. It will cost $1,100,000 to purchase the equipment. If HCB
waits 1 year to invest, then they will know if UT has won the championship or not, and hence which
cash flows will occur. The risk free rate is 6% and the cost of capital is 10%. You would like to use the
Black-Scholes Option Pricing Model to value this investment.

16. Using a decision tree, find the expected NPV of the project if you wait.
a. $68,146
b. $70,191
c. $72,917
d. $75,643
e. $77,687

17. Find the value of P, the price of the underlying asset, that you would use in the BSOPM to value the
option.
a. $551,387
b. $578,957
c. $607,904
d. $638,300
e. $670,215

18. Drinnon Industries currently has no debt. It's beta is 0.80 the risk free rate is 4.0% and the market
risk premium is 6.0%. Drinnon is considering issuing debt and repurchasing shares to change its capital
structure to 60.0% debt. This debt would have a yield to maturity and coupon payment of 7.0%.
Drinnon's tax rate is 40.0%. Using the Hamada formula, what will be its beta after the recapitalization?
a. 1.52
b. 1.64
c. 1.77
d. 1.91
e. 2.07
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 7

19. What will be Drinnon's WACC after the recapitalization?

a. 6.66%
b. 7.19%
c. 7.77%
d. 8.39%
e. 9.06%

20. BillyBob's White House Trinkets is considering a recapitalization. It currently has 65.0% debt
yielding 10.0%. It's stock is risky because of all of that debt, with a beta of 1.7. It's tax rate is 40%. BB
would like to reduce its debt down to 20.0% of its capital structure and figures it can reduce its cost of
debt to 7.0% with this change. The risk free rate is 4.0% and the market risk premium is 6.0%. What will
be BB's WACC after the recapitalization? Use Hamada.
a. 7.76%
b. 7.99%
c. 8.23%
d. 8.48%
e. 8.73%

21. Which one of the following statements about the SNAP IPO is TRUE?
a. Shares issued in the IPO entitle the owner to $1 per share annual dividend.
b. The the existing Class B shares were converted to Class A shares and sold to the public during
the IPO.
c. After the IPO, the new shares will represent about 20% of the voting power in the company.
d. Before the IPO, SNAP was financed with approximately 20% debt.
e. SNAP issuing costs were substantially lower than the standard 7%.

22 .HCB is expecting sales to increase 15% in 2018. Using the AFN formula, calculate HCB's Additional
Funds Needed
HCB, Inc. 2017 2017
Sales $900.00 Operating assets $1,200.00
Costs $700.00 Operating liabilities $180.00
Pre-tax income $200.00 Debt $600.00
Taxes (40%) $80.00 Shareholders' equity $420.00
Net Income $120.00
Dividends $36.00
a. $56.4
b. $64.9
c. $74.6
d. $85.8
e. $98.6
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 8

HCB's financial statements for this year and partial projected financial statements for next year are
shown below. HCB will not issue any new shares or long-term debt and plans on increasing dividends in
the coming year by 10%. HCB balances with special dividend and line of credit. All of HCB's assets are
used in operations.
HCB, Inc. 2017 2018 2017 2018
Sales 900.0 1,160.0 Total Assets 1,260.0 1,350.0
Operating Costs 800.0 900.0
EBIT 100.0 260.0 Operating liabilities 180.0 300.0
Interest expense 10.0 10.0 Line of credit -
Pre-tax income 90.0 250.0 Long-term debt 630.0
Taxes (40%) 36.0 100.0 Common stock 100.0
Net Income 54.0 150.0 Retained earnings 350.0
Ordinary dividends 31.0
Special dividends 0.0

23. Calculate HCB's Special Dividend

a. $132.6
b. $145.9
c. $160.5
d. $176.5
e. $194.2
24. Calculate HCB's projected retained earnings.
a. $235.2
b. $254.0
c. $274.3
d. $296.3
e. $320.0

25. Calculate HCB's projected free cash flow for 2018.

a. $65.1
b. $84.7
c. $110.1
d. $143.1
e. $186.0
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 9

HCB's most recent and projected financial statements and projected free cash flow are shown below.
All items are expected to grow at 5% after the last year of projections.

2017 2018E 2019E

Debt $40.00 $47.00 $53.00
Interest expense $2.80 $3.30 $3.70
Free cash flow $17.00 $14.00 $22.00
Tax rate 40%
WACC 8%
Levered required return on equity 12%
Unlevered required return on equity 10%
growth rate after 2019 5%
26. Calculate the value of HCB's tax shields as of the end of 2017.
a. $16.07
b. $18.48
c. $21.25
d. $24.44
e. $28.11

27.Using the APV model, calculate the intrinsic value of HCB's equity as of the end of 2017.
a. $346.3
b. $363.6
c. $381.7
d. $400.8
e. $420.9

28. Using the FCFE model, calculate the intrinsic value of HCB's equity as of the end of 2017.
a. $345.8
b. $363.1
c. $381.3
d. $400.3
e. $420.3
 FINC 455 Spring 2017 Final 12:40 class Name_________________________ Page 10

Consider the following information for the next problem:

Interest rate in the US4%
Interest rate in Mexico 15%
Mexican peso MXN/USD exchange rate $0.2200
29. You are a U.S. company and raise capital in the U.S. in dollars. You have an opportunity to make an
investment that will cost 10 million pesos and will return 5 million pesos a year for 3 years. Your WACC
is 10%. What is the NPV of your investment?
a. $38,857
b. $44,685
c. $51,388
d. $59,096
e. $67,961

30. Which one of the following statements is FALSE?

a. The Corporate Valuation model can be used when the percentages of debt and equity in the
capital structure are expected to remain fixed.
b. The APV model should be used when the post-merger capital structure changes significantly.
c. Goodwill is amortized for tax purposes.
d. Goodwill is created when a firm pays an acquired firm's board of directors a premium for their
shares.
e. FCFE is free cash flow minus after-tax payments made to debtholders.