INTERMEDIATE CORPORATE FINANCE

Exam II - Sample Questions

Part A (85 points)

1. a. (15) Crum Co’s balance sheet and income statement for 2007 are given below. The
firm expects sales to grow by 50% in 2008. Operating costs, spontaneous liabilities
and assets will increase in proportion to sales. The company plans to finance any
additional funds needed using debt at an interest rate of 10%. What is the company’s
projected funds needed for 2008? Assume interest expenses are 10% of the
beginning of year debt balance.
2007 2008
Sales $1,000
Operating costs 800
EBIT 200
Interest 16
EBT 184
Taxes (40%) 73.6
Net Income 110.40
Dividends (60%) 66.24
Addn. To RE 44.16

Cash 30
A/R 150
Inventories 200
Total CA 380
Gross FA 700
Accum.Depreciation 80
Net FA 620

Total assets 1000

A/P and accruals 150

Debt 200
Common stock 150
Retained Earnings 500
Total Liab.& Equity 1000

b. (15) Construct the Year 2008 Statement of Cash Flows for Crum.

2. (15) Lippo In. reports the following capital structure on its balance sheet:
Debt $ 20 m, Preferred stock $ 10 m, Common stock $ 20 m
The debt has 10 years to maturity, carries a coupon rate of 6%, and sells at 86.58% of
face value. The preferred shares have a face value of $100 each and pay an annual
dividend of $11. They sell at $105 each. There are 1 million shares with a market price
of $30 each. The stock has a beta of 1.2. The risk-free rate is 5%. Assume that the risk
premium on the market portfolio is 6%. The tax rate is 40%. (Assume that flotation
costs are negligible.)
a. What is the after-tax cost of debt, preferred stock and common stock?
b. What is the weighted average cost of capital for the firm, if the current capital
structure based on market values is the optimal capital structure?

3. (5) Roland & Company has a new management team that has developed an operating
plan to improve upon last year's ROE. The new plan would place the debt/TA ratio at 55
percent which will result in interest charges of $7,000 per year. EBIT is projected to be
$25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0.
The average tax rate will be 40 percent. What does Roland expect return on equity to be
following the changes?

4. (20) A company’s free cash flow (FCF) is expected to be $10 million next year, $20
million in the second year, and $30 million in the third year. The FCF is expected to
increase at the rate of 4% thereafter. The WACC for the company is 10%. The
company’s balance sheet shows $20 million in short-term investments that are unrelated
to operations. The balance sheet also shows $50 million in accounts payable, $90 million
in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100
million in total common equity. If the company has 10 million shares of stock, what is
your best estimate for the stock price per share? ($29.88)

5. (15 pts)There are two mutually exclusive projects with the following cash flows:
Time 0 1 2 3 4 5 ( NPV IRR
MIRR
Project A -$100m $40m $70m $40m $10m $10m (37.3 27.8 17.2
Project B -$100m $10m $20m $70m $40m $60m (42.8 22.16
18.12
The opportunity cost of capital is 10%. Calculate the NPV, IRR, MIRR and payback
period for both projects. Which project should be selected?

Part B. Discussion questions worth 15 points.