FSA3321 (Moore)
Exam 3
Summer 1 - 2005
Third Examination – Finance 3321
Summer 2005 (Moore) – Version 1
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Clearly Circle the BEST response for each of the following questions (Multiple Choice @4):
Use the attached financial statements for Dell-U-Dead Corp. to answer questions 1-3
1. Compute Dell-U-Dead’s current ratio for the year ended February 1, 2002.
a. 0.70
b. 0.81
c. 0.95
d. 1.05
e. 1.43
2. Compute Dell-U-Dead’s Days Sales Outstanding for the year ended February 1, 2001.
a. 5.74
b. 26.57
c. 27.75
d. 32.27
e. 34.77
3. Compute Dell-U-Dead’s Operating Profit Margin for the year ended February 1, 2002.
a. 5.74%
b. 8.35%
c. 9.31%
d. 11.85%
e. 11.93%
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
4. Which of the following decreases free cash flows to the firm (both equity and debt)?
a. An increase in gross margins
b. An increase in inventories
c. A decrease in accounts receivable
d. An increase in accounts payable
e. A decrease in Plant, Property and Equipment
5. As
a.
b.
c.
d.
e.
the firm’s net financial leverage increases:
Its spread moves in the same direction
Its spread moves in the opposite direction
Its spread moves independently
Its spread changes at the same level since the two terms that mean the same thing
Its spread is controlled by the product management function
6. Which of the following actions would increase a company’s sustainable growth rate?
a. Decreasing Inventory turnover
b. Purchasing Fixed Assets
c. Decreasing Cost of Goods Sold
d. Increasing Accounts Payable Turnover
e. Increasing the dividend payout ratio
7. Total Asset Turnover in 2004 is computed at 1.40 on an asset base of 10,000,000. Total
sales in 2005 are predicted to grow by 10% and net income is expected to grow by 5%.
Assuming Asset Turnover is forecast to be 1.5 in 2005, forecast Total Assets for 2005.
a. $9,800,000
b. $10,266,667
c. $10,500,000
d. $11,000,000
e. $15,000,000
8. Which of the following types of businesses do you expect to show the highest degree of
seasonality in quarterly earnings?
a. Fast Food Restaurants (e.g. McDonalds).
b. Supermarkets and Grocery Stores
c. Diversified Freight and Transport Companies
d. Auto Parts Stores
e. Cotton Farming
9. Which of the following situations will most likely result in managers deciding to increase
the outlays for working capital?
a. they expect that the sales will shrink in the future,
b. they expect that operating efficiency will improve
c. the way of doing business is not likely to change
d. Working Capital Turnover is projected to despite constant forecast sales.
e. Days Sales Outstanding is expected to increase despite no change in sales.
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
10. Consider a following company: VD is 100 with kd of 9%. VE is 200 and WACCBT is
13.0%. ke is 15% and the tax rate is 30%. Compute the after tax WACC for the firm.
a. 6.3%
b. 9.1%
c. 12.1%
d. 13.0%
e. 15.4%
11. Consider a company with the following: Value of debt is 200 with kd of 12%. Value of the
firm is 600; ke is 18% and rf = 4% and T = 30%. Compute WACC before tax.
a. 4%
b. 12%
c. 14.8%
d. 16%
e. 18%
12. Assume the market return and risk-free rate remain unchanged. Which of the following
must be true if the firm’s Beta suddenly changes from 1.8 to 0.9?
a. The firms cost of equity declines by 50%
b. The firm’s cost of debt increases in direct proportion to the decrease in the cost of
equity because the WACC must remain constant
c. The WACC of the firm decreases
d. The value of the equity decreases
e. The cost of equity increases
13. You have just computed the Beta of a stock to be 1.5 and the estimate of the relevant riskfree rate is 3%. The expected market return next period is 6% and your estimate of K e is
15%. What is the appropriate long-run market risk premium?
a. 3.0%
b. 7.0%
c. 7.5%
d. 8.0%
e. 9.0%
14. Assume next period’s dividend is forecast to be $1.20 per share; that WACC = .18; the cost
of equity is 20%; the cost of debt is 14%; the risk-free rate is 5% and the long-run
dividend growth rate is expected to be 4% . The best estimate the today’s share value
using the discounted dividends method is:
a. $6.00
b. $6.24
c. $7.500
d. $12.00
e. $40.00
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
15. From an empirical (estimation) perspective, the main problem of the discounted dividends
valuation model (as compared to free cash flows and residual income) is that:
a. Dividend payments are too variable compared with price variability
b. The implied investment horizon to recover value is unrealistically short.
c. The amount of price variability explained by dividend variability is relatively small.
d. Next period’s dividends are relatively difficult to predict.
e. Special dividends are difficult to incorporate when firms pay regular dividends
16. Discounted dividends valuation models require which of the following discount factors?
a. WACC and the dividend growth rate
b. Cost of Debt and Cost of Equity
c. Cost of Debt and the dividend growth rate
d. Cost of Equity and the dividend growth rate
e. Cost of Equity and WACC
Use the following information to solve the following three (3) problems
Valuation with P/E and P/B multiples (finish this)
Atmos Energy is a west Texas based natural gas producer and distributor that you are trying
to value. Using the method of comparables, assess the value of Atmos. Information is
provided concerning the current share price (PPS), current earnings per share (EPS) and the
current book value of equity per share (BPS) for Atmos and three of its competitors.
Required: Value Atmos using the P/E and P/B multiples.
CrossTex Industries
RGC Resources
Atmos Engergy Corp.
Kinder Morgan
PPS
41.75
24.33
25.75
63.40
EPS
2.83
1.78
1.55
3.11
BPS
28.13
17.82
18.15
21.75
17. Using the Price earnings multiple, what is the value per share for Atmos Energy when
performing a valuation based on the method of comparables?
a. $25.22
b. $25.35
c. $26.00
d. $32.59
e. $34.87
18. Using the Price-to-book multiple, what is the value per share for Atmos Energy when
performing a valuation based on the method of comparables?
a. $25.22
b. $25.35
c. $32.59
d. $32.82
e. $34.87
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
19. Which company appears to be an “outlier” that should be omitted when computing the
industry average market-to-book ratio?
a. CrossTex Industries
b. RGC Resources
c. Atmos Engergy Corp.
d. Kinder Morgan
e. None of the firms appear to be an outlier
20. The present value (today) of the terminal (continuation) value cash flow that begins in 7
years is $157,542,407 assuming a cost of equity equal to 8%. The year 7 free cash flow
(beginning of the growing perpetuity) is $15,000,000. What is the growth rate required for
the continuation value term?
a. 1%
b. 2%
c. 3%
d. 4%
e. 5%
Computation of Valuations Models Section
Use the following summary financial statement information and forecasts provided by TTU
Value-Metrics to answer the valuation questions in this section about Hi-Flyer Corp.
All Per Share
EPS
DPS
BVE (year end)
CFFO
CFFI
CFFF
BV Liabilities
Ke
Kd
WACC
Actual
31 Dec 2004
4.50
1.10
25.00
5.00
-3.00
-2.00
25.00
0.08
0.06
0.07
Estimated
31 Dec 2005
5.25
1.50
Estimated
31 Dec 2006
3.60
1.80
Estimated
31 Dec 2007
4.80
2.00
6.00
-2.50
-4.00
4.00
-4.00
2.00
6.00
-5.00
2.00
CFFO = Cash Flow from operating activities
CFFI = Cash Flow from investing activities
CFFF = Cash Flow from financing activities
21. Using the TTU Value-Metrics forecasts, determine the intrinsic value of High Flyer shares.
Use the discounted dividends model; assume the forecast dividend payment in 2008 is
$2.25 and that is will growth by 4% per year in perpetuity. The intrinsic share value is:
a. $29.95
b. $37.50
c. $41.85
d. $49.17
e. $60.77
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
22. (Sensitivity Analysis). You know that dividend growth rates are estimated with error. In
the previous problem, the dividend growth perpetuity was assumed to be 4% per year.
What would be the impact on share price if the growth rate were assumed to be 2% (all
other information remains the same).
a. $14.88 higher
b. $14.88 lower
c. $18.75 higher
d. $18.75 lower
e. cannot be determined from the information provided
23. (Free Cash Flow Valuation). Compute the free cash flow per share to the firm in 2007.
a. $6.00
b. $0.75
c. $1.00
d. $7.50
e. $10.00
24. (Free Cash Flow Valuation). Assume that free cash flow per share to the firm per share is
forecast to be $2.00 per share in 2008 and that it is expected to grow by 6% per year
thereafter. The estimated intrinsic value per share is:
a. 78.13
b. 103.93
c. $3.93
d. $142.35
e. $75.13
25. What would the impact on your estimated share price be in the previous question if the
growth rate in the terminal value perpetuity were zero?
a. $171.43 increase
b. $171.43 decrease
c. $139.94 increase
d. $139.94 decrease
e. $18.78 decrease
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
Dell-U-Dead Computer Corporation
Balance Sheet (in Millions) (1 February 20XX)
ASSETS
Current Assets:
Cash and equivalents
Short-term Investments
Accounts Receivable (net)
Inventories
Other
2002
2001
$ 3,641
273
2,269
278
1,419
$ 4,910
525
2,424
400
1,467
Total Current Assets
$ 7,877
$ 9,726
826
4,373
359
100
996
2,418
290
240
Total non-current assets
$ 5,658
$ 3,499
Total Assets
$13,535
$13,670
$ 5,075
1,600
444
300
100
$ 4,286
1,550
192
450
300
$ 7,519
$ 6,778
520
302
150
120
230
509
261
120
100
280
Total Non-Current Liabilities
$ 1,322
$ 1,270
Total Liabilities
$ 8,841
$ 8,048
$ 5,605
(2,249)
1,364
( 26)
$ 4,795
--839
(12)
Total Stockholders’ Equity
$ 4,694
$ 5,622
Total Liabilities & Stockholders’ Equity
$13,535
$13,670
Non-Current Assets:
Property, plant and equipment (net)
Investments
Goodwill
Other non-current assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Accrued Liabilities
Unearned Revenues
Notes Payable – Current
Other
Total Current Liabilities
Non-Current Liabilities:
Long-Term Debt
Pension Liabilities
Other Post-Retirement Benefit Liabilities
Deferred Tax Liability
Other Liabilities
Stockholders’ Equity:
Common Stock Issued and Outstanding
Treasury Stock
Retained Earnings
Other Comprehensive Income
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
Dell-U-Dead Computer Corporation
Income Statement (in Millions**)
For the Year Ending February 1, 20XX)=
Net Revenue
Less: Cost of Goods Sold
Gross Profit
Operating Expenses
Selling, General and Administrative
Interest Expense
Lease Expenses
Research, Development and Engineering
Special charges
Total operating expenses
Operating Income
Investment and other income (loss), net of tax
2002
2001
$31,168
25,661
$31,888
25,445
$ 5,507
$ 6,433
$ 1,824
76
884
452
482
$ 2,333
67
793
482
105
$ 3,718
$ 3,780
$ 1,789
(58)
$ 2,663
581
Income before taxes and cumulative effect
of change in accounting principle
$ 1,731
Provision for income taxes
485
$ 3,194
958
Income before cumulative effect of change
in accounting principle
$ 1,246
Cumulative effect of change in accounting principle
---
$ 2,236
59
Net Income
Earnings Per Common Share:
Basic EPS
Diluted EPS
Weighted Average Shares Outstanding:
Basic
Diluted
**
$ 1,246
$ 2,177
$ 0.48
$ 0.26
$ 0.87
$ 0.79
2,602
4,543
2,582
2,746
All items in millions of dollars except Earnings per Share data
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FSA3321 (Moore)
Exam 3
Summer 1 - 2005
Dell-U-Dead Computer Corporation
Statement of Cash Flows (in Millions)
For the Year Ending February 1, 20XX
Cash Flows from Operating Activities:
Net Income
Adjustment to reconcile income to cash
provided by operating activities:
Depreciation and amortization
Tax benefits of employee stock plans
Special charges
Gains/Losses in investments
Other
Changes in:
Operating working capital
Non-current assets and liabilities
2002
2001
$ 1,246
$ 2,177
239
487
742
17
178
240
929
105
(307)
135
826
62
642
274
Net cash provided by operating activities $ 3,797
$ 4,195
Cash Flows from investing activities:
Investments in securities:
Purchases
Maturities and sales
Capital expenditures
$(5,382)
3,425
(303)
$(2,606)
2,331
(482)
$(2,260)
$ (757)
Cash flows from financing activities:
Purchase of common stock
$(3,000)
Issuance of common stock under employee plans
295
Other
3
$(2,700)
404
(9)
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange rates on cash
Net increase (decrease) in cash
$(2,702)
$(2,305)
(104)
(32)
$(1,269)
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$ 1,101