Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
Use the information for the question(s) below.

In November 2019, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares
outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt,
$163.82 million in net income, and cash of $257.09 million.

1) Perrigo's market debt-to-equity ratio is closest to: 1) _______

A) 0.89. B) 0.75. C) 0.50. D) 0.24.

2) Perrigo's price-earnings ratio (P/E) is closest to: 2) _______

A) 35.64. B) 21.85. C) 29.77. D) 15.96.

3) Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 8%, then the present value of this stream of cash flows is closest
to: 3) _______

A) $26,000. B) $24,074. C) $21,211. D) $22,871.

4) You are saving for retirement. To live comfortably, you decide that you will need $2.5 million by the
time you are 65. Today is your 30th birthday, and you decide, starting today, and on every birthday up to
and including your 65th birthday, that you will deposit the same amount into your savings account.
Assuming the interest rate is 5%, the amount that you must set aside each year on your birthday is
closest to: 4) _______

A) $26,260. B) $71,430. C) $26,100. D) $27,680.

Use the following information to answer the question(s) below.

Suppose the current zero-coupon yield curve for risk-free bonds is as follows:

Maturity (years) 1 2 3 4 5
YTM 3.25% 3.50% 3.90% 4.25% 4.40%

5) The price per $100 face value of a three-year, zero-coupon, risk-free bond is closest to: 5)
_______
A) $89.16. B) $86.39. C) $93.80. D) $90.06.

6) Which of the following statements is FALSE? 6) _______

A) Coupon bonds always trade for a discount.
B) At any point in time, changes in market interest rates affect a bond's yield to maturity and its price.
C) If the bond trades at a discount, an investor who buys the bond will earn a return both from receiving
the coupons and from receiving a face value that exceeds the price paid for the bond.
D) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to,
par.

Use the following information to answer the question(s) below.

Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in one
year, and its expected price right after paying that dividend is $33.

7) Rearden's expected dividend yield is closest to: 7) _______

A) 4.20%. B) 4.00%. C) 3.65%. D) 3.40%.

Use the information for the question(s) below.

Von Bora Corporation is expected to pay a dividend of $1.40 per share at the end of this year and a $1.50
per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two
years. Von Bora's equity cost of capital is 10%.

8) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid. You
then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid. The capital
gain rate that you will receive on your investment is closest to: 8) _______

A) 6.25%. B) 3.75%. C) 3.50%. D) 4.00%.

Use the following information to answer the question(s) below.

Wyatt Oil, an all-equity financed firm, has just reported EPS of $4.00 per share. Despite an economic
downturn, Wyatt is confident regarding its current investment opportunities, but due to the current
financial crisis, Wyatt does not wish to fund these investments externally. Wyatt's board has therefore
decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of
$2 per share) and retain these funds instead. The firm just paid its current dividend of $1.00 per share
and expects to keep its dividend at $1 per share next year as well. In subsequent years, it expects its
growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend
payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. All dividends and
repurchases occur at the end of each year.

Wyatt's existing operations are expected to generate the current level of earnings per share in the future.
Assume that the return on new investments is 16% and that reinvestments will account for all future
earnings growth. Wyatt's current equity cost of capital is 12%.

9) Wyatt's expected EPS in two years is closest to:

A) $5.04. B) $5.38. C) $4.48. D) $4.64. 9) _______

Use the information for the question(s) below.

You expect CCM Corporation to generate the following free cash flows over the next five years:

Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40

Following year five, you estimate that CCM's free cash flows will grow at 5% per year and that CCM's
weighted average cost of capital is 13%.

10) The enterprise value of CCM corporation is closest to:

A) $350 million. B) $290 million. C) $396 million. D) $382 million. 10) ______

Use the information for the question(s) below.

Defenestration Industries plans to pay a $4.00 dividend this year and you expect that the firm's earnings
are on track to grow at 5% per year for the foreseeable future. Defenestration's equity cost of capital is
13%.

11) Assuming that Defenestration's dividend payout rate and expected growth rate remain constant, and
Defenestration does not issue or repurchase shares, then Defenestration's stock price is closest to:
11) ______

A) $22.25. B) $50.00. C) $32.30. D) $30.75.

12) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the
remaining $2 per share to repurchase stock. If Defenestration's payout rate remains constant, then
Defenestration's stock price is closest to: 12) ______

A) $22.25. B) $30.75. C) $50.00. D) $32.30.

13) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the
remaining $2 per share to repurchase stock. If Defenestration maintains this dividend and total payout
rate, then the rate at which Defenestration's dividends and earnings per share are expected to grow is
closest to: 13) ______

A) 5%. B) 9%. C) 13%. D) 7%.

Use the information for the question(s) below.

You expect CCM Corporation to generate the following free cash flows over the next five years:

Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40

Following year five, you estimate that CCM's free cash flows will grow at 5% per year and that CCM's
weighted average cost of capital is 13%.

14) If CCM has $200 million of debt and 8 million shares of stock outstanding, then the share price for
CCM is closest to: 14) ______

A) $24.50. B) $49.50. C) $12.50. D) $19.35.

15) If CCM has $150 million of debt and 12 million shares of stock outstanding, then the share price for
CCM is closest to: 15) ______

A) $11.25. B) $20.50. C) $22.75. D) $49.50.

Use the following information to answer the question(s) below.

Wyatt Oil, an all-equity financed firm, has just reported EPS of $4.00 per share. Despite an economic
downturn, Wyatt is confident regarding its current investment opportunities, but due to the current
financial crisis, Wyatt does not wish to fund these investments externally. Wyatt's board has therefore
decided to suspend its stock repurchase plan and cut its dividend to $1 per share (from its current level of
$2 per share) and retain these funds instead. The firm just paid its current dividend of $1.00 per share
and expects to keep its dividend at $1 per share next year as well. In subsequent years, it expects its
growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend
payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. All dividends and
repurchases occur at the end of each year.

Wyatt's existing operations are expected to generate the current level of earnings per share in the future.
Assume that the return on new investments is 16% and that reinvestments will account for all future
earnings growth. Wyatt's current equity cost of capital is 12%.

16) Wyatt's current stock price is closest to:

A) $49.11. B) $54.00. C) $51.23. D) $61.38. 16) ______

17) The Rufus Corporation has 125 million shares outstanding and analysts expect Rufus to have
earnings of $500 million this year. Rufus plans to pay out 40% of its earnings in dividends and they
expect to use another 20% of their earnings to repurchase shares. If Rufus' equity cost of capital is 15%
and Rufus' earnings are expected to grow at a rate of 3% per year, then the value of a share of Rufus
stock is closest to: 17) ______

A) $16.00. B) $33.50. C) $20.00. D) $13.35.

Use the information for the question(s) below.

Von Bora Corporation is expected to pay a dividend of $1.40 per share at the end of this year and a $1.50
per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two
years. Von Bora's equity cost of capital is 10%.

18) Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid.
You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid. The
dividend yield that you will receive on your investment is closest to: 18) ______

A) 5.75%. B) 4.00%. C) 6.25%. D) 6.50%.

Use the following information to answer the question(s) below.

Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in one
year, and its expected price right after paying that dividend is $33.

19) Rearden's expected capital gains yield is closest to: 19) ______
A) 8.2%. B) 6.4%. C) 10.0%. D) 4.0%.

20) Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of
$0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's
dividend yield and equity cost of capital are: 20) ______

A) 4.0% and 6.0% respectively. B) 3.0% and 7.0% respectively.

C) 3.0% and 10.0% respectively. D) 4.0% and 10.0% respectively.

21) Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect
VBC's dividend to grow by 5% per year forever and VBC's equity cost of capital is 13%, then the value of
a share of VBC stock is closest to: 21) ______

A) $15.40. B) $25.00. C) $40.00. D) $11.10.

22) The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is
expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of
capital is 14%. If the dividend payout rate is expected to remain constant, then the ex pected growth rate
in the Sisyphean Company's earnings is closest to: 22) ______

A) 8%. B) 6%. C) 2%. D) 4%.

23) You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will
pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new
investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is
closest to: 23) ______

A) 7.5%. B) 6.0%. C) 4.5%. D) 3.0%.

24) JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use
the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to
grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's
dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the
expansion, the value of a share of JRN after the announcement is closest to: 24) ______

A) $15.00. B) $27.50. C) $25.00. D) $31.25.

25) You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans
to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on
retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained
earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of
capital is 12%, then the price of a share of Bean's stock is closest to: 25) ______

A) $43.50. B) $17.00. C) $27.65. D) $10.75.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
26) Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four
years (affecting D1, D2, D3, and D4). Beginning in year five, the growth rate is expected to drop to 7
percent per year and last indefinitely. If GRF just paid a $2.00 dividend and the appropriate discount rate
is 15 percent, then what is the value of a share of GRE?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
27) If a bond is currently trading at its face (par) value, then it must be the case that: 27) ______
A) the bond is a zero-coupon bond.
B) the bond's yield to maturity is equal to its coupon rate.
C) the bond's yield to maturity is less than its coupon rate.
D) the bond's yield to maturity is greater than its coupon rate.

Use the following information to answer the question(s) below.

Consider the following four corporate bonds that have semiannual compounding:

Bond #1 #2 #3 #4
Price $1000.00 $932.05 $1067.95 $1098.96
Coupon Rate 8% 7% 9% 9%
Years to Maturity 5 10 10 20

28) Which of these bonds sells at a discount? 28) ______

A) #1 B) #2 C) #3 D) #4

29) Suppose a five-year bond with a 7% coupon rate and semiannual compounding is trading for a price
of $951.58. Expressed as an APR with semiannual compounding, this bond's yield to maturity (YTM) is
closest to: 29) ______
A) 8.2%. B) 7.8%. C) 7.0%. D) 7.5%.

30) Consider a zero-coupon bond with 20 years to maturity. The price at which this bond will trade if the
YTM is 6% is closest to: 30) ______

A) $215. B) $335. C) $306. D) $312.

31) You are saving for retirement. To live comfortably, you decide that you will need $2.5 million by the
time you are 65. If you assume you are able to do that, and will live 20 more years (until age 85), the
amount you can withdraw at the end of each of those years at an interest rate of 5% before your
retirement fund is empty is closest to: 31) ______

A) $75,606. B) $197,987. C) $200,606. D) $72,987.

32) Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 8%, then the future value of this stream of cash flows is closest to:
32) ______

A) $12,635. B) $10,339. C) $11,699. D) $10,832.

33) Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 10%, then the present value of this stream of cash flows is closest
to: 33) ______

A) $460. B) $600. C) $287. D) $674.

34) Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 6%, then the future value of this stream of cash flows is closest to:
34) ______

A) $1500. B) $1626. C) $1723. D) $1288.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the information for the question(s) below.

Joe just inherited the family business, and having no desire to run the family business, he has decided to
sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate
payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and
$75,000 in three years. The current market rate of interest for Joe is 6%.

35) In terms of present value, how much will Joe receive for selling the family business?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
36) Luther's Operating Margin for the year ending December 31, 2018 is closest to: 36) ______
A) 6.8%. B) 0.5%. C) 5.4%. D) 0.7%.

Use the information for the question(s) below.

In November 2019, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares
outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt,
$163.82 million in net income, and cash of $257.09 million.

37) Perrigo's debt to equity ratio is closest to: 37) ______

A) 0.75. B) 0.89. C) 0.24. D) 0.50.

Use the table for the question(s) below.

Consider the following balance sheet:

Luther Corporation
Consolidated Balance Sheet
December 31, 2019 and 2018 (in $ millions)

Liabilities and
Assets 2019 2018 Stockholders' Equity 2019 2018
Current Assets Current Liabilities
Cash 63.6 58.5 Accounts payable 87.6 73.5
Notes payable/
Accounts receivable 55.5 39.6 short-term debt 10.5 9.6
Current maturities of long-
Inventories 45.9 42.9 term debt 39.9 36.9
Other current assets 6.0 3.0 Other current liabilities 6.0 12.0
 Total current assets 171.0 144.0 Total current liabilities 144.0 132.0

Long-Term Assets Long-Term Liabilities

Land 66.6 62.1 Long-term debt 239.7 168.9
Buildings 109.5 91.5 Capital lease obligations --- ---
Equipment 119.1 99.6 Total Debt 239.7 168.9
Less accumulated
depreciation (56.1) (52.5) Deferred taxes 22.8 22.2
Net property, plant, and
equipment 239.1 200.7 Other long-term liabilities --- ---
Goodwill 60.0 -- Total long-term liabilities 262.5 191.1
Other long-term assets 63.0 42.0 Total liabilities 406.5 323.1
Total long-term assets 362.1 242.7 Stockholders' Equity 126.6 63.6

Total liabilities and

Total Assets 533.1 386.7 Stockholders' Equity 533.1 386.7

38) When using the book value of equity, the debt to equity ratio for Luther in 2019 is closest to: 38)
______
A) 0.43. B) 2.98. C) 2.29. D) 3.57.

39) If in 2019 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,
then using the market value of equity, the debt to equity ratio for Luther in 2009 is closest to: 39)
______

A) 1.78. B) 4.07. C) 1.47. D) 2.31.

40) Luther's current ratio for 2019 is closest to: 40) ______
A) 1.09. B) 1.19. C) 0.92. D) 0.84.

41) Luther's quick ratio for 2018 is closest to: 41) ______
A) 0.77. B) 1.15. C) 1.30. D) 0.87.

42) The change in Luther's quick ratio from 2018 to 2019 is closest to: 42) ______
A) an increase of .10. B) an increase of .15.
C) a decrease of .15. D) a decrease of .10.

Use the following information for ECE incorporated:

Assets $200 million

Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million

43) ECE's Return on Assets (ROA) is: 43) ______

A) 5.0%. B) 15.0%. C) 7.5%. D) 8.5%.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the information for the question(s) below.

You expect DM Corporation to generate the following free cash flows over the next five years:

Year 1 2 3 4 5
FCF ($ millions) 75 84 96 111 120
Beginning with year six, you estimate that DM's free cash flows will grow at 6% per year and that DM's
weighted average cost of capital is 15%.

44) Calculate the enterprise value for DM Corporation.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
Use the table for the question(s) below.

Consider the following probability distribution of returns for Alpha Corporation:

Current
Stock Price Stock Price in Probability
($) One Year ($) Return R PR
$35 40% 25%
$25 $25 0% 50%
$20 -20% 25%

45) The expected return for Alpha Corporation is closest to:

A) 10%. B) 0.00%. C) 6.67%. D) 5.00%. 45) ______

Use the information for the question(s) below.

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move
independently of each other. For both types of firm there is a 70% probability that the firm will have a 20%
return and a 30% probability that the firm will have a -30% return.

46) What is the expected return for an individual firm?

A) 5% B) 3% C) -5% D) 14%
46) ______

47) The standard deviation for the return on an individual firm is closest to:
A) 5.25%. B) 15.0%. C) 10.0%. D) 23.0%. 47) ______

48) The standard deviation for the return on a portfolio of 20 type S firms is closest to:
A) 5.10%. B) 23.0%. C) 5.25%. D) 15.0%. 48) ______

49) The standard deviation for the return on a portfolio of 20 type I firms is closest to:
A) 5.25%. B) 15.0%. C) 5.10%. D) 23.0%. 49) ______

Use the table for the question(s) below.

Consider the following probability distribution of returns for Alpha Corporation:

Current
Stock Price Stock Price in Probability
($) One Year ($) Return R PR
$35 40% 25%
$25 $25 0% 50%
 $20 -20% 25%

50) The variance of the return on Alpha Corporation is closest to:

A) 4.75%. B) 3.625%. C) 3.75%. D) 5.00%. 50) ______

51) The standard deviation of the return on Alpha Corporation is closest to:
A) 19.4%. B) 19.0%. C) 21.8%. D) 22.4%. 51) ______

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the information for the question(s) below.

You expect DM Corporation to generate the following free cash flows over the next five years:

Year 1 2 3 4 5
FCF ($ millions) 75 84 96 111 120

Beginning with year six, you estimate that DM's free cash flows will grow at 6% per year and that DM's
weighted average cost of capital is 15%.

52) If DM has $500 million of debt and 14 million shares of stock outstanding, then what is the price per
share for DM Corporation?
THE END