Principles of Modern Finance Sample Midterm

This four-credit course is for students who major in finance. By the end of this course,

Faculty and students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents:

Horizontal analysis allows side by side comparisons on a year to year basis to determine the performance from one year to the next. The company decides on standards to compare the results of the analysis. Standards are researched by checking competitors, internet research of general industry guidelines or standards created from past experience in the company.

(CST2410) final exam was only ten questions long, with 7 short response questions and 3 multiple choice questions.

Rubric: The quiz is worth 25 points. Each selected-response question is worth 1 point. The student will receive 1 point for selecting the correct answer. Each constructed-response is worth 5 points. In order to receive all 5 points for each constructed response, the student must fulfill the criteria below. The minimum passing score is 19 out of 25

price is $25 per share. The most recent dividend was $1 and the growth rate is 5%.

Sunrise Industries Ltd. is considering the purchase of an additional printing press for $25,000. It is expected that additional cash revenue each year will be $24,000 before any taxation. Cash costs are expected to be $13,000, however $1,800 of these will be non deductable for taxation purposes. The useful life of the press is expected to be five years with a salvage value of $1,200. The Commissioner of Taxation has specified the rate for depreciation on such a press to be 22.5% diminishing value method. The

This practice exam consists of 30 multiple choice questions on 11 pages (including this cover page).

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

The machine will have a depreciation of $140,000 for the first five years; this is determined by dividing the initial investment by five. The old machine will be sold in 2010 for $25,000 which is below the current book value of $36,000. This is why there is a capital gain of $3,850 that will add to the incremental savings plus the depreciation for that year. The new sheeter will be sold at the end of the last year for $120,000 which will be taxed at 35; this is why a cost of $42,000 appears for the last cash flow (Exhibit 1). The NPV is a positive $1,063,567 and the IRR is 36%, this shows that the project will add value to the company along with having a great return. The payback period for the project is 2.45…Using the growth rate of 3%, the sales are projected to be nearly doubled from 2009 with the new sheeter. However, Pitts believes that he would not be surprised to see them increase by 7% or

| This assesses a company’s financial durability by examining whether it is at least profitable enough to pay off its interest expenses.

Which of the following is NOT normally regarded as being a barrier to hostile takeovers? (Points : 5)

1. The cause to the conflict in the rankings is that while the IRR ranking shows a percentage so that you can see what percentage you are making on certain amount, it does not show the size of the project.

Both firms are expected to generate cash flows of $50 million per year for the foreseeable future and the market value of the equity of ABC, Inc is $500 million. Estimate the return on equity of XYZ, Inc. Assume there are no taxes, and the risk-free rate is 4%. (No more than two decimals in the percentage interest rate, but do not enter the % sign.)

-Brokerage firms manage and facilitate the purchase of stocks, bonds, and other types of investments.