CIS SAMPLE EXAM 2021S2
Writing Time: 150
Total Duration 150 mins
Finance金融代写 Funtopia plans to acquire Wonderland in 2022 since Funtopia believes that Wonderland’s current financial leverage is not optimal.
Instructions to Candidate: Finance金融代写
- Answer ALL questions (full marks: 60).
- This is a Closed Book examination.
- You should answer all questions of PART A on the multiple choice answer sheet. Detach the multiple choice answer sheet and place it in the front of your blue answer book at the end of the exam.
- You should answer all questions of PART B in the blue answer book and should begin each answer on a new page in the answer book.
- Please allocate your time according to the percentage contribution of the questions.
- Examination materials must NOT be removed from the examination room.
• Calculator - Graphics
• Calculator - Standard
• ONE (1) double-sided A4 sheet of handwritten notes. Typed notes are NOT permitted.
• Multiple choice answer sheet
• Blue answer booklet
PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO PLEASE SEE NEXT PAGE
Part A: multiple choice questions [TOTAL 40 MARKS] Select the most appropriate (‘best’) solution to each of the following questions. You should answer all questions of PART A on the multiple choice answer sheet.
A firm has several options available to it in times of financial distress. The firm may:
A. reduce capital and R & D spending.
B. raise new funds by selling securities or major assets.
C. file for bankruptcy.
D. negotiate with lenders.
E. take any or all of the other actions.
The stock price of XYZ Ltd is $45. EPS is $2.50 and the required return on equity is 8 per cent annually. Which one of the following statements is false?:
A. NPVGO per share is $13.75
B. Growth opportunities are 30.56 per cent of the stock price
C. All else equal, a fall in the stock price to $40 implies growth opportunities have fallen to 21.88 per cent of the stock price
D. All else equal, an increase in the required return on equity to 10 per cent will cause NPVGO to rise to $22 per share
Question 3 Finance金融代写
Last year, Eldred’s Car Repairs Ltd had a price-earnings ratio of 15. This year, the price-earnings ratio is 18. Based on this information, it can be stated with certainty
A. the price per share increased
B. the earnings per share decreased
C. investors are paying a higher price for each share of stock
D. either the price per share or earnings per share, or both, changed
A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a:
A. tender offer.
B. proxy contest.
D. leveraged buyout.
Question 5 Finance金融代写
Company Argo has applied for a loan at ANZ Bank. Emma, the credit analyst at the bank,has gathered the following information from the company’s financial statements:
Total assets $115,000
Net working capital 3,800
Book value of equity 21,000
Accumulated retained earnings 19,600
The stock price of Argo is $40 per share and there are 8,000 shares outstanding. Calculate the Z-score for this company to predict its likelihood of corporate bankruptcy.
Which of the following statements is correct? The payoff of a call can be replicated by:
A. buying a stock, buying a put and borrowing the present value of the exercise price at the risk-free rate
B. buying a stock, buying a put and investing the present value of the exercise price in a treasury bond
C. selling a stock, selling a put and borrowing the present value of the exercise price at the risk free rate
D. selling a stock, selling a put and investing the exercise price in treasure bond
Question 7 Finance金融代写
Which one of the following statements is correct? All else equal, as a firm increases its retention ratio:
A. SGR increases and EFN declines
B. SGR falls and EFN declines
C. SGR increases and EFN rises
D. SGR falls and EFN rises
Which one of the following stated acquisition motive is likely not in shareholder’s best interest?
A. Acquiring undervalued firms
B. Taking over poorly managed firms and change management
C. Empire building
D. Acquiring a target firm in the same business to create economies of scale
Question 9 Finance金融代写
Which one of the following statements is false? To model equity as an option, we can argue that:
A. shareholders own the firm and put the firm's assets to debtholders when asset value is below the debt value
B. debtholders own the firm and shareholders call the firm's assets by paying debt obligations when asset value is above debt value
C. shareholders own the firm and call the firm's assets when asset value is above debt value
D. until the firm is liquidated equity always has some value as long as asset returns are risky
Which one of the following statements concerning growth rates is correct?:
A. The internal growth rate (IGR) is always equal to sustainable growth rate (SGR) when debt exists
B. If the actual growth rate is higher than SGR, the company will need more nextperiod external financing
C. The SGR is the maximum rate at which the firm can grow by using internal financing and issuing new equity
D. Lower net income permits higher IGR and SGR
A stock is currently priced at $80 per share. A put on the share with an exercise price of $85 is trading at $12. The expiry is 4 months. The dividend yield is 3% and the riskfree rate is 6%, both continuously compounded. Use Put-Call Parity to calculate the price of a call option with a strike price of $85 and 4 months to expiration.
Question 12 Finance金融代写
Consider the following pre-merger information about a bidding firm (firm B) and a target firm (firm T). Assume that both firms have no outstanding debt.
For firm B: Number of shares outstanding=5,800; Price per share=$48
For firm T: Number of shares outstanding=2,800; Price per share=$36
Firm B has estimated that the value of the synergistic benefits from acquiring firm T is $15,000. If firm T is willing to be acquired for $40 per share in cash, what will be the price per share of the merged firm?
Zonda Trading Company has:
Company Tax Rate 34%
Cost of Capital (After tax) 15%
What is the corporation’s Economic Value Added (EVA)?
A. - $0.45m
Question 14 Finance金融代写
The debt equity ratio of a firm is 0.6. The total asset turnover is 1.40 and the profit margin is 12%. Total equity is $4,800. What is net income?
E. None of the above
Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34%. What is the operating cash flow for this project?
Question 16 Finance金融代写
ABC Ltd. is currently worth $20 million. The assets are expected to be either $25 million or $18 million in one year’s time. The face value of the company’s debt is $10 million. The risk free rate is 5%. What is the value of the equity in this firm?
PART B: short-answer questions [TOTAL 20 MARKS] You must answer ALL questions and show all calculations. Please note that no marks will be awarded if there are no workings provided in your answer. Round all numbers to 4 decimal places.
The following are the details on two potential merger candidates, Funtopia and Wonderland, in 2020:
Revenues $4,400.00 $3,125.00
Cost of Goods Sold
(without Depreciation) 87.50% 89.00%
Depreciation $200.00 $74.00
Tax Rate 35.00% 35.00%
Working Capital 10% of Revenue 10% of Revenue
Market Value of Equity $2,000.00 $1,300.00
Outstanding Debt $160.00 $250.00
Both firms are in steady state and are expected to grow 5% a year in the long term. Capital spending is expected to be 120% of depreciation with deprecation growing at 5% a year. The beta for both firms is 1, and both firms are rated BBB, with an interest rate on their debt of 8.5%. (The treasury bond rate is 7%, and the market risk premium is 5.5%.) As a result of the merger, the combined firm is expected to have a cost of goods sold of only 80% of total revenues. The combined firm does not plan to borrow additional debt.
a) What is the status quo valuation of Funtopia?
b) What is the status quo valuation of Wonderland?
c) How much is the operating synergy worth in this acquisition plan?
Question 2 Finance金融代写
Funtopia plans to acquire Wonderland in 2022 since Funtopia believes that Wonderland’s current financial leverage is not optimal. The financial information of
Wonderland in 2021 is as follows, Free cash flow to the firm (FCFF) = 153 million, market value of equity=$1,300 million, outstanding debt=250 million, cost of
debt=8.5%, tax rate=35%, beta=1. Wonderland is already in steady state and is expected to grow 5% a year in the long term. The treasury bond rate is 7%, and the
market risk premium is 5.5%. Funtopia intends to increase the debt ratio of Nova to 30% of total capital from the current level after the acquisition, which will incur a cost of debt of 9%.
a) What is the value of Wonderland, operating independently?
b) What would be the value of Wonderland under Funtopia’s control?
c) How much is the value of control worth in this acquisition plan?
Consider 2 companies Toop and Domain and the following facts.
• Toop generates $600 million in Free Cash flow to Equity (FCFE) from its own operations (expected in perpetuity) and has a 30% investment in shares of
Domain. The discount rate of Toop’s operations is 15% and the number of shares outstanding is 100 million.
• Domain generates $400 million in Free Cash flow to Equity (FCFE) from its own operations (also expected in perpetuity), the discount rate of its operations
is 10% and has 400 million shares outstanding.
a) Estimate the per share value of company Toop.
b) Estimate the per share value of Toop and Domain if Domain also has a 15% shareholding in Toop, assuming such a cross-shareholding was created before the passage of the Corporations Act 2001. Verify your solution is correct or not.