What are the three methods used in the course to assess a stocks intrinsic value? Can a stock actual (as traded) value be less than the intrinsic value?

2. What is the difference between the expected rate of return and the required rate of return?

3. As interest on debt is a deductible expense for corporations, why don't all corporations fund themselves with 99.9% debt (say with one share owned by one person)? Consider from the viewpoint of the lenders.

4. Why is it critical that the triple imperative be met in project management from a financial and managerial perspective?

5. Which is better to use for calculating the WACC: the market value of debt and equity or book value? Why?

Quantitative Questions: 15 marks each. Four quantitative questions.

6. Your firm is considering two investment projects each of which cost 25 M$. Your cost of capital is 10% and the investment will produce the following after tax cash flows in millions of $.

Year Project A Project B

1 5 20

2 10 10

3 15 8

4 20 6

a)a) What is the payback period for each project? Payback:

b)If the two projects are independent and the cost of capital is 10%, which project(s) should

your firm undertake?

NPV_A: NPV_B: Choice:

c) If the two projects are mutually exclusive and the cost of capital is 5% which project should be undertaken?

NPV_A: NPV_B: Choice:

d) If the two projects are mutually exclusive and the cost of capital is 15% which project should be undertaken?

NPV_A: NPV_B: Choice:

e) What is the crossover rate? Crossover rate: %

f) If the cost of capital is 10%, what is the MIRR of each project? Which project(s) should be selected if independent?

MIRR_A: MIRR_B: Choice:

7. Capital Investments Corporation's debt has a market value of $40 million and stock has a market value of $60 million (=3 million outstanding shares @ $20 each). The firm pay s 10% rate of interest on new debt and has a beta () of 1.41. The corporate tax rate is 34% and the Security Market Line (SML) applies.Currently the market risk premium is 4.68% and Treasury Bill rate is 5.49%. What is the corporations WACC?

WACC:

8. Fairpeter Manufacturing, a maker of twisted manila rope, is considering the replacement of its old fully depreciated twisting machine. Machine X cost $190,000 with a 3 year life and after tax cash flows of $87,000 per year. Machine Y costs $360,000 has a 6 year life and after tax cash flows of $98,300 per year. However, it requires a major overhaul costing $50,000 in year 3. The machines are mature technology and may be expected to be replaced in kind. Fairpeter's cost of capital is 14%

a) Should the old machine be replaced? Reason? (no calculations needed)

b) Calculate the EAA of machines X and Y and recommend the preferred machine if replacing.

EAA_X: EAA_Y: Choice:

9. ACME has a current dividend of $4.00. Shareholders required a rate of return of 10%. Although the dividend has been growing at a rate of 30% per year in recent years, the growth rate is expected to last only for the next two years. After year two, the growth rate will stabilize at 5% per year.

a) What is ACME's stock worth now? Share Price @ t=0 : $/share

b) What is the expected stock price in year 1? Share Price @ t=1: $/share

c)During year one, what is the expected (i) dividend yield (ii) capital gains yield (iii) total return?

Dividend yield (1): Capital gains (1): Total(1):

d) During year two, what is the expected (i) dividend yield (ii) capital gains yield (iii) total return?

Dividend yield (2): Capital gains (2): Total(2):