Essay on Final Exam Finances

Choose the best answer by typing the letter in bolded script (e.g., “Correct answer:B”).
For computational questions: You must show your work where possible to receive credit.

1. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?
a. All common stocks fall into one of three classes: A, B, and C.
b. All common stocks, regardless of class, must have the same voting rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same dividend.
e. Some class or classes of common stock can be entitled to more votes per share than other classes.
CORRECT ANSWER E

2. Company Z has the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Please reference the given general Dividend Growth Model formulas:

Stock Price per share, P0 = Dividend per share (DPS) expected for Year 1 . (Required Return less Dividend Growth rate, g)

Required Return = DPS + g = Dividend Yield + Capital Gains Yield P0
Dividends per share for Year 1 $2.75 $2.75 / .20 = 13.75 /
Required Return 20%
Market Price $35.50

What is the expected Capital Gains Yield for Company Z?
a. 15.50%
b. 7.85%
c. 12.25%
d. 10.50%
CORRECT ANSWER C
$2.75 / $35.50 = .0775. .2 - .0775 = 12.25g. .20 - .0775 – 12.25.

3. You must estimate the intrinsic value of MacGregor Apparel Inc.’s common stock. The end-of-year free cash flow (FCF1) is expected to be $56.75 million, and it is expected to grow at a constant rate of 3.0% a year thereafter. The company’s WACC is 19.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 7.5 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
a. $ 8.34
b. $10.17
c. $22.98
d. $30.63 (56.75/(.19-.03)) – 125 = 229.6875/7.5 = 30.625
e. $37.08
CORRECT ANSWER D

4. Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
d. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
CORRECT ANSWER B

Use the following described situation to answer questions numbered 5 and 6.
Germania Instruments Corp. (“GIC”) manufactures precision equipment for cameras. The company’s Total Debt is comprised of senior notes outstanding with 8 years to maturity that are trading at $1,043.50 per bond with a $1,000 face value, and the company has 55,000 of these bonds outstanding. The bonds pay interest annually based on a 7.75% coupon interest rate. GIC is planning to issue $25 million of new preferred stock, which will have a par value of $50.00 per share, dividends per share of $5.50, and per-share flotation costs of $3.75 per share. The company has a marginal income tax rate of 29.50%.
5. What is GIC’s Pre-Tax Cost of Debt? After-Tax Cost of Debt? a. 7.7236% and 4.5048% b. 7.7236% and 2.2188% c. 7.0209% and 4.9497% 72.0625/1021.75 = .07053 * .705 = 4.97% d. 6.6124% and 4.4303%
CORRECT ANSWER C

6. What is GIC’s Pre-Tax Cost of Preferred Stock? After-Tax Cost of Preferred Stock? a. 5.4348% and 3.6413% b. 11.8919% and 11.8919% 5.5/(50-3.75) c. 11.000% and 11.0000% d. 10.8696% and 7.2826%
CORRECT ANSWER B

7. Elanico LLC’s capital structure is briefly

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