Microsoft word MID test n01
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MID-TERM TEST- No 01
SUBJECT: CORPORATE PRICING
SEMESTER 2, 2021-2022
Duration: 90 minutes
E1 (1 mark): Utilitarian Co. is looking to expand its appliances division. It currently has a beta of 0.9, a D/E
ratio of 2.5, a marginal tax rate of 30%, and its debt is currently yielding 7%.
JF Black, Inc. is a publicly traded appliance firm with a beta of 0.7, a D/E ratio of 3, a marginal tax rate of
40%, and its debt is currently yielding 6.8%. The risk-free rate is currently 5% and the expected return on the
market portfolio is 9%. Using this data, calculate Utilitarian's weighted average cost of capital and JF Black's
weighted average cost of capital.
E2 (1 mark): An investor deposits $4,000 in an account that pays 7.5%, compounded quarterly. How much
will this investment be worth after 12 years?
E3: (3 marks): Company X has a summarized balance sheet at 31/12/N Currency unit: million VND
Assets
Book value
Sources of financing
Book value
Current Assets
1200
Liabilities
1900
Non-current Assets
2800
Owner’s Equity
2100
Total Assets
4000fx
Liabilities + Owner’s Equity
4000
According to the revaluation of all assets and liabilities, there has been some changes taking place:
1. The original and accumulated depreciation of the fixed assets at 31/12/N
Kinds of fixed assets
The original price
Accumulated depreciation
1.
2.
3.
Real estate property
Machines
Transportations
500
800
300
150
300
200
4.
5.
Management tools
Others
180
200
90
110
1,980
850
Total fixed assets
According to the revaluation of all assets and liabilities, there has been some changes taking place
The revaluation ratio of the fixed assets by the book value.
- Real estate property: 0.85; Machines: 0.8; Transportations: 0.9; Management tools: 0.75; Others: 0.9
2. Some receivables that are not be able to collect have a book value of 50 million VND while some doubtful
receivables with the book value of 80 million VND have been acquired by a debt trading company with the
price being equal to 40% of its recorded value.
3. Obsolete and unserviceable raw materials inventory has a book value of 70 million VND
4. X still has to pay the fixed assets rental payments during the next 10 years, 50 million VND per year. In
order to rent an equivalent asset at this moment, a company has to pay the amount of 58 mVND each year.
5. Investing in securities of company B: (2000 stocks) book value is 200 million VND. At the time of
revaluing, the price of a B’s stock in the Stock Exchange is 95000 VND.
6. Company’s capital in partnership business is recorded as 400 milVND, after being revalued, it goes up by
55 milVND
7. After collecting the profiles, X has already obtained all the documents proving that some liabilities at the
time of valuation will no longer be accounted for and those liabilities have a book value of 120 million VND
Determining the value of company X knowing that:
- Net income at the time of valuation is recalculated as an average of net income in the last 3 years and ends
up with an amount of 850 million VND. Net income is expected to increase 10% per year in the next 3 years.
- Net asset value is expected to annually increase 6% per year
- An average returns on equity ratio of comparable companies in the industry is 13%.
- Yield on Treasury bond is 11%, equity risk premium on the securities market is 3%.
E4 (2.5 marks): Company ABC that majors in manufacturing consumer good has been in good condition
with the following financial data:
•
Net income in Year N is XXXXXXX USD; Dividend payout ratio is 65%
•
ROE in Year N is 25%, which is assumed to be constant in the significantly growing period.
•
ABC has a beta of 1,2; risk-free rate is 7%, market risk premium is 5%.
•
Assume that ABC keeps growing strongly in the next 4 years, then enters into a more stable period
with a growth rate being equal to the growth rate of the economy at 8%.
•
In the second period, it is expected that: ß = 1, 𝑅𝑂𝐸$ = 20%;
a, Determine the value of ABC at present;
b, Determine the value of ABC at the beginning of the year N+3.
*** XXXXXXX is your ID student
E5 (2.5 marks): Company ABC has the following data:
•
Net income: YYYY million USD
•
Fixed capital investment: 70 million USD
•
Depreciation: 80 million USD
•
Working capital investment: 50 million USD
•
Net borrowing (the difference between new principal (debt) issuing and old principal (debt) paid out):
30 million USD
•
According to the 5-year plan, net income, fixed capital investment, working capital investment,
depreciation and net borrowing are expected to grow at 8% per year and required rate of returns on equity is
12% per year.
Determine the value of ABC:
a, based on FCFE discount model? After the first 5 years, ABC grows constantly at the rate of 4% per year
and required rate of returns on equity is 14% per year.
b, based on FCFF discount model? Current borrowing an amount of 1500 million from bank with the rate
of 12% per year. In the first 5 years, FCFF is expected to grow at 8% per year. After that, ABC plans to grow
constantly at the rate of 3% per year and required rate of returns on equity is 16% per year. Optimal debt ratio
of X is 30% (Debt/total assets). Corporate income tax is 20%.
*** YYYY is your date of birthday (dd/mm)
