FINA 4210 Midterm 2 questions with
verified answers
You are performing a simulation for risk analysis. One value driver you are particularly
concerned about is the first-year sales figure. You discuss these concerns with someone in
market research.
They report that while they originally gave you a figure of $10,000,000 for first-year sales, that
was simply the mean of likely values. In reality, they consider it just as likely that the firm sees
first-year sales of any number between $5 million and $15 million.
Which of the following distributions would make the most sense in your simulation? - correct
answer ✔✔Uniform
You can choose today whether to roll out one of two new products, but you can only choose
one. Product A has a 45% chance of success, and if successful will pay off $4 million in terms of
NPV. If it is a failure, your NPV will be -$250,000.
Product B has a higher chance of success, at 65%. If successful, its NPV will be $2.5 million, and
if it fails, it will only lose $50,000. (NPV = -$50,000).
Which product do you choose, and what is the NPV of this project? - correct answer ✔✔Project
A, $1.663 million
My firm currently has a total book equity (common stock plus retained earnings) of $1.5 billion,
and a total book value of debt of $750 million. The market cap for my firm is $6.5 billion, and
the current market value of its debt is $1.5 billion. There are plans in place to recapitalize the
firm by repurchasing equity with a new debt issuance; this will bring the firm to approximately
25% debt and 75% equity if measuring market values, and it will occur by the end of this year.
What weight of debt should I use when calculating this firm's WACC? - correct answer ✔✔25%
Your firm has recently issued bonds with exactly 9.5 years left to maturity. The coupon rate is
8.25%, paid in semiannual coupons. Current trading price is $1034.26. What is your estimate of
this firm's cost of debt? Assume face value of $1000. - correct answer ✔✔7.734%
, Using Figure 4-3 from the textbook (also given on slide 16 for Chapter 4), estimate the cost of
debt for a firm that traditionally offers only 10-year bonds and has a A+ debt rating from S&P.
Assume, if necessary, that current Treasury yields are as follows, and answer in percentage
points without the percentage sign (i.e., 25.8% should be given as 25.8).
1 mo. - 0.03%3 mo. - 0.05%6 mo. - 0.07%1 yr. - 0.08%5 yr. - 0.71%10 yr. - 1.40%20 yr. - 2.11%30
yr. - 2.23% - correct answer ✔✔2.00
ALP-PP originally issued its preferred shares at 5.3% of their $25 par value, paying a $1.33
dividend. Those shares are currently trading at $27.5. What is your estimate of this firm's cost of
preferred stock? Answer in decimal form to four decimal places, e.g., 26.1% is .2610. - correct
answer ✔✔.0484
Your firm has a 1.2 CAPM beta. The market risk premium is currently 5%, and the risk-free rate
as proxied for by the 10-year T-bond is 2.60%. Your client wants you to use CAPM plus a size
premium to estimate cost of equity. The firm in question has a $25 billion market cap.
What is your estimate of the cost of equity? Use the chapter slides if necessary for size
premium. - correct answer ✔✔8.6%
I am attempting to estimate my firm's beta through the use of comps. The only matching firm I
can find has an equity beta of 1.1. The debt-to-equity ratio is 18.24%, and I will assume a debt
beta of 0.2.
What is this comparable firm's asset beta? - correct answer ✔✔.961
After some work, I have found several comparable firms and calculated their asset betas. The
average of those betas indicates an industry average asset beta of .875. If my firm is all-equity
financed, what is my firm's equity beta? - correct answer ✔✔.875
The firm I am valuing recently paid a dividend of $1.36. I believe that dividend will grow at 4%
forever. If the stock is currently trading at $25, what its cost of equity according to a single-stage
growth model? - correct answer ✔✔9.658%
verified answers
You are performing a simulation for risk analysis. One value driver you are particularly
concerned about is the first-year sales figure. You discuss these concerns with someone in
market research.
They report that while they originally gave you a figure of $10,000,000 for first-year sales, that
was simply the mean of likely values. In reality, they consider it just as likely that the firm sees
first-year sales of any number between $5 million and $15 million.
Which of the following distributions would make the most sense in your simulation? - correct
answer ✔✔Uniform
You can choose today whether to roll out one of two new products, but you can only choose
one. Product A has a 45% chance of success, and if successful will pay off $4 million in terms of
NPV. If it is a failure, your NPV will be -$250,000.
Product B has a higher chance of success, at 65%. If successful, its NPV will be $2.5 million, and
if it fails, it will only lose $50,000. (NPV = -$50,000).
Which product do you choose, and what is the NPV of this project? - correct answer ✔✔Project
A, $1.663 million
My firm currently has a total book equity (common stock plus retained earnings) of $1.5 billion,
and a total book value of debt of $750 million. The market cap for my firm is $6.5 billion, and
the current market value of its debt is $1.5 billion. There are plans in place to recapitalize the
firm by repurchasing equity with a new debt issuance; this will bring the firm to approximately
25% debt and 75% equity if measuring market values, and it will occur by the end of this year.
What weight of debt should I use when calculating this firm's WACC? - correct answer ✔✔25%
Your firm has recently issued bonds with exactly 9.5 years left to maturity. The coupon rate is
8.25%, paid in semiannual coupons. Current trading price is $1034.26. What is your estimate of
this firm's cost of debt? Assume face value of $1000. - correct answer ✔✔7.734%
, Using Figure 4-3 from the textbook (also given on slide 16 for Chapter 4), estimate the cost of
debt for a firm that traditionally offers only 10-year bonds and has a A+ debt rating from S&P.
Assume, if necessary, that current Treasury yields are as follows, and answer in percentage
points without the percentage sign (i.e., 25.8% should be given as 25.8).
1 mo. - 0.03%3 mo. - 0.05%6 mo. - 0.07%1 yr. - 0.08%5 yr. - 0.71%10 yr. - 1.40%20 yr. - 2.11%30
yr. - 2.23% - correct answer ✔✔2.00
ALP-PP originally issued its preferred shares at 5.3% of their $25 par value, paying a $1.33
dividend. Those shares are currently trading at $27.5. What is your estimate of this firm's cost of
preferred stock? Answer in decimal form to four decimal places, e.g., 26.1% is .2610. - correct
answer ✔✔.0484
Your firm has a 1.2 CAPM beta. The market risk premium is currently 5%, and the risk-free rate
as proxied for by the 10-year T-bond is 2.60%. Your client wants you to use CAPM plus a size
premium to estimate cost of equity. The firm in question has a $25 billion market cap.
What is your estimate of the cost of equity? Use the chapter slides if necessary for size
premium. - correct answer ✔✔8.6%
I am attempting to estimate my firm's beta through the use of comps. The only matching firm I
can find has an equity beta of 1.1. The debt-to-equity ratio is 18.24%, and I will assume a debt
beta of 0.2.
What is this comparable firm's asset beta? - correct answer ✔✔.961
After some work, I have found several comparable firms and calculated their asset betas. The
average of those betas indicates an industry average asset beta of .875. If my firm is all-equity
financed, what is my firm's equity beta? - correct answer ✔✔.875
The firm I am valuing recently paid a dividend of $1.36. I believe that dividend will grow at 4%
forever. If the stock is currently trading at $25, what its cost of equity according to a single-stage
growth model? - correct answer ✔✔9.658%
