Ok I have a final exam soon. Does anyone have any questions at all that they cou

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Spring 1998 Name: 1 Final Exam: Corporat e Financ e 1 h o u r All of the questions in this exam relate to a company called Mallinckrodt, which is head quartered in St. Louis, Missouri, and is a company involved in pharmaceuticals and specialty chemicals. The stock of the company, traded on the NYSE, is at a 52-week low of $ 32 per share. The CEO of the company, Mr. Ray Holman, has invited you to come in and do a corporate financial analysis of the firm, and has offered to pay you handsomely for your services. · Page 8 of this exam has the income statements and balance sheets for the last 2 years · Page 9 of this exam has the statement of cash flows for the last 4 years · Page 10 has a summary table of interest coverage ratios, ratings and default spreads that you might find useful. · Page 11 has industry averages for betas, debt ratios, returns on equity and capital, capital expenditure/depreciation and working capital as % of revenues for the two segments that Mallinckrodt is in - pharmaceuticals and specialty chemicals. Additional Notes · You can ignore the preferred stock in the firm for your calculations. · Use a market risk premium of 5.5% throughout this analysis. · The long term treasury bond rate through out this analysis can be set at 6%.Spring 1998 Name: 2 1. The following is the Bloomberg regression output, using returns from 1992 to 1997 for Mallinckrodt. a. If the long term treasury bond rate today is 6%, estimate the cost of equity for Mallinckrodt, based upon the raw beta for the firm. ( 3 points)Spring 1998 Name: 3 b. Mallinckrodt operates in two different business segments - pharmaceuticals and specialty chemicals. In 1997, the two businesses had the following operating income: Business Segment Operating Income Pharmaceuticals $ 255.4 Million Specialty Chemicals $ 51.5 Million Total $ 306.90 Million Based upon the industry averages reported on page 12 for the two segments, estimate the bottom-up unlevered beta for Mallinckrodt. ( 5 points)Spring 1998 Name: 4 c. Mallinckrodt has 73 million shares outstanding today, trading at $ 32 per share. Assuming that the book value of debt on its books, which is $ 556.90 Million, is equal to market value (of debt), estimate the bottom-up levered beta for Mallinckrodt. The firm has a marginal tax rate of 40%. ( 4 points) d. Estimate the return on equity earned by Mallinckrodt in the 1997 financial year, based upon average book value of equity between 1996 and 1997. ( 2 points)Spring 1998 Name: 5 2. You have estimated the optimal debt to capital ratio for Mallinckrodt, based upon minimizing the cost of capital, to be 40%. a. Estimate the current cost of capital for Mallinckrodt, assuming that the beta for the stock is correctly estimated at 0.67, the cost of debt is based upon the rating estimated from the interest coverage ratio and the long term treasury bond rate is 6%. Mallinckrodt has 73 million shares outstanding today, trading at $ 32 per share and $ 556.90 million in debt outstanding (book as well as market). ( 5 points) b. At the optimal debt to capital ratio of 40%, Mallinckrodt has an interest coverage ratio of 3.54. Estimate the cost of capital at the optimal debt ratio. (You can still use that the current regression beta of 0.67 to arrive at the new beta) ( 6 points)Spring 1998 Name: 6 3. a. To look at the firm's dividend policy, you look at Mallinckrodt's financial statements for the last year. Mallinckrodt, in 1997, had net income of $ 190.10 million, capital expenditures of $ 169.70 million, depreciation of $127.70 million and its non-cash working capital increased by $ 33.70 million. If it financed 25% of its external financing needs with debt , estimate its FCFE in 1997. ( 5 points) b. Using the statement of cash flows provided, estimate the percentage of the FCFE that was returned to stockholders (in the form of dividends and stock buybacks) in 1997. (Stock Buybacks = Decr in Capital Stock) (5 points)Spring 1998 Name: 7 4. In may attempt to value Mallinckrodt, I have projected the following cash flows for the firm for the next 3 years, which are expected to be high growth years (with a growth rate of 10%), and for year 4, which is assumed to be the first year of stable growth (when the growth rate is expected to drop to 3%). Base 1 2 3 T e rmi n a l Y e a r EBIT (1-t) $ 184.20 $ 202.62 $ 222.88 $ 245.17 $ 252.53 + Deprecn $ 128.00 $ 140.80 $ 154.88 $ 170.37 $ 175.48 - Cap Ex $ 170.00 $ 187.00 $ 205.70 $ 226.27 $ 193.03 - Chg in WC $ 50.30 $ 55.33 $ 60.86 $ 20.08 FCFF $ 106.12 $ 116.73 $ 128.41 $ 214.89 Using the cost of capital estimated in problem 2a, value the firm. (If you had trouble getting the cost of capital in 2a, assume a cost of capital and value the firm). (15 points)Spring 1998 Name: 8Spring 1998 Name: 9Spring 1998 Name: 10 Interest Coverage Ratios, Ratings and Default Spreads If interest coverage ratio is > to Rating is Spread is -100000 0.199999 D 10.00% 0.2 0.649999 C 7.50% 0.65 0.799999 CC 6.00% 0.8 1.249999 CCC 5.00% 1.25 1.499999 B- 4.25% 1.5 1.749999 B 3.25% 1.75 1.999999 B+ 2.50% 2 2.499999 BB 2.00% 2.5 2.999999 BBB 1.50% 3 4.249999 A- 1.25% 4.25 5.499999 A 1.00% 5.5 6.499999 A+ 0.80% 6.5 8.499999 AA 0.50% 8.50 100000 AAA 0.20%Spring 1998 Name: 11 Industry Averages Pharmaceuticals Specialty Chemicals Beta (Levered) 1.15 0.70 Debt/Equity Ratio (Market) 10% 35% Return on Equity 18% 14% After-tax Return on Capital 15% 12.5% Capital Expenditures/Depreciation 110% 110% The marginal tax rate for all firms is 40%. Hope this helps found it from a friend.

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