4. A firm\'s debt ratio is 40%. Currently, its interest expense is $500,000 on $
ID: 2761343 • Letter: 4
Question
4. A firm's debt ratio is 40%. Currently, its interest expense is $500,000 on $5 million of debt. Tax rate is 40%. If the firm's ROA is 6%, what is the firm's ROE? Hint: use DuPont.
A. 4.0%
B. 5.8%
C. 10%
D. none of the above
5. A company has the following balance sheet. How much of the firm's capital is investor-supplied?
Cash
$10
Accounts payable
$20
Short term investments
20
Accruals
30
Accounts receivable
30
Notes payable
20
Inventory
40
Current liabilities
$70
Current assets
$100
Long term debt
30
Net fixed assets
80
Common stock
10
Retained earnings
70
Total assets
$180
Total liabilities + equity
$180
A. $130
B. $40
C. $110
6. Last year, the free cash flow of Mac Engineering Corp was $ 1million (i.e., FCFo = $1 million). You estimate that the company's FCF will grow by 20 percent this year (i.e., FCF1 = $1.2 million) and 15 percent next year. After two years, its free cash flow is expected to grow at a constant rate of 5 percent. The cost of capital is 12%. Calculate the firm's value of operations (VOP)
A. $12.23
B. $16.91
C. $18.67
D. none of the above
7. RISK & RETURN. Which of the following is an appropriate measure of the total risk of a single asset? And which risk measure is appropriate for a stock that is part of a well-diversified portfolio?
A. Variance; correlation coefficient
B. Standard deviation; correlation coefficient
C. Standard deviation; beta
D. None of the above is an accurate response to the two questions
8. RISK & RETURN. For this and the next 1 questions: The following is a market model regression output where Y = GE's stock return and X = S&P 500 index return. Use the data to answer the questions that follow.
Regression Statistics
Multiple R
0.7614
R Square
0.5797
Adjusted R Square
0.5745
Standard Error
0.0459
Observations
83
ANOVA
df
SS
MS
F
P-value
Regression
1
0.2349
0.2349
111.6984
0.0000
Residual
81
0.1703
0.0021
Total
82
0.4052
Coeff.
Std. Err.
t Stat
P-value
Intercept
0.0076
0.0052
1.4547
0.1496
SP500
1.1653
0.1103
10.5687
0.0000
What proportion of the total variation in GE stock performance is accounted for by the changes in the market?
A. About 76%
B. About 58%
C. About 1.16%
D. None of the above
9. The standard deviation of the market index is 4.59% and the standard deviation of GE is 7.03%. Given this information, what is the covariance of GE and the market index?
A. .002457
B. .001905
C. none of the above
Cash
$10
Accounts payable
$20
Short term investments
20
Accruals
30
Accounts receivable
30
Notes payable
20
Inventory
40
Current liabilities
$70
Current assets
$100
Long term debt
30
Net fixed assets
80
Common stock
10
Retained earnings
70
Total assets
$180
Total liabilities + equity
$180
Explanation / Answer
4) dupont formula to compute ROE = profit margin*Asset turnover * equity multiplier
= profit /sales *sales /total sset * Total asset / equity
debt = 40% hence equity = 60% therefore equity = 5million *.6/.4 = $7.5 million
total liability = total debt + equity = $5 + $ 7.5 = 12.5 million
Therefore total asset = 12.5million
ROA = 6% = sales /Total asset
6% = sales /12.5
hence sales = .75million
sales = 0.75 million
less interest exp = .5
profit = .25
tax = .1
profit after tax = .15
hence ROE = .15/7.5 = 2%
Hence option D is the answer none of the above
5) Option 2 will be the answer as the total amount invested by investor will be $40 as the total fund raised by debt and equity is 30+ 10 = $40
6)
Hence the option is option A
7) option C is the right answer
Standard deviation is used to find out the risk associated to single asset whereas the beta is used to assess the rsik associated to the entire portfolio.
Particulars 0 1 2 terminal value Cash flow $1 1.2 1.38 11.45 Cost of capital 12% discount formula 1 1/1.12^1 1/1.12^2 1/1.12^2 0.89 0.80 0.80 Firms value of operation 1 1.07 1.10 9.13 Total 12.299Related Questions
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