Name:_____________________ FIN311 Sample EXAM #2 and Answer

Instructions:

1. Write name on top of this page and next page.

2. This is a closed-book and closed-note exam. Show all work for problems.

Formulas given at the exam:

(1). present value and future value of a lump sum:

(2). PV of Perpetuity =

(3). PV of Ordinary Annuity = =

(4). PV of Annuity Due =

(5). Capital Asset Pricing Model (CAPM):

E(Ri) = Rf + i[E(Rm) - Rf]

(6) Dupont model:

ROE = Profit Margin (PM) Asset Utilization (AU) Equity Multiplier (EM),

=

(7). common stock that pays dividend at a constant growth rate:

r =

coupon bond: P0 = {Interest per period

Preferred stock: P0 =Div/r

(8)WACC =

(9)

IRR:

MIRR: PV of cost =

Profitability Index = PV of cash inflows / PV of cash outflows

EAC (Equivalent Annual Cash Flow) =

(10) Project After-tax Cash Flows = Operating cash flows – Increases in NWC – Net capital Spending,

where Operating cash flows = EBIT + Depreciation – Taxes

=(Sales - Costs) × (1-Tc) + Depreciation × Tc

FIN311 Name:_____________

Prof. Lin Guo Sample Exam #2

1. You know the following information about Ameritool Corporation.

* Ameritool is 70% debt financed, and 30% equity financed.

* Ameritool Corp's common stock will pay dividend $2.5 per share next year. The dividend is expected to grow at 2% per year. The common stock price is $30 per share.

* Ameritool’s bond sells for 102% of par (par value=$1000), and has 10 years to maturity. The bond is paying interest annually and has a coupon rate 8%. Ameritool’s tax rate is 40%.

(a) Calculate the cost of equity and cost of debt for Ameritool Corp.

(b) Calculate the weighted average cost of capital (WACC) for Ameritool Corp.

(c) Ameritool is considering a project which has the same risk as the firm's typical project, and the new project has IRR...