BAF 301 Introduction to Financial Management | Emirates College Of Technology

BAF 301 Introduction to Financial Management | Emirates College Of Technology

Question 1:Answer the following questions:                                                          

1.      If a firm went from zero debt to successively higher levels of debt, why would you expect its share price to first rise, then hit a peak and then begin to decline?

2.      What is business risk?  What factors influence a firm's business risk?

3.      Consider two hypothetical firms:  Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt.  Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms.

  1. Use the following data for the Sara Company to calculatethecost of common stocks (Rs), the cost of Preferred stocks (Rps), and the cost of Debt: (Rd)?(1×3= 3 Marks)




Risk Free Rate



Stock Risk



Market Return



Interest Rate for Debt

Rd (B.T)


TAX rate



Preferred Stock Dividend



Preferred Stock Price



floatation cost ps




5.      Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 35 percent? 

Question 2:Answer the following question:

Ø  Using the free cash flow valuation model, show the only avenues by which capital structure can affect the value of the firm.

Question 3:Answer the following questions:

1.      Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent. (10 Marks)

Calculate the paybackfor Project A and the payback for Project B. The NPV for Project A and the NPV for Project B. Which project, if any, should the company accept? 




Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?


Question 4:Answer the following questions

Sara Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future.  The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%.  What is the company's current stock price?


Sandy Corp believes the following probability distribution exists for its stock.  What is the coefficient of variation on the company's stock?

            Probability                          Stock's

                        State of                              of State                       Expected

                        the Economy                    Occurring                       Return 

                        Boom                                   0.45                             25%

                        Normal                                 0.50                             15%

                        Recession                             0.05                              5%


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