## BAF 301 Introduction to Financial Management | Emirates College Of Technology

BAF 301 Introduction to Financial Management | Emirates College Of Technology

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)
 Item Symbol Value Risk Free Rate Rf 7% Stock Risk B 1.5 Market Return Rm 25% Interest Rate for Debt Rd (B.T) 9% TAX rate T 5% Preferred Stock Dividend D(ps) 10 Preferred Stock Price P(ps) 100 floatation cost ps FC \$4

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?

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

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?

6.

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?

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?

2.

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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