Corporate Finance : Solutions Req

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Joined: Thu Dec 13, 2012 6:42 am

Corporate Finance : Solutions Req

Postby gautam.jain01 » Thu Dec 13, 2012 6:45 am


Can someone pls share the solutions to the below questions from Corporate Finance.

1. BackInSoon, Inc., has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the tenth year. Assuming that these cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent, calculate the initial cash outlay.
Ans : $19,090

2. Assuming that the most recent year’s earnings are $5, what is the estimated value of the stock using the earnings multiplier method of valuation?
Ans : $23.32

3. ABM declared its last dividend as 4% of the stock price of ABM which was $ 40 at the time of dividend declaration. The Return on equity of ABM is 14% and its payout rate is 60%. Calculate the cost of capital for ABM.
Ans: 9.82% Iam getting ans=9.6%, but that is incorrect

4. Market Risk Premium for a stock in Bangladesh (having CRP= 2%) is 9%. The covariance of the stock with the market is 5 and Risk free rate in Bangladesh is 3%. Calculate the cost of equity if the variance of the return on market portfolio is 4.
Ans: 16.75%

5. Dilitech Inc. issued 20yr, zero coupon bonds worth $1,000 nominal value and life. If bond is valued $500 then what is the yield on the bond
Ans: 3.5%

6. Indian Telecom Inc. stock is selling at $20. It is expected to pay a dividend of $2.1. If required rate of return for investors is 15% then at how much rate is the dividend expected to grow at
Ans : 4%

7. Ringa Ringa Corp. is closely focusing on working capital management. It has planned to reduce its days sales outstanding (DSO) from 50 days to 45 days. Its sales this year has grown by 15% to reach 100,000. Thus based on DSO only , company must have seen a/an ______ of $_______(total no of days in year = 360)
Ans : Additional investment, 422

8. If a company’s net profit margin is -7.5%, its total asset turnover is 1.3times, and its financial leverage ratio is 1.2 times, its return on equity is closest to –
Ans : -11.7%

Gautam Jain


Finance Junkie
Posts: 61
Joined: Fri Aug 03, 2012 11:24 am

Re: Corporate Finance : Solutions Req

Postby pankaj » Wed Dec 19, 2012 6:59 pm

1. Since it is given that cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent,you need to use the IRR funda.

PV of out flow = PV of Inflow
(PV of Outflow is your investment today)

year 1 to 9 = 2500 is the cash flow
year 10 = 2500+5000 is the cash flow
now, discounted it back using 8% as the discount rate, to find the present value of total inflow.

2. i guess some data is missing
3. find growth rate. g= retention rate * ROE
=40% * 14%
find D1 = 40 * 4% * (1+5.6%)= 1.6896

p = D1/(ke-g)
ke = (D1/p)+g
= (1.6896/40)+5.6%
= 9.824%
Assumed, current market price of the stock is 40, since no information is given.

4. first, find Beta
Beta = cov of security with the market/var of market
= 5/4 = 1.25
CAPM Model
ke = Rf + beta * (mkt risk premium + Country risk premium)
= 3% + 1.25 * (9%+2%)= 16.75%

5. Use financial calculator
N=20, pmt=0, pv= -500, fv= 1,000, I/y = ?
so, calculate I/y, it should be 3.5%

6. - g = (D1/p)- ke
= (2.1/20)- 15%
- g = - 4.5%
g = 4.5%

7. Give me some time .......i'll get back to u!!!

8. Apply 3 step DuPont Analysis
ROE = NI/sales * Sales/ total Assets * Total Assets/Total Equity
ROE = Net profit Margin * Asset Turnover Ratio * Financial Leverage
ROE = -7.5% * 1.3 * 1.2 = - 11.7%

Hope this help!!!!!!! :D

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