MID TERM TEST 2

SECTION A - MULTIPLE CHOICE

Question 1. For a start-up firm in a growing industry, when the projected assets are higher
than the projected liabilities and shareholders' equity, which is be best way to balance the
balance sheet?
A. Issuing more long-term debt
B. Reducing cash and cash equivalent.
C. Investing more in financial assets.

Question 2. A drop in the market price of a firm's common stock will immediately increase
its:
A. Return on equity B. Dividend payout ratio C. Dividend yield
Clean surplus accounting:
Dt = CIt + BVt-1 – BVt
 Dividend = Comprehensive income + changes in book value of equity

Question 3. The adjustment to cash flow from operating activities necessary to obtain free
cash flow to the firm (FCFF) are:
A. Add non-cash charges, subtract fixed capital investment, and subtract working capital
investment.
B. Add after-tax interest expense and subtract fixed capital investment.
C. Add net borrowing and subtract fixed capital investment.
FCFF = CFO – FC Inv + Interest (1 – t)
Question 4. Under the clean surplus accounting, total dividend used in the dividend-based
valuation model is equal to:
A. Comprehensive income each year, adjusted for the change in the market value of
common equity.
B. Annual net income, adjusted for the change in the book value of common equity.
C. Comprehensive income each year, adjusted for the change in the book value of
common equity.
Question 5. An analyst is in the process of determining what the current share price should
be for a company. In early January, the analyst collected the following information: Dividend
at the end of previous year is $1.00; annual dividend growth rate is expected to be 5%
constantly; the required rate of return of equity investors is 10%. The current share price
should be:
A. $21.00 B. $20.00 C. $7.00
𝐷1 𝐷0 (1+𝑔) $1(1+5%)
P0 = = = = $21.00
𝑟𝑒 −𝑔 𝑟𝑒 −𝑔 10%−5%
Question 3 (ĐỀ 1): To determine the free cash flow for both debt holders and shareholders
(FCFF), starting from EBITDA, we need to:
A. Add back depreciation tax shield
B. Add back investment in fixed assets
C. Add back an increase in working capital
FCFF = EBITDA (1 – t) + Depreciation x t – FC inv – WC investment
Question 4 (ĐỀ 1): An analyst is reviewing the financial statements of a company whose
operating income has declined from the prior year. The following ratios have been
calculated:
Prior year Current year
Gross profit margin ↑ 15% 20%
Operating profit margin ↓ 12% 10%
Inventory turnover -> COGS/Inventory 10.5 times 9.8 times
Based on the above, the analyst could infer that the decrease in operating income may
be due for:
A. Lower revenue per unit sold
B. Accumulation of unused inventory
C. An increase in advertising expense
Sales
- COGS
Gross profit
- Selling & GA
Operating income
Question 5 (ĐỀ 1): Which one of the following factors would likely causes a firm to increase
its use of debt financing as measured by the debt to capital ratio? -> nghe lại record
A. Increased economic uncertainty -> high systematic risk -> difficult to increase debt
financing.
B. An increase in the price – earnings ratio P/E -> ↑high stock market expectation
C. An increase in the corporate income tax rate
SECTION B - CHOOSE THE BEST ANSWER WITH EXPLANATION
Question 6. Blue Moon Corporation has net sales in 2022 of 600 million. The gross profit
margin in 2022 is 30%. The nominal GDP growth rate is 6.7% and the real GDP growth is
3.5%. The net sale in 2023 is estimated to grow 70 basis points slower than the nominal
GDP. The growth rate of net sales will be equal to that of Cost of Goods Sold. The projected
gross profit in 2023 is closest to:

Net sale: 600 million

𝑆𝑎𝑙𝑒−𝐶𝑂𝐺𝑆
Gross profit margin = = 30%
𝑆𝑎𝑙𝑒
Nominal GDP = 6.7%
Real GDP = 3.5%
Net sales grow = 6.7% - 0.7% = 6%
Net sales 2023 = 600*(1+6%) = 636 mil
Growth rate of net sale equal to COGS
Gross profit margin 2023 = 30%
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒 2023 − 𝐶𝑂𝐺𝑆 2023
= 30%
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 2023
Gross profit 2023 = 30%*636 = 190.8

Question 6: Net sales in 2022 of 600m. The gross profit margin 2022 is 25%. An analyst
estimated that the net sales in 2023 will increase by 8% and the growth rate of net sales will
be kept equal to that of COGS. The projected gross profit 2023 is closet to
2022 2023
Sales 600 600(1+8%)
Gross profit margin 25% 25%
GP 150 162
Question 7. A company which has no current debt has a beta of 0.95 for its common stock.
Management is considering a change in the capital structure to 30% debt and 70% equity.
This change would increase the beta on the stock to 1.05, and the after-tax cost of debt
would be 7.5%. The expected return on equity is 16%, and the risk-free rate is 6%. Should
the company's management proceed with the capital structure change?
No debt  𝐑 𝐞 𝐛𝐞𝐟𝐨𝐫𝐞 = 𝐑 𝐟 + 𝛃(𝐑 𝐦 − 𝐑 𝐟 )
Beta before β = 0.95 = 6% + 0.95 x 9.52%
Change structure to 30% Debt, = 15.4%
70% Equity → R e = WACC = 15.4%
After tax cost of debt = 7.5%  𝐑 𝐞 𝐚𝐟𝐭𝐞𝐫 = 𝐑 𝐟 + 𝛃(𝐑 𝐦 − 𝐑 𝐟 )
Beta after β = 1.05 16% = 6% + 1.05(R m − R f )
R e = 16% → (R m − R f ) = 9.52%
R f = 6%  WACCafter = 30% × 7.5% + 70% × 16% = 13.45%
➔ Should the company change its capital
structure?
➔ Yes

Question 7. A publicly traded corporation in an industry with an average price-earnings

ratio of 25 has the following summary financial results:
IS BS
Sale: $1,000,000 Assets: $2,500,000
Expense: $500,000 Liabilities: $1,000,000
Operating income: $500,000 Shareholders’ equity: $1,500,000
Taxes: $300,000
Net income: $200,000
A competitor wishes to make a bid to acquire the stock of the company. What is the current
market value?
A. $1,500,000
B. $5,000,000
C. $10,000,000
P/E = 25
E = Net income = 200,000
P = E x Price – earnings ratio = 25 x $200,000 = $5,000,000
Question 8. A company has 100,000 outstanding common shares with a market value of
$24 per share. A dividend of $1.6 per share was paid in the current year and the company
has a dividend payout ratio of 40%. The price-earnings ratio of the company is.
𝐏 𝐏𝐫𝐢𝐜𝐞 (𝐏𝐫𝐢𝐜𝐞 × 𝐏𝐚𝐲𝐨𝐮𝐭 𝐫𝐚𝐭𝐢𝐨) Net income after tax
= = 𝐄𝐩𝐬 =
𝐄 𝐄𝐩𝐬 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐩𝐞𝐫 𝐬𝐡𝐚𝐫𝐞 Outstanding common share
24 × 40% Dividend
= =6 ( )
1.6 payout ratio
=
Outsanding common share
Question 8. A financial analyst is using the two-stage model of dividend growth to value a
corporation that paid an annual dividend last year of $4 per share. The annual dividend is
assumed to grow at 10% per year for the next 3 years and then grow at 5% per year
thereafter. A 12% required return is assumed. Which change in one of the assumptions
would cause the analyst to find a higher value for the stock?
A. The required return Is changed from 128 to 14%.
B. The 3-year assumption is changed to 5 years.
C. The 10% growth rate has changed to 8%.
𝐷0 (1+𝑔1 ) 𝐷0 (1+𝑔1 )2 𝐷0 (1+𝑔1 )3 𝐷0 (1+𝑔1 )3 (1+𝑔2 )
Equity value = + + +
1+ 𝑟𝑒 (1+ 𝑟𝑒 )2 (1+ 𝑟𝑒 )3 (1+ 𝑟𝑒 )3

Question 9. Company MIT earned $ 80 million before interest and taxes last year. Capital
expenditure was $ 50 million, and depreciation was S30 million. The additional working
capital was $ 10 million. The firm's weighted average cost of capital is 12%, the marginal tax
rate is 40% and the expected cash flow growth is constant at 5%. The market value of debt
is $ 100 million. The value of MIT's equity is closest to:
A. $150 million B. $170 million C $190 million
Question 9. Company UPS earned $60 million before interest and taxes last year. Capital
expenditure was $30 million, and depreciation was $20 million. The additional working
capital was $6 million. The firm's weighted average cost of capital is 12%, the marginal tax
rate is 35% and the expected cash flow growth is constant at 5%. The market value of debts
is $150 million. The value of UPS's equity is closest to:
EBIT = $60m 𝐅𝐂𝐅𝐅 = 𝐄𝐁𝐈𝐓 × (𝟏 − 𝐭𝐚𝐱 𝐫𝐚𝐭𝐞) + 𝐃𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧
FC Inv = $30m − (𝐅𝐂𝐥𝐧𝐯 + 𝐖𝐂𝐥𝐧𝐯 )
WC Inv = $6m  FCFF = 60 x (1 – 35%) + 20 – (30 +6) = $23m
Depreciation = $20m 𝐅𝐂𝐅𝐅 23
𝐕𝟎 = × (𝟏 + 𝐠) = × (1 + 5%) = 345m
Tax rate = 35% 𝐫−𝐠 12% − 5%
g = 5%  𝐕𝐞 = 𝐕𝟎 − 𝐕𝐝 = 345 − 150 = 195
r = 12%
Vd (value of debts) = $150m
SECTION C - EXERCISES
Question 10. Black Mount Corporation has been growing at a rate of 8% per year and
expects this growth to continue and produce earnings per share of $4.50 next year. The firm
has a dividend payout ratio of 40% and a beta value of 1.5. The risk-free rate is 6% and the
return on the market is 15%.
REQUIRED:
a. Calculate the required rate of return on common stock of Black Mount Corporation.
b. What is the expected current market value of Black Mount Corporation's stock?
Tóm tắt: a. Required rate of return:
g = 8% 𝐑 𝐞 = 𝐑 𝐟 + (𝐑 𝐦 − 𝐑 𝐟 ) × 𝛃
E1 = $4.50  6% + (15% - 6%) x 1.5 = 19.5%
Dividend payout ratio = 40% b. Expected current market value:
Beta β = 1.5 𝐝𝟏 = 𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐩𝐚𝐲𝐨𝐮𝐭 𝐫𝐚𝐭𝐢𝐨 × 𝐄𝟏 = 40% × 4.5 = 1.8
R f = 6% 𝐝𝟏 1.8
𝐕𝐞 = = = 15.6
R m = 15% 𝐫𝐞 − 𝐠 19.5% − 8%
Question 11. DEL Corporation has just paid a (𝐃𝟎 ) total dividend of $10 million and its
current (𝐅𝐂𝐅𝐅𝟎 ) free cash flow for the firm is $27 million. Analysts project earnings and free
cash flow will (𝐠 𝐀 ) grow at the rate of 8% over the next five years. From Year + 6, total
dividends and free cash flow are projected to grow at a long-term (𝐠 𝐁 ) growth rate of 5%. At
the end of Year 0, DHIL Corporation has a market beta (𝛃) of 1.3. At that time, the yield on
intermediate term US Treasury bonds (𝐑 𝐟 ) was 4%. Assume that a market risk premium
(𝐑 𝐦 − 𝐑 𝐟 ) is 7%. The cost of debt before tax (𝐑 𝐝 𝐛𝐞𝐟𝐨𝐫𝐞 𝐭𝐚𝐱 ) is 10%. The marginal tax rate for
DHL is 20%. The target capital structure with (𝐖𝐝 ) 40% of debt and 60% of equity (𝐖𝐞 ) is
maintained. Suppose DEL has 5 million shares outstanding at the beginning of Year +1,
traded at the price of $ 40 per share. The market value of debt at the beginning of Year +1 is
150 million.
REQUIRED:
a. Calculate the cost of equity capital and WACC at the beginning of Year + 1.
b. Calculate the equity value using the dividend discount model and given the share price
at the start of Year + 1, do DHE's shares appear underpriced, overpriced, or fairly priced?
c. Calculate the equity value using the free cash flow model and given the share price at the
start of Year +1, do DHI's shares appear underpriced, overpriced, or fairly priced?
Tóm tắt: a. cost of equity capital, WACC at the beginning of Year + 1?
Beta β = 1.3 𝐑 𝐞 = 𝐑 𝐟 + (𝐑 𝐦 − 𝐑 𝐟 ) × 𝛃
R f = 4%  = 4% + 7% x 1.3 = 13.1%
R m − R f = 7% 𝐖𝐀𝐂𝐂 = 𝐖𝐞 × 𝐑 𝐞 + 𝐖𝐝 × 𝐑 𝐝 𝐛𝐞𝐟𝐨𝐫𝐞 𝐭𝐚𝐱 × (𝟏 − 𝐭𝐚𝐱 𝐦𝐚𝐫𝐠𝐢𝐧)
R d before tax = 10%  WACC = 60% x 13.1% + 40% x 10% x (1 – 20%) = 11.06%
Tax margin = 20%
We = 60%
Wd = 40%
b. dividend discount model
D0 = $10m
g A = 8%
g B = 5%
R e = 13.1%
=> D1 = D0 × (1 + g A )1= 10 x (1 + 8%)1 = 10.8
D2 = D0 × (1 + g A )2 = 10 x (1 + 8%)2 = 11.664
D3 = D0 × (1 + g A )3 = 10 x (1 + 8%)3 = 12.597
D4 = D0 × (1 + g A )4 = 10 x (1 + 8%)4 = 13.604
D5 = D0 × (1 + g A )5 = 10 x (1 + 8%)5 = 14.693
D6 = D5 × (1 + g B ) = 14.693 x (1+5%) = 15.428
D6 15.428
P5 = = = 190.4685
R e − g B 13.1% = 5%
10.8 11.664 12.597 13.604 14.693 190.4685
→𝑉0 = (1+13.1%)1 + (1+13.1%)2 + (1+13.1%)3 + (1+13.1%)4 + (1+13.1%)5 + (1+13.1%)5 = 146.5517
Outstanding share = 5m
=> value per share = 146.5/5 = 29 < 40 => overpriced
c. free cash flow model
FCFF0 = $27m
=> FCFF1 = FCFF0 × (1 + g A )1 = 27 x (1 + 8%)1 = 29.16
FCFF2 = FCFF0 × (1 + g A )2 = 27 x (1 + 8%)2 = 31.493
FCFF3 = FCFF0 × (1 + g A )3 = 27 x (1 + 8%)3 = 34.012
FCFF4 = FCFF0 × (1 + g A )4 = 27 x (1 + 8%)4 = 36.733
FCFF5 = FCFF0 × (1 + g A )5 = 27 x (1 + 8%)5 = 39.672
FCFF6 = FCFF5 × (1 + g B ) = 39.672 x (1+5%) = 41.655
FCFF6 41.655
P5 = = = 687.38
R wacc − g B 11.06% − 5%
29.16 31.493 34.012 36.733 39.672 687.387
→V0 = (1+11.06%)1 + (1+11.06%)2 + (1+11.06%)3 + (1+11.06%)4 + (1+11.06%)5 + (1+11.06%)5 = 531.071
=> 𝐕𝐞 = 𝐕𝟎 − 𝐕𝐝 = 531.071 – 150 = 381.071
Outstanding share = 5m
=> value per share = 381.071/5 = 76.214 > 40 => underpriced
Question 12. Using the following data for Black Mount Corporation, calculate how much
long-term debt the company needs to balance its balance sheet. Assume that Black Mount
pays common shareholders a dividend of $25 in Year +L, the interest rate is 10%, the
income tax rate is 20% Present the projected income statement and balance sheet for Year
+1.
Items Year +1 (in million USD)
Operating income 58
Interest expense 8
Income before tax 50
Tax provision at 20% 10
Net income 40
Total assets 200
Accrued liabilities 43
Long term debt 80
Common stock at par 20
RE at beginning of year +1 34
Assume long term debt to X
 Interest expense = 0.1X
Items Year +1 (in million USD)
Operating income 58
Interest expense 0.1X
Income before tax 58 – 0.1X
Tax provision at 20%
Net income 0.8 x (58 – 0.1X) = 46.4 - 0.08X

RE at end = 34 + 46.4 – 0.08X – 25 = 55.4 – X

200 = 43 + X + 20 + 55.4 – 0.08X => X = 88.7

Question 13. Big Pie Corporation generates constant annual cash flows of $15 million. The
appropriate discount rate for these cash flows is 20% per annum. Big Pie Corporation plans
to make a bid for the entire share capital of Small Pie Corporation. If Small Pie corporation
was acquired, the combined business would generate constant annual cash flows of $20
million and the appropriate discount rate would be 16% per annum.
Required:
a. Calculate the value of Big Pie Corporation before the acquisition.
b. What is the maximum price Big Pie should pay for all shares of Small Pie's shares.
Exercise 1. Projecting Income Statement
Big Pie Corporation has the following information:
- Revenues of year N is $10 billion
- Gross profit margin of year N is 30%
- Fixed cost (excluded depreciation): 10% of revenues
- Depreciation: $1.2 billion
Big Pie Corporation expects inflation for the year N+1 is 5% but the unit price increases by
2%. The company also intends to invest $ 2 billion in machinery, which will be depreciated
in 10 years by a straight-line method. Because of an investment in fixed assets, the gross
profit margin of Big Pie Corporation is expected to increase to 35%. Assuming that the
volume of year N+1 is equal to Year N; the proportion of fixed cast (not include depreciation)
is 10% of revenues; income tax rate is 20%; no deferred tax. Present the projected income
statement for Big Pie Corporation in year N+1.
Projection N N+1
Revenue 10 Unit price increase by 2%, volume unchanged
 10.2
COGS 10 x (1 – 30%) 10.2 x (1 – 35%) = 6.63
Gross profit margin 30% 35%
Fixed cost 10% x 10 = 1 10% x 10.2 = 1.02
Dep. 1.2 A new machine of 2 billion in 10 years, straight line
 1.2 + 2/10 = 1.4
Operating profit 0.8 1.15
Income tax 0.16 0.23
Net income 0.64 0.92 => đề thi có thể kết hợp với câu tìm X ở trên
để làm. Câu này chưa có nợ vay nhưng bài thi sẽ
có mở rộng thêm.
ABC Corporation has the following information:
- Revenues of year N is $240 billion
- Gross profit margin of year N is 30%
- Fixed cost (excluded depreciation): 20% of revenues
- Annual Depreciation: $20 billion
ABC expects inflation for the year N+1 is 5%. The company also intends to invest S 50 billion
in machinery, which will be depreciated in 10 years by a straight - line method Because an
investment in fixed assets, the gross profit margin is expected to increase to 35%. Assuming
that in the year N+1, the sale volume increases by 2%, the price increases by the inflation
rate, the fixed cost/revenue ratio will be unchanged, income tax rate is 20%, no deferred tax,
no other costs.
REQUIRED
1. Present the projected income statement in year N+1.
Items Year Year Explanation
N N+1
Revenue 240 257 𝑆𝑎𝑙𝑒𝑁+1 = 𝑆𝑎𝑙𝑒𝑁 (1 + 𝑔𝑠𝑣 )(1
+ 𝑔𝑝𝑟𝑖𝑐𝑒)
COGS = Sale – Gross profit 168 167
Gross profit 72 90 𝐺𝑃𝑁+1 = 35% × 257
Depreciation 20 25 20+50/10
Fixed cost (exclude depreciation) 48 51 20% - 257
EBT = COGS – Depre – Fixed cost 4 14
Income tax expense (20%) 0.8 2.8
Net income 3.2 11.2
2. The projected balance sheet is as follows: ($ billion)
Items Year N+1
Total Assets 300
Accrued liabilities. 50
Long-term debt 130
Common stock at par 100
The retained earnings of Year N are $12 billion. An analyst uses dividends as a flexible
financial account. Compute the volume of dividends you can assume that will pay in order
to balance your projected balance sheet.
Total Asset = Total L +E (Accrued L + LT Debt + Common Stock + Retained earnings N+1)
 Retained earnings N+1 = 300 – 50 – 130 – 100 = 20 (billion)
RE n+1 = Retained earnings + NI – Dividend
 20 = 12 + 11.2 – Dividend  Dividend = 3.2
 year Year 1 Year 2 Year 3 Beyond 4+
Sale Growth (%) 7 4 2 0
OPM (%) 10 12 12 12
Tax rate (%) 17 17 17 17
FC lnv 5 3 2 0
WC lnv 2 2 2 0
This year sales: 380m The current WACC: 10%
Depreciation is 7m then increasing 0.5m each year during the competitive advantage
period. Short-term investments are maintained at 2.5m. Debt held by the company has a
nominal value of 120m, market value $95 per $100.
Year 0 Year 1 Year 2 Year 3 Year 4 +
sale growth 7% 4% 2% 0%
380 406.60 422.86 431.32 431.32
OPM 10% 12% 12% 12%
tax rate 17% 17% 17% 17%
Operating profit 40.66 50.74 51.76 51.76
depreciation 7 7.5 8 8.5 8.5
FCI% 5% 3% 2% 0%
FCI 1.33 0.49 0.17 0.00
WC lnv (%) 2% 2% 2% 0%
WC lnv 0.532 0.325 0.169 0.000
Total 39.39 49.30 51.12 51.46
39.39 49.3 51.12 51.46
𝑉0 = 1
+ 2
+ 3
+ × 0.1 = 501.584
(1 + 10%) (1 + 10%) (1 + 10%) (1 + 10%)3
120
Vd = × 0.5 = 114
100
Short term investment = 2.5m →𝐕𝐞 = 𝐕𝟎 − 𝐕𝐝 = 501.584 − 114 = 385,084
Direct method Indirect method
Cash sales: sales-change in AR. Net income
Cash paid. Gain on sales.
To suppliers Dep
Cogs AR
Changes in inventory AP
Changes in AP Inventory
To debtholders Interest payable
Interest expense CFO
Change in interest payable.
To government
Taxes
CFO
ROA = (1 − t) × Interset × OPM × Asset turnover
1
ROE = (1 − t) × Interest × OPM × Asset turnover × Equity Multipler ×
1−t
Sales
Asset turnover =
Average total asset
P D0 × (1 + g) 0.4 × (1 + 5%)
Trailing : = =6
E E0 × (re − g) 1 × (12% − 5%)
P D1
Leading : × (re − g) = 5.7
E E0
EBITDA = Net income + Depreciation + Taxes + Amortization + Interest expense