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  1. PAP Inc.’s financial statements are as follows:
PAP Inc. Balance sheet For the Period ended 2016 and 2017 ($000)
ASSETS
 20162017 
Cash$ 200$ 150 
Accounts receivable450425 
Inventory550625 
CURRENT ASSETS$ 1,200$ 1,200 
Plant & equipment$2,200$2,600 
Less Accumulated Depreciation(1,000)(1,200) 
Net Plant & equipment$1,200$1,400 
Total Assets$2,400$2,600 
LIABILITIES & Owner’s Equity
Accounts payable$ 200$150 
Notes Payable current (9%)0150 
CURRENT LIABILITIES$ 200$300 
Bonds$ 600$600 
Owner’s Equity 
 Common stock$900$900 
Retained earnings700800 
Total Owner’s Equity$ 1,600$1,700 
Total liabilities & Equity$2,400$2,600 
PAP Inc. Income Statements (000’s)
 20162017
Sales$1,200$1,450
COGS700850
Gross Profit$500$600
Selling, general, ADM Expenses3040
Depreciation220200
Operating Income$ 250$ 360
Interest expense5064
EBT$200    $ 296
Taxes (40 %)80118
Net income$120$178

(10 pts) Using the financial statements above, Calculate PAP Inc.’s free cash flows from operation for year ending in 2017?

  • (10 pts) Renfro Rentals has issued bonds that have a 5% coupon rate, payable semi-annually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?
  • Berdwen, Inc. is analyzing the merits of a potential project. There is great volatility in the marketplace which will impact the project with risky free cash flows. Berdwen, Inc. has a weighted average cost of capital of 12.2%, and forecasts the free cash flows below:
YearExpected FCF
0-$10,000
1$16,241
2-$5,540

(10 pts) Use an appropriate capital budgeting technique to determine if the project should be accepted? Why or why not?

  • (10 pts) Weisman Electronics just paid a $1.00 dividend, the market yield is 10%, the risk-free rate is 4%, and Weisman’s Beta is 2.5. How fast do investors expect the company to grow in the future if its stock is selling for $15.75?
  • (10 pts) Larry, Inc. has three components of capital: preferred stock, common stock, and corporate bonds with a target capital mix of 10%, 45%, and 45%, respectively. It faces an after-tax cost of debt of 3.2%; 6% cost of preferred stock, and 12% cost of common stock. If Larry, Inc is in the 21% marginal tax rate, what is its weighted average cost of capital?
  • (10 pts) Tysseland Company’s present market value capital structure shown below is optimal. There is no short-term debt:
Capital ComponentMarket value
Debt30,000,000
Common equity90,000,000

Bonds have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholder’s required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.)   The marginal tax rate is 30%. What is Tysseland’s WACC?

  •  (10 pts) A project has an initial cost of $40,000, expected net cash flows of $9,000 per year for 7 years, and a cost of capital of 11%.
    • What is the project’s NPV?
    • What is the project’s IRR?
    • What is the project’s MIRR?
    • Should the project be accepted? Explain.
  • (10 pts) A 30-year bond matures in 7 years sells for $950, pays interest semiannually, and has a yield to maturity of 10.5883%. What is the bond’s current yield?
  • (10 pts) Two mutually exclusive projects, Alpha and Beta have free cash flows listed below with unequal lives. The firm has a cost of capital of 15%. Use the replacement chain method to determine which of the two projects should be selected:
 AlphaBeta
Year 0($18,543)($45,664)
Year 1$5,000$20,000
Year 2$5,000$20,000
Year 3$5,000$20,000
Year 4$5,000 
Year 5$5,000 
Year 6$5,000 
  1. (10 pts) Using the table below, what is the maximum that an investor should be willing to pay for the share of common stock today?

Table below to be used with problem #6:

VariableValueExplanation
Dividend growth estimate5%, 0%5% for next 2 years (annual estimate) and 0% per year indefinitely thereafter.
Current dividend$1.00Paid to shareholders on record as of 4/28/21
Beta coefficient2.0Expected future estimate of beta
Expected market return12.0%Expected (annual) return on the S&P 500 Index
RFR5.0%Expected 10-year Treasury bond yield

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