NationaU FIN609A Seminar in Financial Managemen TEST ONE 2022
TEST ONE
PLEASE ANSWER THE FOLLOWING QUESTIONS
MAKE SURE YOU SHOW YOUR WORK
1A. A firm has net income of $197,400, a return on assets of 8.4 percent, and a debtequity ratio of .72.
What is the return on equity?
1B. Tessler Farms has a return on equity of 11.28 percent, a debtequity ratio of 1.03, and a total asset turnover of .87.
What is the return on assets?
2. John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at (t = 0), and she will be entering
college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to
increase at a rate of 3.5% a year. Ellen should graduate in 4 yearsif she takes longer or wants to go to graduate school, she will be on her own.
Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).
So far, John and Daphne have accumulated $15,000 in their college savings account (at t = 0). Their longrun financial plan is to add an
additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in
each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%.
How large must the annual payments at t = 5, 6, and 7 be to cover Ellen's anticipated college costs?
3. Kebt Corporation's Class Semi bonds have a 12year maturity and an 8.75% coupon paid semiannually (4.375% each 6 months),
and those bonds sell at their $1,000 par value. The firm's Class Ann bonds have the same risk, maturity, nominal interest rate,
and par value, but these bonds pay interest annually. Neither bond is callable.
At what price should the annual payment bond sell?
4. Moon Software Inc. is planning to issue two types of 25year, noncallable bonds to raise a total of $6 million, $3 million
from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to
raise $3,000,000. These are called "par" bonds. Second, Original Issue Discount (OID) bonds, also with a 25year maturity
and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.25%. The OID bonds must be
offered at below par in order to provide investors with the same effective yield as the par bonds.
How many OID bonds must the firm issue to raise $3,000,000?
Disregard flotation costs, and round your final answer up to a whole number of bonds.
5. DHF Company has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus
a required return on an average stock of 10.00%. Now the required return on an average stock
increases by 30.0% (not percentage points). Neither betas nor the riskfree rate change.
What would DHF's new required return be?
6.. Huxley Building Supplies' last free cash flow was $1.75 million. Its free cash flow growth rate is expected
to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever.
Its weighted average cost of capital WACC is 12%. Huxley has $5 million in shortterm investments
and $7 million in debt and has 1 million shares outstanding.
What is the best estimate of the current intrinsic stock price?

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