CFA二级Corporate Finance9 Tests.docx

CFA二级Corporate Finance9 Tests.docx

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CFA二级CorporateFinance9Tests

CorporateFinance-Chu

HiChumanagesamanufacturingsubdivisionofRestarCorporation.Restarisaconglomeratewithdivisionsinthecontainerindustry.Chu’staskistoforecasttheprofitabilityofafour-yearprojectforthemanufacturingofspecialtylabeledaluminumcans.Restarhasnevermanufacturedsuchanitembeforeandwillrequirenewequipmentfortheproject.Exhibit1displaysChu’sabridgedforecastedfinancialprojectionsfortheproject.

Exhibit1

SpecialtyLabeledAluminumCansProjectFinancialProjections,YearEndTotals

（$thousands）

Year0

Year1

Year2

Year3

Year4

Fixedcapital

100,000

Workingcapital

0

Totalinvestment

100,000

Sales

60,000

72,000

86,400

103,680

Operatingcosts

24,000

28,800

34,560

41,472

Depreciation

25,000

25,000

25,000

25,000

Earningsbeforeinterestandtaxes（EBIT）

11,000

18,200

26,840

37,208

Interest

4,000

3,112

2,154

1,118

Earningsbeforetaxes（EBT）

7,000

15,088

24,686

36,090

Tax（40%）

2,800

6,035

9,874

14,436

Netincome

4,200

9,053

14,812

21,654

Dividends

1,680

3,621

5,925

8,662

Additiontoretainedearnings

2,520

5,432

8,887

12,992

Capitalused

100,000

75,000

50,000

25,000

0

Restar’sCostofCapitalandCapitalStructure

Costofdebt（pretax）

8.00%

Costofequity

15.00%

Debtratio（Totaldebt/Totalassets）

50.00%

InameetingwithRestar’sCFO,TreyPapier,Chudiscussesthemeritsoftheproject.Chumakesthefollowingpoints:

∙ AllassumptionsintheprojectionsarebasedonRestar’soveralldebtandequitymixandonRestar’scorporatepolicyregardingdividendpayout.

∙ Insteadofusingtheweightedaveragecostofcapital（WACC）,however,theprojectshouldbeevaluatedwithaproject-specificmarket-determineddiscountrateof16%becausetheprojectisunlikeanyofthefirm’scurrentmanufacturingprocesses.

PapierasksChuifhehasconsideredotherevaluationmethods.ChurepliesthathehascomputedtheeconomicprofitusingtheWACC.

Chustatesthatheisuncertainabouttheappropriatecostofequitytouse,however,becausetwoweeksearlier,Restar’smanagementannouncedthatthefinancingmixwouldchangebyincreasingthetargetdebtratioto60%.Asaresult,hesays,thechoicesseemtobethe

∙ firm’scurrentcostofequity,or

∙ costofequitybasedontheModigliani–Millertaxmodelandthenewtargetdebtratio,assumingthatthepretaxcostofdebtrisesto8.75%.

Papierinterjectsthatthecurrentcostofequitywouldbebetterbecausetheimplementationofthenewfinancingmixislikelytobedelayed.Papierstatesthatthedelayisbecausethestructureoftheboardofdirectorsisabouttochangeinthefollowingmanner:

∙ TheCEOwillnolongerbethechairmanoftheboard.

∙ TheretiredoriginalfounderofRestarwillbecomethechairmanoftheboard.

∙ Theboardwillnowhaveamajorityofmembersthatareindependent.

Despitethesechanges,Papierbelievesitisstillimportanttoexplorethepotentialvalueofthisnewproject.

Threeweekslater,ChuandPapiermeetagaintoreviewChu’swork.Aftersomediscussion,theythinkanalternativeprojectwillperformthesametaskastheoriginalproject.Thealternativeprojectwillcoverasix-yearperiod.Chuhascalculateditsnetpresentvalue（NPV）basedonafter-taxoperatingcashflowswiththesamediscountrateof16%usedfortheoriginalproject.ChuandPapieragreethatbecausethetwoprojectsaremutuallyexclusive,theycandecidebetweentheprojectsusingtheequivalentannualannuityapproach.Exhibit2summarizesthetwoprojects’NPVs.

Exhibit2

ComparisonofProjectNPVs

Project

ProjectLife

NPV

Original

4years

$6,406,450

Alternative

6years

$8,141,220

1 of 6

BasedonExhibit1,theafter-taxoperatingcashflow（inthousands）forYear1is closest to:

$31,600.

$46,600.

$33,200.

Question

2 of 6

BasedonExhibit1,theeconomicprofit（inthousands）forYear1is closest to:

$1,100.

–$8,400.

–$3,300.

Question

3 of 6

ThedividendpaymentpolicyassumedbyChuinExhibit1is mostaccurately describedasa:

residualdividendpayoutpolicy.

constantdividendpayoutratiopolicy.

stabledividendpolicy.

Question

4 of 6

ThecostofequityunderthenewlyannouncedfinancingmixusingChu'sassumptiononthechangeinthecostofdebtandtheModigliani–Millertaxmodelis closest to:

15.6%.

16.3%.

15.1%.

Question

5 of 6

Whichchangestotheboardofdirectorsis least consistentwithbestpracticesinthecompositionofaboard?

Specificchoiceofthenewchairmanoftheboard

ChangeregardingtheCEO

Changeinthecompositionoftheboardmembership

Question

6 of 6

Basedontheequivalentannualannuitymethodfortheoriginalandalternativeprojects,the mostappropriate conclusionisto:

accepttheoriginalproject.

beindifferentbetweenthetwoprojects.

acceptthealternativeproject.

CorporateFinance-Scott

CindyScottisreviewingcashflowprojectionsfora$300,000capitalinvestmentforadaptableequipmenttoservicehercompany’smanufacturingefforts.Aftercarefulstudy,analystshavedeterminedthatwhenputtothebestuseoverthenextfiveyears,theincrementalcontributionoftheequipmentproducesapositivenetpresentvalue（NPV）of$183,109,assuminga15%annualdiscountrate（seeExhibit1）.

Exhibit1

ForecastedCashFlow

（allvaluesin$）

Year1

Year2

Year3

Year4

Year5

Sales

370,000

425,500

510,600

663,780

531,024

Variablecashexpenses

185,000

212,750

255,300

331,890

265,512

Fixedcashexpenses

30,000

50,000

50,000

50,000

50,000

Depreciation

（1）

60,000

60,000

60,000

60,000

60,000

Operatingincomebeforetax

95,000

102,750

145,300

221,890

155,512

Tax（40%）

38,000

41,100

58,120

88,756

62,205

Operatingincomeaftertax

57,000

61,650

87,180

133,134

93,307

Aftertaxoperatingcashflow

117,000

121,650

147,180

193,134

153,307

Salvagevalue

20,000

Salvagevalueaftertax

12,000

Totalaftertaxcashflow

117,000

121,650

147,180

193,134

165,307

（1）Straight-lineoverfiveyears

NPV （15%annualdiscountrate）:

$183,109

Scottreceivesarequestfromhermanager,PatStevens,tocalculatebotheconomicandaccountingincomeusingthecashflowanalysisinExhibit1.Scottlearnsthattheequipmentistobefinancedentirelywithaloanat12%,withinterestpaidannuallyforfiveyearsandthefullprincipalpaidattheendofthefifthyear.

ScottasksTedLudlow,anothercoworker,foradditionalsuggestionsabouttheanalysis.Ludlowmakesthefollowingthreesuggestions:

1.ConsidertheanalysisinExhibit1asabasecase,andthenproducetwoadditionalanalyses,anoptimisticandapessimisticcase,assumingdifferentpossibleeconomicenvironments.

2.Producethesedifferentanalyseswithafive-yearmodifiedacceleratedcostrecoverysystem（MACRS）accelerateddepreciationschedule（Exhibit2）.

3.Calculateoperatingincomeaftertaxminusthedollarcostofcapital（i.e.,theweightedaveragecostofcapital（WACC）multipliedbythecapitalinvestment）.

Exhibit2

MACRSSchedule

5-YearMACRS*Schedule

Year1

Year2

Year3

Year4

Year5

Year6

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

*MACRS:

 ModifiedAcceleratedCostRecoverySystemforaccelerateddeprecation

WhileapplyingthesuggestionsfromLudlow,Scottisinformedaboutacompetingprojectthatperformsthesametaskoverathree-yearperiod.ThenewprojecthasanNPVof$128,146withthesamediscountrateandcapitalinvestmentastheprojectinExhibit1（five-yearproject）.Scottstartstoconsiderthemeritsofthenewproject（three-yearproject）relativetothefive-yearproject.

1 of 6

TheeconomicincomeforYear3is closest to:

$48,365.

$109,877.

$57,407.

Question

2 of 6

TheaccountingincomeforYear2is closest to:

$61,650.

$40,050.

$25,650.

Question

3 of 6

Ludlow'sfirstsuggestionis best describedasanexampleof:

scenarioanalysis.

MonteCarlosimulation.

sensitivityanalysis.

Question

4 of 6

FollowingLudow'ssecondsuggestion,thefirstyear'safter-taxoperatingcashflowwill mostlikely:

decrease.

remainunchanged.

increase.

Question

5 of 6

Ludlow'sthirdsuggestionis best describedasthecalculationof:

freecashflowtoequity.

residualincome.

economicprofit.

Question

6 of 6

Whencomparingthetwoprojects,Scottshould mostlikely accept:

bothprojects.

onlythefive-yearproject.

onlythethree-yearproject.

CorporateFinance-NationalPlastics

NationalPlasticsCorp.isaleadingmanufacturerofhigh-qualityinjection-moldedplasticpackagingmaterialsusedbyvariousindustries,primarilyfoodandbeverageprocessingandpackagingfirms.InlateNovember2012,thecompanyreceivedapprovalfortwoimportantpatentapplications—oneprovidingforimprovedtamperprotectionforplasticcontainersandanotherforanimprovedbiodegradableplasticfilmthatallowsforbetterfoodpreservation.

On4January2013,HainesFoodsandSnacks,Inc.,launchedahostiletakeoverbidforallofthesharesofNationalat$30pershare（a$5premiuminexcessofthepre-bidprice）.HainesFoodsisanationaldistributorofdelianddairyproducts.Ifitsbidissuccessful,itplanstocontinuetooperateNationalasawhollyownedsubsidiary.

ZenithThermoPlasticsInc.producesplasticcontainersandbagsthatareusedbythefoodandbeverageindustry.KeithWhelan,whoisbothchiefexecutiveofficerandchieffina