B2

Question 1

Capital Asset Pricing Model (CAPM)

Answer 1

=Risk-free rate + [Beta x (Market return - Risk-free rate)]

Question 2

Discounted Cash Flow Method - to estimate the cost of retained earnings

Answer 2

= Dividend / Stock Price + Expected Growth

Question 3

Weighted Avg Cost of Capital (WACC)

$50 Million Project

$15 Million Bonds - After Tax Cost of Debt 7%
$35 Million from Retained Earnings - Cost of Equity 12%

Answer 3

(15/50) x .07 = 0.021
(35/50) x .12 = 0.084
0.105%

They might give a bunch of unnecessary information. Real cost of debt is lower because interest is tax deductible.

Question 4

Cost of Preferred Stock

Answer 4

=Dividend / Issuance Price

issuance price = price that it will be issued and sold on the market for.
This is the % of money that the company will pay for each share of preferred stock (their cost to issue it)

Question 5

Cost of Debt

Answer 5

=After tax interest cost/ Issuance Price

= Int Rate x (1 - Tax Rate) / Issue Price of Bonds (Debt)

Question 6

Financial Leverage increases when?

Answer 6

the Debt to Equity Ratio increases

Question 7

Rank these in order of risk and thus potential returns:

Commercial Paper
Negotiable CDs
T Bills
Banker’s acceptances

Answer 7

1. Commercial Paper
2. Banker’s acceptances
3. Negotiable CDs
4. T Bills

Question 8

Answer 8

Question 9

Answer 9

Question 10

Working Capital

Answer 10

Current Assets - Current Liabilities

Question 11

Answer 11

Question 12

Question 13

Question 14

Safety Stock

50 week calendar year
10,000 units per year
Order Quantity - 2,000
Safety Stock Level - 1,300
Lead Time - 4 Weeks

Answer 14

Basically, how many sales will happen in the lead time needed to get an order plus the safety stock is when you need to make another order

10,000 / 50 = 200 sales per week
200 x 4 weeks = 800 sales during Lead Time

800 + 1,300 Safety Stock
2,100

Question 15

Question 16

Constant Growth Dividend Discount Model assumes….?

Answer 16

stock and dividend price will grow at same rate

Question 17

Answer 17

Question 18

A high Price / Earnings ratio is an indication of what?

Answer 18

Investors expect increased growth in the years to come

Question 19

Question 20

Zero Growth Model

Answer 20

Price = Dividend / Discount Rate (Required Rate of Return)

Question 21

Price to Earnings

Answer 21

= Stock Price / Annual Earnings per Share

Question 22

PEG Ratio

Answer 22

= (Stock Price / EPS) / (Growth x 100)

Price to Earning (PE Ratio) / Growth Rate x 100

Question 23

Market (Median) Value Approach

Answer 23

Take the average of the two middle values

Question 24

Question 25

Question 26

Question 27

Answer 27

Question 28

Question 29

Question 30

Question 31

Question 32

Answer 32

Question 33

Answer 33

Question 34

Present Value of Net Cash Outflows:

$750,000 cost of Machine - Useful Life of 5 Yrs. with a scrap value of 10% of the purchase price at the end of the 5 Yrs.

Option 1: 5 Yr Lease - Annual Payment of $155,000 payable at beginning of the year. Machine must be returned.

Option 2: 5 Yr Bank Loan - $750,000 at 7% interest, subject to covenants

Answer 34

Option 1: because it is due at the beginning of the year, this is an annuity due. If the PV Factors do not give you this, it would be

$155,000 First Payment at Present Value +
$155,000 at PV Factor for 4 years (5-1), since only the remaining payments are subject to inflation.

Option 2:
$750,000 - the PV of the residual value of the Machine.

Since the PV of the cash outflows represents the cost today including the current inflation of future payments, the machine will be paid for today at $750,000 but we will get back the residual value of the machine after 5 years or…

$750,000 x 10% = $75,000 x PV of $1 after 5 years

Question 35

Question 36

Question 37

Question 38

Price Elasticity of Demand Formula

Answer 38

% Change in Qty Demanded
/
% Change in Price

% Change = New - Old / Old

  This is expressed in Absolute Value

Question 39

Answer 39

I

Question 40

Answer 40

I

Question 41

Answer 41

Question 42

Answer 42

Only the after-tax profit part are adjusted for tax.

FOH + (Before Tax Desired Profit x (1-TaxRate) / Contribution Margin per Unit