Business Minimize Operating Costs Reports

Q U E S T I O N 1
1. Goal of a Corporation is to:
Maximize Market share of its Business
Minimize Operating costs
Maximize Stockholders Wealth AKA price per
share (PPS)
Maximize Earnings per share (EPS)
Minimize Income Taxes
Minimize Total Operating Expenses
10 points
Q U E S T I O N 2
1.
Modigliani & Miller (M&M) Theorem of Finance is used to explain the relationship between the
Value (V) of Firm and its Capital Structure, Debt/Equity (D/E) ratio. According to M&M the
Value of a Form (V) is maximized when:
Since Cost of Debt is higher than Cost of Equity-this means the WACC will be
Minimum when D is Equal to 0% and E is equal to 100 0%.
At a certain D/E ratio, where the Cost of Bankruptcy is Minimum.
At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is Maximum.
At a certain D/E ratio, where Weighted Avg. Cost of Capital (WACC) is minimum.
Since Cost of Equity is higher than Cost of Debt-this means the WACC will be
Minimum when D is Equal to100% and E is equal to 0%.
Since, V = D + E, no matter, what is the value of D/E ratio, the V is constant.
10 points
Q U E S T I O N 3
1. XYZ CORPORATION has a rather High Beta Coefficient (B) of 1.35 because it has outstanding
Bonds worth $ 600 million as a compared it’s Shareholders’ Equity of $ 400 million. You
have been asked by the XYZ to calculate the $-amount of Bonds that it must either pay off
or buyback to reduce its Beta to 1.25. Your approximate answer is:

Note: Assume XYZ is 21% Marginal Tax Bracket (MTB)
$ 97m
$ 82
m
$
120m
$ 37m
$ 95m
$ 75
m
10 points
Q U E S T I O N 4
1. Calculate the Discounted Payback (DPBK) for the following Cash Flows using a
Discount Rate of 12%.
Yr CF
0
$
(100.00)
1
$ 50.
00
2
$ 35.
00
3
$ 25.
00
4
$ 20.
00
5
$ 40.
00
2.
a
. 4.21
b
. 3.51 Yrs
c
. 3.76
years
d
. 4.20 yrs
e
. 2.60
years
f. 3.00
10 points

Q U E S T I O N 5
1. The CAPM model was introduced by Jack Treynor (1961, 1962) William Sharpe (1964), John
Lintner(1965) and Jan Mossin (1966) independently. CAPM formula is:
Ks = Krf + (Km- Krf) B
Where, Ks= Cost of Issuing a Security = Investors Required Return = 15%
Krf = Risk Free Rate of Return as measured by Avg Return of T-Bills = ?
Km = Avg Market Return measured by S&P-500 or some other as Proxy for the
whole Market = 12.5%
B = Beta Coefficient of the Issuer of the Security = 1.25
Estimated Risk Free Rate of Return (Krf) is:
a
.
4.17
%
b
.
2.25
%
c
.
2.50
%
d
.
0.96%
e
.
1.75
%
f. 10.8
%
10 points
Q U E S T I O N 6
1. The difference between Scenario Analysis and Sensitivity Analysis, with
respect to the NPV of a Capital Budgeting Project is:
a
.
Sensitive Analysis forecasts the Calculated Value NPV, when the values of more than one
input variables are changed. On the other hand, Scenario Analysis forecasts the Calculated
Value of NPV when, the value of only one input Variable is changed.
b
.
Both Analyses calculate the Value of NPV by changing all of the Input Variables.
c
. Both Analyses are used to detect the right values of input variables that
would maximize the calculated Value of NPV.
d
. For all practical purposes, there is little or no difference between Scenario
and Sensitivity Analyses, because both are known as What-If-Analyses.
e
.
Scenario Analysis forecasts the Calculated Value NPV, when the values of more than one
input variables are changed. On the other hand, Sensitivity Analysis forecasts the
Calculated Value of NPV when, the value of only one input Variable is changed.
10 points
Q U E S T I O N 7
1. ABC Corporation’s Project X 22 with initial investment of $ 20m shows a
Profitability Index of 1.60. What is the NPV of this Project:

a
. $
10m
b
. $
20m
c
. $
32m
d
. $
12m
e
. $
44m
f. $
15m
10 points
Q U E S T I O N 8
1. According to most of the Text Books in Finance, the Capital Budgeting Criteria is
NPV, But, according to to Prof. Kalia the best Capital Budgeting Criteria is
Discounted Payabck (DPBK) Method, Because:
a
. It can be used to calculate all of the Capital Budgeting
Criteria.
b
. It is based on old reliable Decision Making AAR method.
c
. Because DPBK is More Important in Decision Making process
than NPV.
d
. It calculates NPV as well as DPBK at the same time.
e
. It can also calculate PI
f. it calculates NPV as well as IRR at the same time.
10 points
Q U E S T I O N 9
1. In case of a Corporation going bankrupt, priority claim on the assets is:
Bonds
Debentures
Pf Stock
Common Shares
Common Shares
Pf Shares
Bonds
Debentures