Finanace-QA104

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1) Company A is trying to propose a tender offer to the shareholders of firm B, a public company. What is the reasonable level of offer price that Company A should propose to firm B?
 
(A) B’s 52-week average daily closing price
 
(B) B’s 52-week high price
 
(C) B’s 52-week low price

 

2) The implied equity risk premium is a forward-looking premium, estimated from the level of stock prices (the index) today and expected earnings/cash flows in the future. Assume that you compute the implied ERP at the start of a year and the market goes up 20% during the course of the year and that you compute the implied ERP again at the end of the year. Assuming that the risk free rate and growth rate do not change over the course of the year, which of the following would you expect to happen to the implied ERP?
 

1. A) The ERP will go down
2. B) The ERP will go down, if the earnings/cash flows went up by less than 20% during the year
3. C) The ERP will go down, if the earnings/cash flows went up by more than 20% during the year
4. D) The ERP will not change

 
3) You are trying to compute the change in working capital to use in computing free cash flow to the firm for ABC Inc. The firm’s total working capital increased from $100 million last year to $120 million this year. However, this working capital includes excess cash and interest-bearing short term debt; last year’s balance had $30 million in excess cash and $15 million in interest bearing short term debt, whereas this year’s balance has $20 million in excess cash and $25 million in interest-bearing short term debt. What effect did working capital have on your cash flow this year?
 

1. A) Decreased cash flow by $20 million
2. B) Decreased cash flow by $30 million
3. C) Decreased cash flow by $35 million
4. D) Decreased cash flow by $40 million

 
4) Wayfarers Inc. is a risky technology company that is expected to have a cost of capital of
 
12%. An analyst is doing a 10-year forecast in a DCF analysis. If the expected FCF in year 11 is $80 million and the expected growth rate in perpetuity is 3%, estimate the present value of the terminal value at the end of year 10.
 

 
286. A) $286.20 million
287. B) $308.43 million
288. C) $367.97 million
289. D) $440.62 million

 
5) Free cash flow to the firm (FCFF) is the cash available to
 

1. A) all of the firm’s investors.
2. B) bondholders and preferred stockholders.
3. C) bondholders.
4. D) equity investors

 

6) You have finished a discounted cash flow valuation of a company, discounting free cash flows to the firm at the cost of capital to arrive at a value of $2 billion. You have also valued individual assets on the company’s balance sheet. Which of the following assets would you add to your estimated value to arrive at the value of the overall business?
 

1. A) Goodwill of $500 million
2. B) Brand name value of $ 300 million
3. C) Value of real estate (headquarters building) of $200 million
4. D) None of the above

 

7) Investments that are less liquid are usually valued lower than otherwise similar liquid investments. Which of the following is a way of incorporating the effect of illiquidity on value.
 

1. A) Use a lower discount rate for the illiquid asset and reduce the DCF value by an illiquidity

discount
 

1. B) Use a higher discount rate for the illiquid asset and reduce the DCF value by an illiquidity

discount
 

1. C) Use the same discount rate for the illiquid asset (as you would for a liquid asset) and reduce the DCF value by an illiquidity discount.

 

2. D) Use a lower discount rate for the illiquid asset and don’t adjust the DCF value.

 
8) If you are want to increase a company’s PE ratio, what can you do?
 

1. A) Increase growth rate
2. B) Increase payout ratio
3. C) Reduce risk
4. D) All of above

 

9) You are looking at valuing the brand name of a consumer product company that has an enterprise value of $2.5 billion on revenues of $ 1 billion. If companies in the same sector that produce generic substitutes trade at an EV/Sales ratio of 1.5, what is the approximate value of brand name at the company?
 

1. A) $0.5 billion
2. B) $1 billion
3. C) $1.5 billion

 

10) Selena Inc. is a fashion apparel manufacturer that is trading at an EV/EBIT multiple of 10, much higher than the average multiple for the sector. Which of the following best explains why this may be happening?
 

1. A) Selena Inc. is in a risky emerging market, whereas the comparables are in developed markets
2. B) Selena Inc. has a much lower return on capital than the comparable companies
3. C) Selena Inc. pays no taxes but comparable companies pay tax rates that average 30%
4. D) Selena Inc. has much larger reinvestment needs than comparable companies

 
11) “Junk Bond” means
 

1. A) the bond is already in default position
2. B) the bond is worth nothing
3. C) the bond is in speculative grade
4. D) the bond is not suitable for investment by anyone

 

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12) When doing a corporate bond rating, a rating agency will usually review the following
 

1. A) the company’s financial ratios, e.g. interest coverage ratios, debt payback ratios
2. B) the company’s competitiveness within the industry
3. C) the sovereign rating of the country in which the company operates
4. D) all of the above

 
13) Which of the following is a correct statement
 

1. A) Debt is more expensive than equity because the company has to pay interest on debt but it does not necessarily have to pay dividend.

 

1. B) Firm value always go up when company increases leverage because of the value of the tax shield

 

1. C) MM Proposition I says, capital structure does not matter in an environment in which there’s tax

 

2. D) In a tax environment, a firm’s value will go up, up to a certain point of leverage, and then go down when leverage further increases

 

 

14) Which of the following is a correct statement
 

1. A) To qualify for a NYSE listing, a company needs to have 3 years of profitability

 

2. B) To qualify for a HKSE listing, a company does not necessarily need 3 years of profitability

 

15）A 15% “Green shoe” mechanism means
 

1. A) the underwriters can sell the issuer’s stocks up to 115% of the issuance size and buy back 15% if the initial trading price is below the issue price

 

2. B) the underwriters can sell the issuer’s stocks up to 100% of the issuance size and buy back 15% if the initial trading price is below the issue price

 

3. C) the underwriters can sell the issuer’s stocks up to 100% of the issuance size and sell 15% more if the initial trading price is above the issue price

 

1. D) the underwriters can sell the issuer’s stocks up to 85% of the issuance size and sell 15% more if the initial trading price is above the issue price

 
16) In a HK IPO, a Sponsor does not necessarily need to do one of the following tasks
 

1. A) Be the communications channel between the issuer and the HK Exchange
2. B) Take responsibilities for the due diligence process
3. C) Underwrite the IPO
4. D) Ensure the truthfulness of the documents submitted to the HK Exchange

 

17) To do an IPO in HK, which of the following is NOT a must-to-do item required by the Regulator
 

1. A) Appoint a Sponsor
2. B) File a Prospectus
3. C) Provide a Profit Forecast
4. D) Appoint Independent Directors onto the Board

 
18) If a company’s Debt/EBITDA ratio is 10, most likely it means
 

1. A) The company is a high growth company
2. B) The company is popular in the fixed income market
3. C) The company’s cost of debt is cheap
4. D) The company’s debt has fallen into a speculative category

 

19) A book-building process in an IPO means
 

1. A) Collecting orders for IPO shares at different price levels
2. B) Preparation and printing of an IPO prospectus
3. C) Collection of all IPO documents to be submitted to the regulators
4. D) None of the above

 
20) In a LBO transaction, investors use majority debt funding for the purchase. Therefore,
 

1. A) all of the debt used in the transaction will be highly speculative
2. B) none of such debt is worth investing at any price
3. C) all such debt has to be approved by the government regulator
4. D) equity investors’ expected return will be higher than that of investors in companies with average leverage

 

Longer Questions

 

21) The following is a debt-amortization table prepared by analyst when uses APV to value a
 
LBO target. The initial debt amount is $1,000 million. The pre-tax cost of debt is 6%. Tax rate is 40%. At the beginning of year 5, the debt amount is reduced to $400 million and stays at that level. Fill in the blanks with appropriate numbers and calculate the present value of all taxbenefits. Keep two digits that follow the decimal point.
 

Year Debt Due at Start of Year	($mil) Interest	Expense ($mil)	Tax Benefit ($mil)	PV ($mil)
1	1000.00
2	850.00
3	700.00
4	550.00
5	400.00
In perpetuity	400.00

 

22) You are considering an acquisition of XYZ Inc., a mature, manufacturing company. The company currently has an EV/EBITDA of 5. The company has EBITDA of $100 million,
 
Depreciation of $40 million, capital expenditures of $30 million, no working capital needs and a tax rate of 40%. If the cost of capital for the company is 10%, it has stable growth and the growth rate is 2%, is the company cheap or expensive? Explain.
 

23) Please (1) list the major differences between a publicly listed company vs. a private company (not listed) (4 points), and (2) describe the pros and cons for a company to go public (6 points)
 

24) Please describe the major steps for executing an IPO in HK Exchange. (10 points)
 
Product Code: Finanace-QA104
 
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