1. When completing a valuation, one generally assumes a constant capital structure. How does this assumption affect shareholders?
Is this assumption realistic? What is the alternative to maintaining a constant capital structure, and what effect would this have
on your valuation? (8 marks)
2. In your opinion, are North American capital markets efficient? (8 marks)
3. ABC Company had the following earnings per share:
Fiscal Year : 2010 2011 2012 2013 2014
Earnings Per Share : $0.78 $0.80 $0.79 $0.78 $0.82
a. Provide the formula for the random walk model of earnings. Predict the EPS for 2015. (2 marks)
b. Provide the formula for the mean-reverting model of earnings assuming a five year time span and predict the EPS for 2015. (2 marks)
c. What is the forecasted EPS in 2016 under each model? (2 marks)
d. What are the advantages and disadvantages of each method? (4 marks)
4. Billings Company’s financial leverage is 1.5. Its net income is $1 million and has $5 million in shareholders’ equity.
a. What is its ROE? (2 marks) b. Explain your calculation and what the value of each component means. (3 marks)
5. Quindora Company had abnormal earnings of $25,000 in 2014. It is forecasted to have 5% growth in these earnings for five years, followed
by indefinite growth of 3%. Cost of equity is 6%.
a. What is the terminal value of earnings as of January 1, 2015? (4 marks)
b. What is the terminal value if there is no growth after the fifth year? (2 marks)
c. What is the terminal value if growth remains at 5% indefinitely? (2 marks)
d. Without knowing anything else about Quindora company, which growth amount would you choose for your forecast. Why? What are the
implications of each option? (4 marks)
6. The following table shows financial data for two companies. One is a pharmaceutical company, and the other is a manufacturer in
a mature industry. Identify which is which and explain your decision using all three measures. (7 marks)
Company X Company Y
Sales growth rate 2.00% 6.00%
NOPAT margin 3.00% 15.00%
LT assets to sales 60.00% 21.00%
7. You are the auditor of a medium-sized contract manufacturer. While it has not been announced, you know that a number of managers
are considering a leveraged buyout of the company. How would this affect your audit planning? (8 marks)
8. The market risk premium is 6%, the risk free rate is 3.4%, and XYZ company’s cost of equity is 10.6%.
a. What is XYZ’s common
equity beta? (2 marks)
b. You are completing a valuation of XYZ, and it has adjusted its capital structure from a debt to capital ratio of 30% to 35%.
Without providing calculations, explain how this would affect your forecast. (3 marks)
9. Are private investors that use E*Trade or other online discount brokerages more likely to use fundamental or technical analysis?
Why? (8 marks)
10. PFN Technologies is a successful software developer with an ROE of 22% and a book value of equity of $12.8 million.
Its cost of equity is 9%. Assuming a PE multiple of 3.6:
a. What is the market’s expected growth rate for the company? (2 marks)
b. If the market changes its growth expectations to 3.5%, what would the price per share be if there are 25.6 million shares outstanding? (1 mark)
11. Huska Company is currently valued at $45 in the market. Agnew Company is considering acquiring Huska and believes it can add value in
two ways: $12 of value can be added through better working capital management, and an additional $8 of value can added using proprietary technology.
In a competitive bidding contest, how much of this additional value will the acquirer have to pay out to the target’s shareholders to emerge
as the winner? Explain. (8 marks)
12. You are a major shareholder and director of a large oil and gas company with significant cash reserves. Management has proposed diversifying
due to the severe drop in the price of crude and presented an investment opportunity in a pharmaceutical start-up. Would you approve the
investment? (8 marks)
13. Filimon Manufacturing has an Altman Z-score of 10.0779 for the year 2014. It’s Xn values and some financial data are as follows:
X1 X2 X3 X4 X5
??? 0.1075 0.1780 12.0 1.3000
Net Working Capital ???
Total Assets $2,000,000
Retained Earnings $215,000
EBIT $356,000
BV Total Liabilities $410,000
Sales ???
Market Value of Equity $4,920,000.00
a. What were sales for 2014? (2 marks)
b. What was net working capital for 2014? (3 marks)
c. Based on the Altman Z-score alone, credit distress is not predicted for Filimon. Still, the very large net working capital amount could be cause
for concern. What might cause this? In what scenarios could this large amount be positive for the company? (5 marks)
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