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Corporate financial management test 1

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FALL 2020
FIN 3303- 03
Test 1
Student Name: …………………………….

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Problems Solving (50 Points)
Problem 1:
Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon
value.
Your firm projects net cash flow in years 1 through 6 as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
100 Million $
120 Million $
135 Million $
140 Million $
147 Million $
153 Million $
If the project ends at the end of the sixth year, what is the horizon value of this project?
Assume that the company has a historical growth rate of 5% and a discount rate of 10%.
Show the details of your calculation?
Problem 2:
You have the following bond maturing in 4 years:
Face Value = 1.000$;
Semiannual dividends = 25$;
Annual Interest rate= 3.75%
1. Compute the PV of the cash flows?
2. What will happen to the bond price if the interest rate increase to 5%

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FALL 2020 FIN 3303- 03 Test 1 Student Name: ……………………………. Problems Solving (50 Points) Problem 1: Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value. Your firm projects net cash flow in years 1 through 6 as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 100 Million $ 120 Million $ 135 Million $ 140 Million $ 147 Million $ 153 Million $ If the project ends at the end of the sixth year, what is the horizon value of this project? Assume that the company has a historical growth rate of 5% and a discount rate of 10%. Show the details of your calculation? Problem 2: You have the following bond maturing in 4 years: Face Value = 1.000$; Semiannual dividends = 25$; Annual Interest rate= 3.75% 1. Compute the PV of the cash flows? 2. What will happen to the bond price if the interest rate increase to 5% 3. Compute both the duration and the modified duration of the bond ? 4. Interpret your results in question 3? Problem 3: You have the following two mutually exclusive projects: Projects A B Co -20,000 -40,000 The discount rate is 10%. Which project you will choose? Explain in details why C1 +40,000 +55,000 Essay Questions (50 Points) Question 1 When Microsoft announced its first ever-regular dividend, the stock price experienced a significant drop. Explain why? Question 2: Why do firms relay heavily on internal funds instead of external funds? Question 3: Explain how sharehold ...
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