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Corporate Finance Skills Assessment

Congratulations on being accepted into the MSF program! As you get ready to embark on this exciting journey, we kindly request your participation in this survey/quiz. It will assist in assessing your current understanding of the subject matter and aid you in making informed decisions when selecting your courses.

If you have any questions about your score, please contact Karla Lucht @ msf-advising@business.illinois.edu

Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $1.00 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

-$0.663

-$0.709

-$0.631

-$0.65

-$0.598

Suppose you just won the state lottery, and you have a choice between receiving $2,075,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

11.10%

10.38%

12.14%

9.44%

11.83%

Year	0	1	2	3
Cash Flow	$100	$150	$200	$300

What is the future value at year 3 of the above set of cash flows if the appropriate discount rate is 11%?

863.57

806.82

616.82

843.57

Ryngaert Inc. recently issued annual paying non-callable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 9.7%, at what prices should the bond sell?

$725

$524.76

$690.48

$835.47

A B

Required Return 10% 12%

Market Price	$25	$40
Expected Growth	7%	9%

See above table. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is correct?

These two stocks should have the same expected return

These two stocks must have the same dividend yield

These two stocks must have the same capital gains yield

These two stocks must have the same expected yearÔÇÉend dividend

Stock	Amount	Beta
1	$400,000	1.50
2	$600,000	0.50
3	$1,000,000	1.25
4	$2,000,000	0.75

Assume that you are the portfolio manager of the Delaware Fund, a $4 million mutual fund that contains the above stocks.

The required rate of return in the market is 14% and the risk free rate is 6%. What rate of return should investors expect (and require) on their investment in this fund?

12.70%

10.90%

11.50%

13.30%

•   The company has annual paying bonds outstanding that mature in 26 years with an annual coupon of 7.5%. The bonds have a face value of $1,000 and sell in the market today for $920.
•   The risk free rate is 6%.
•   The market risk premium is 5%.
•   The stock’s beta is 1.2.
•   The company’s tax rate is 40%.
•   The company’s target capital structure consists of 70% and 30% debt.
•   The company uses the CAPM to estimate the cost of equity and does not include flotation costs as part of its cost of capital.

Trojan Services' CFO is interested in estimating the company's WACC and has collected the above information.

What is Trojan's WACC?

10.87%

9.39%

9.89%

9.75%

Cash flows occurring in different periods should not be compared unless:

interest rates are expected to be stable.

the flows have been discounted to a common date.

the flows occur no more than one year from each other.

high rates of interest can be earned on the flows.

MS Finance Skills Assessment-Corporate Finance

Corporate Finance Skills Assessment