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INSTRUCTIONS:
1. You are valuing a firm that has $370 million in tax loss carryforwards. If the firm has earnings this
year of $760 million and pays a marginal tax rate of 40%, what will be the firms effective tax rate?
a) 0.0%
b) 16.3%
c) 20.5% (taxable income of 760-370=390 gives tax of 156 or 20.5%)
d) 40.0%
2. Which of the following sections from the Statement of Cash Flows would describe funds used to
purchase property, plant, and equipment?
3. You are calculating the weighted average cost of capital (WACC) for a firm that has a single
convertible bond and no other debt. The bond is a zero coupon bond with 10 years to maturity and a
face value of $120 million. The firms cost of debt equals 6% and the convertible bond is currently
trading for a market value of $92 million. What debt value should be used to calculate the weight in
the debt component of the WACC formula?
a) $92 million
b) $120 million
c) $67 million 120
DebtValue $67.01million
d) $25 million (1.06) 6
4. The financial statements for McDonalds are provided at the end of the exam. Based on this
information, what is the accounts receivable turnover ratio for McDonalds? (To avoid confusion,
assume that all amounts listed under "accounts and notes receivable" are accounts receivable.)
a) 28.24
b) 12.92 Sales t 22786 .6
28.24
c) 21.62 ARt 1 806 .9
d) 16.88
6. Your firm has just completed an acquisition for a total price of $2 billion. The net value of the
tangible and intangible assets of the acquired firm equals 1.65 billion. Which of the following
statements correctly describes the treatment of this acquisition on the firms reported financial
statements under current GAAP accounting rules?
7. Which of the following should NOT be excluded from past cash flow estimates when developing
forecasts of future cash flows?
a) (14 points) Calculate the total value of operating lease debt for McDonalds assuming a cost of
debt equal to 7%.
5870
Annuity Length 8.04 yrs
730
1 1.07 8.04
730
990 918 854 787 730 .07 6665.0
PV 1
2
3
4
5
(1.07) (1.07) (1.07) (1.07) (1.07) (1.07) 5
b) (6 points) Using the balance sheet provided at the end of the exam and your answer to part (a),
calculate the adjusted book value of debt for McDonalds as of year-end 2007.
Debt 1126.6 864.5 7310 9301.10
Note: You could also use average equity and asset values from the beginning and ending balance sheets. Using
these values would give an ROE of 15.58%.
OR
a) (14 points) You are performing a valuation of Boeing based on free cash flow to the firm
(FCFF). You have decided to capitalize R&D using a five-year life. Using this information,
calculate both the R&D amortization that should be applied to income in the most recent year
and the unamortized value of the R&D asset remaining on the balance sheet at year end.
b) (10 points) For 2007, Boeing reported net income of $4,074 million, operating income of
$5,830 million, capital expenditures of $1,672 million, and depreciation of $1,334 million.
The firm also increased their non-cash working capital by $1,200 million and paid off debt
totaling $1,360 million. The firm made acquisitions totaling $75 million and paid a tax rate of
30%. Using this information, calculate the FCFF for Boeing in 2007 before adjusting for the
capitalization of R&D.
c) (8 points) Recalculate the FCFF for Boeing in 2007 after adjusting for the capitalization of
R&D.
The adjustment to both after-tax operating income and capex is the same, so FCFF is unaffected by
the R&D adjustment and quals $2468.