Which is the cost of capital for the oil refining division closest to?

Division  Asset Beta Next Period’s Expected Expected Growth Rate Free Cash Flow ($mm) 

Oil Exploration  1.4  450  4.0% 

Oil Refining  1.1  525  2.5% 

Gas & Convenience Stores  0.8  600  3.0% 

 The risk-free rate of interest is 3% and the market risk premium is 5%.
Which is the cost of capital for the oil refining division closest to?
A) 6.5%
B) 7.0%
C) 8.5%
D) 10.0%

Cost of Capital = Risk Free Return + Beta x Market Risk Premium

Cost of Capital = 3% + 1.1 x 5% = 8.5%

Number 2 question
You expect CCM Corporation to generate the following free cash flows over the next 5 years.
Year   1 2 3 4 5

FCF ($ millions)   25 28 32 37 40

 

If CCM has $150 million of debt and 12 million shares of stock outstanding, then which is the share price for CCM closest to?
A) $49.50
B) $11.25
C) $20.50
D) $22.75

Value at end of Year 5 = (40*1.05)/(.13-.05) =525

Value of Firm Today = 25/(1.13) + 28/(1.13^2) + 32/(1.13^3) + 37/(1.13^4) + (40+525)/(1.13^5) = 395.58

Value of Equity = 395.58-150 = 245.58

Value per Share = (245.58/12) = 20.47 or 20.5

Note: For this question we need required return and growth rate. From my previous experience it is 13% and 5%. If your figures are different please let me know.

Number 3 question
Which is the variance of the returns on the Index from 2000 to 2009 closest to?

 

Year End

Index Realized Return

(R-R)

(R-R)^2

 

2000

23.60%

14.78%

0.0218448

 

2001

24.70%

15.88%

0.0252174

 

2002

30.50%

21.68%

0.0470022

 

2003

Division  Asset Beta Next Period’s Expected Expected Growth Rate Free Cash Flow ($mm) 

Oil Exploration  1.4  450  4.0% 

Oil Refining  1.1  525  2.5% 

Gas & Convenience Stores  0.8  600  3.0% 

 The risk-free rate of interest is 3% and the market risk premium is 5%.
Which is the cost of capital for the oil refining division closest to?
A) 6.5%
B) 7.0%
C) 8.5%
D) 10.0%

Cost of Capital = Risk Free Return + Beta x Market Risk Premium

Cost of Capital = 3% + 1.1 x 5% = 8.5%

Number 2 question
You expect CCM Corporation to generate the following free cash flows over the next 5 years.
Year   1 2 3 4 5

FCF ($ millions)   25 28 32 37 40

 

If CCM has $150 million of debt and 12 million shares of stock outstanding, then which is the share price for CCM closest to?
A) $49.50
B) $11.25
C) $20.50
D) $22.75

Value at end of Year 5 = (40*1.05)/(.13-.05) =525

Value of Firm Today = 25/(1.13) + 28/(1.13^2) + 32/(1.13^3) + 37/(1.13^4) + (40+525)/(1.13^5) = 395.58

Value of Equity = 395.58-150 = 245.58

Value per Share = (245.58/12) = 20.47 or 20.5

Note: For this question we need required return and growth rate. From my previous experience it is 13% and 5%. If your figures are different please let me know.

Number 3 question
Which is the variance of the returns on the Index from 2000 to 2009 closest to?

 

Year End

Index Realized Return

(R-R)

(R-R)^2

 

2000

23.60%

14.78%

0.0218448

 

2001

24.70%

15.88%

0.0252174

 

2002

30.50%

21.68%

0.0470022

 

2003