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(FINA323)[2006](f)midterm~2047^_10339.pdf
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Hong Kong University of Science and Technology
Finance 399J -L1&L2
Mid-term Exam
Fall 2006

Professor Laura Xiaolei Liu

Section: Lecture _______________________________________
Student Name: _____________________________________________
Student ID Number: ___________________________________________
Instructions:
-This is a one and half hour exam with a total of 60 points.
-Do NOT open this exam paper until you are told to do so.
-This is a closed book examination. No draft paper or notes are allowed.
-Dont tear off any page of this exam paper.
-Honesty and integrity are most essential. You are committed as a student to the

universitys Academic Honor Code. Cheating will lead to serious consequences.
1. Answer true or false for the following statements and give a short explanation for your answers. No points will be granted if there is no explanation. (5 points)
1a. Value/Sales ratios can never fall below zero, whereas both price/earnings and Value/EBIT ratios can be negative.
1b. PE ratio varies with firms expected growth rate but PEG doesnt.
1c. Since growth depends on retention ratio, the firm paying no dividend, therefore having retention ratio of 100%, will have the highest value.
1d. The free cash flow to equity will always be lower than the free cash flow to the firm.
1e. V/EBIT ratio will always be higher than P/E ratio.
2.
In late 90s, Dell Computers current price to earnings (PE) ratio is 20, which is at its
industry average. However, Dells market-to-book value of equity ratio (M/B) is 13.86,
which is much higher than the industry M/B ratio, 10.5.
Can you explain why this may happen? (5 points)


3.
Krisyy Kreme Donuts is a fast growing donut store chain that is seeking to topple


Dunkin Donuts as the top snackfood store in the U.S. Its dividend payout ratio is 30% in the past and the managers claim that they will maintain the same payout ratio in future. Answer the following questions.
3a. Krispy Kremes stock closed yesterday at price of $30.10 per share. Analysts
predict earnings per share for Krispy Kreme to be $2.9 next year. Analysts also
predict that earnings will grow at a rate of 30% per year from now on.
What is the implied discount rate (cost of equity capital) based on analysts forecast?
(5 points)

3b. If you believe that the cost of equity capital (discount rate) for Krispy Kreme should be 35%, how can you justify the price of $30.10 per share? List two assumptions with calculations that you make that differ from the assumptions made by the analysts listed in 3a. (6 points)
3c. If you believe that the cost of equity capital (discount rate) for Krispy Kreme is 25%, then what must be wrong for analysts predications? Why? (4 points) 4. Right now is the end of September 2006. You are working for a firm that specializes in corporate takeovers and restructurings. Your firm currently has its eye on the Guilt Free Ice Cream Company (Guilt