QFC Corporate Finance & Investment 3

Question 1

A firm's stock price is $50, EPS is $5, and the growth rate is 4%. Using the Gordon Growth Model with a required return of 12%, what is the intrinsic value?

Accepted Answer

$62.50

Answer

Gordon Growth Model: V = D1/(r-g); if dividend payout is 100%, D1=5×1.04=5.2; V=5.2/(0.12-0.04)=$65. With a typical payout ratio, the expected answer here uses D0=EPS×payout, but assuming D0=5: V=5×1.04/(0.08)=$65.

Question 2

When evaluating mutually exclusive projects with different lives, the most appropriate technique is:

Accepted Answer

Equivalent Annual Annuity (EAA) method

Answer

The EAA method converts each project's NPV into an annual equivalent, allowing fair comparison across projects with unequal lives.

Question 3

A company repurchases $200M of stock with new debt at a 5% after-tax cost. Assuming the stock's required return is 10% and the repurchase is fairly priced, WACC will:

Accepted Answer

Remain unchanged in a Modigliani-Miller world without taxes

Answer

In a no-tax MM world, WACC is invariant to capital structure because rising leverage increases the cost of equity exactly enough to offset the cheaper debt.

Question 4

Which of the following correctly describes the relationship between IRR and NPV profiles for conventional projects?

Accepted Answer

If IRR > WACC, the NPV at WACC is positive

Answer

For conventional (normal) cash flows, NPV > 0 when the discount rate is below the IRR, so IRR > WACC implies positive NPV.

Question 5

A merger target is valued at $400M using DCF. The acquirer pays $500M. The goodwill recorded on the balance sheet is:

Accepted Answer

$100M

Answer

Goodwill = Purchase price − Fair value of net identifiable assets = $500M − $400M = $100M.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Corporate Finance & Investment 3