Q.No. 1: The following data are pertinent for Companies A and B:Company A Company B

Present Earnings (in millions) $ 20 $ 4Number of Shares (in millions) 10 1Price / earnings ratio 18 10

a) If the two companies were to merge and the share exchange ratio were 1 share of Company A for each share of Company B, what would be the initial impact on earnings per share of the two companies? What is the market value exchange ratio? Is a merger likely to take place?

b) If the share exchange ratio were 2 shares of Company A for each share of Company B, what would happen with respect to Part (a)?

c) If the exchange ratio were 1.5 shares of Company A for each share of Company B, what would happen?d) What exchange ratio would you suggest?

Q.No. 2: A $1,000-face-value bond has a current market price of $935, an 8 percent coupon rate, and 10 years remaining until maturity. Interest payments are made semi-annually. Before you do any calculations, decide whether the yield to maturity is above or below the coupon rate. Why?

a. What is the implied market-determined semi-annual discount rate (i.e., semi-annual yield to maturity) on this bond?

b. Using your answer to Part (a), what is the bond’s (i) (nominal annual) yield to maturity? (ii) (Effective annual) yield to maturity?

Q.No. 3: Delphi Products Corporation currently pays a dividend of $2 per share, and this dividend is expected to grow at a 15 percent annual rate for three years, and then at a 10 percent rate for the next three years, after which it is expected to grow at a 5 percent rate forever. What value would you place on the stock if an 18 percent rate of return was required?

Q.No. 4: Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the merger is undertaken. The cash price of Benson is $125,000.

a) Would you recommend the merger?b) Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will

return cash inflows of $40,000 per year for each of the next 10 years? c) If the cost of capital did not change with the merger, would your decision in part b be different? Explain.

Q.No. 5: “See, I told you things would work out,” said Barry Kresmier, president of Lomax Company. “We expanded sales from $1.6 million to $2.0 million in 2009, nearly doubled our warehouse space, and ended the year with more cash in the bank than we started with. A few more years of expansion like this and we’ll be the industry leaders.”“Yes, I’ll admit our statements look pretty good,” replied Sheri Colson, the company’s vice president. “But we’re doing business with a lot of companies we don’t know much about and that worries me. I’ll admit, though, that we’re certainly moving a lot of merchandise; our inventory is actually down from last year.”A comparative balance sheet for Lomax Company containing data for the last two years follows:

Lomex CompanyComparative Balance Sheet as on December 31, 2009 and 2008

2009 2008Assets

Current Assets:Cash $ 42,000 $ 27,000Marketable Securities 19,000 13,000

Accounts Receivable 710,000 530,000Inventory 848,000 860,000Prepaid Expenses 10,000 5,000

Total Current Assets 1,629,000 1,435,000Long-term Investments 60,000 110,000Loans to Subsidiaries 130,000 80,000Plant and Equipment 3,170,000 2,600,000

Less Accumulated Depreciation 810,000 755,000Net Plant and Equipment 2,360,000 1,845,000Patents 84,000 90,000Total Assets $ 4,263,000 $ 3,560,000

Liabilities and Stockholders' EquityCurrent Liabilities:Accounts Payable $ 970,000 $ 670,000Accrued Liabilities 65,000 82,000Total Current Liabilities 1,035,000 752,000Long-Term Notes 820,000 600,000Deferred Income Taxes 95,000 80,000Total Liabilities 1,950,000 1,432,000Stockholders' Equity:Common Stock 1,740,000 1,650,000Retained Earnings 573,000 478,000Total Stockholder' Equity 2,313,000 2,128,000Total Liabilities and Stockholders' Equity $ 4,263,000 $ 3,560,000

The following additional information is available about the company’s activities during 2009:a) Cash dividends declared and paid to the common stockholders totalled $75,000.b) Long-term notes with a value of $380,000 were repaid during the year.c) Equipment was sold during the year for $70,000. The equipment had cost $130,000 and had $40,000 in

accumulated depreciation on the date of sale.d) Long-term investments were sold during the year for $110,000. These investments had cost $50,000

when purchased several years ago.e) The company’s income statement for 2009 follows:

Sales $ 2,000,000 Cost of goods sold 1,300,000 Gross Margin 700,000 Selling and administrative expenses 490,000 Net Operating Income 210,000 Non-Operating Items:

Gain on sale on investments $ 60,000Loss on sale of equipment 20,000 40,000

Income before taxes 250,000 Income Taxes 80,000 Net Income $ 170,000

Required: a) Using the indirect method, prepare a statement of cash flows for the year 2009.b) Compute free cash flow for 2009.