FIN435 Second Midterm Part II — Updated Calculation Study Guide

This study guide is aligned to the current actual exam structure for Chapters 10, 11, and 12. It keeps the real question types but does not use the real exam numbers.

Aligned to current test No real exam numbers Process first Show your work

How to use this: Practice the same kinds of calculations that appear on the actual exam. Choose your own reasonable numbers, write the formula, substitute carefully, and show each step clearly.

Updated: Extra practice types that are not in the current final exam version were removed. This guide now focuses only on the question styles that still appear on the test.

Chapter 10 Chapter 11 Chapter 12

General rules for Part II practice

1) Write the structure first

State the formula before plugging in numbers.
Label each input clearly.
Keep time 0, Year 1, Year 2, and terminal-year items separate.

2) Watch the common traps

Coupon rate is not always the cost of debt.
Use market values for WACC weights when asked.
Include taxes, salvage, and working capital only where they belong.

3) Show full intermediate steps

YTM first, then after-tax Kd.
OCF first, then terminal cash flow.
For payback-style questions, show cumulative totals year by year.

Chapter 10 — Cost of Capital

Type 1

Compare three cost-of-equity estimates and find the difference between the highest and lowest

Given: data for bond-yield-plus-risk-premium, CAPM, and dividend-growth. Ask for: all three estimates and the spread between the highest and lowest.

Method A: rs = debt yield + own-firm risk premium Method B: rs = rRF + β(RPM) Method C: rs = D1 / P0 + g Difference = highest estimate − lowest estimate

Solution structure

Compute all three estimates separately.
Do not mix up D1 and D0.
List the three answers from low to high.
Subtract the lowest from the highest.

Calculator: WACC / cost of capital calculator

Type 2

WACC when target weights are given directly

Given: bond data, tax rate, CAPM inputs, and target debt/equity weights. Ask for: WACC.

WACC = wd·Kd(1 − T) + ws·rs

Solution structure

Find the bond's YTM first if cost of debt is not given directly.
Convert Kd to after-tax Kd.
Find cost of equity using CAPM.
Use the target weights given in the problem.

Calculator: WACC / cost of capital calculator

Type 3

After-tax cost of debt from bond price data

Given: bond price, coupon, maturity, par value, payment frequency, and tax rate. Ask for: the after-tax cost of debt.

After-tax Kd = YTM(1 − T)

Solution structure

Solve for YTM from the bond price.
Do not use the coupon rate automatically as Kd.
If the bond pays semiannually, make sure the annual YTM is handled correctly.
Multiply the annual YTM by (1 − T).

Calculator: WACC / cost of capital calculator

Type 4

Cost of equity by CAPM

Given: risk-free rate, expected market return or market risk premium, and beta. Ask for: the cost of equity.

rs = rRF + β(rM − rRF) Or: rs = rRF + β(RPM)

Solution structure

Use the risk-free rate that matches the problem setup.
If market return is given, find RPM first.
Multiply beta by RPM, then add the risk-free rate.

Calculator: WACC / cost of capital calculator

Type 5

Market-value weight of debt

Given: bond count and bond price, plus shares outstanding and stock price. Ask for: the weight of debt for WACC.

Market value of debt = number of bonds × bond price Market value of equity = shares outstanding × stock price wd = Debt market value / (Debt market value + Equity market value)

Solution structure

Use market values, not book values.
Find debt market value and equity market value separately.
Then divide debt market value by total market value.

Calculator: WACC / cost of capital calculator

Type 6

WACC using answers from earlier parts

Given: after-tax cost of debt, cost of equity, and market-value weights. Ask for: WACC.

WACC = wd·Kd(1 − T) + ws·rs

Solution structure

Use the after-tax cost of debt, not the before-tax YTM.
Use the market weights from the earlier step.
Keep debt and equity weights adding to 100%.

Calculator: WACC / cost of capital calculator

Chapter 11 — Capital Budgeting Methods

Type 7

MIRR

Given: a project cash-flow stream and WACC. Ask for: MIRR.

MIRR = (FV of positive cash flows / |PV of negative cash flows|)^(1/n) − 1

Solution structure

Move positive cash flows to the end of the project.
Move negative cash flows to time 0.
Use the project length correctly in the exponent.

Calculator: Capital budgeting / NPV calculator

Type 8

Payback period

Given: an initial outlay and yearly cash inflows. Ask for: the payback period.

Payback = years before full recovery + remaining amount / next year's cash inflow

Solution structure

Add the undiscounted inflows cumulatively.
Find the year in which the initial outlay is finally recovered.
Use a fraction of the year if recovery happens during the year.

Calculator: Capital budgeting / NPV calculator

Type 9

Discounted payback period

Given: an initial outlay, yearly cash inflows, and a discount rate. Ask for: discounted payback.

Discount each future cash flow first, then do cumulative recovery

Solution structure

Discount each cash inflow to present value.
Add discounted inflows cumulatively.
Then find the fraction of the final recovery year.

Calculator: Capital budgeting / NPV calculator

Type 10

Value forgone when someone chooses by IRR instead of NPV

Given: two mutually exclusive projects and a WACC. Ask for: the dollar value forgone if the project with the higher IRR is chosen instead of the project with the higher NPV.

Value forgone = NPV of the better NPV project − NPV of the project chosen by IRR

Solution structure

Compute each project's NPV at the given WACC.
Identify which project has the higher IRR and which has the higher NPV.
If those point to different projects, subtract the lower NPV from the higher NPV.
Use dollar value forgone, not percentage difference.

Calculator: Capital budgeting / NPV calculator

Chapter 12 — Project Cash Flows and NPV

Type 11

Year 1 operating cash flow

Given: sales, depreciation, operating costs, and tax rate. Ask for: operating cash flow.

OCF = (Sales − Costs − Depreciation)(1 − T) + Depreciation

Solution structure

Find EBIT first.
Apply taxes to EBIT.
Add depreciation back because it is not a cash outflow.

Type 12

Year 1 cash flow with MACRS depreciation

Given: depreciable basis, the MACRS rate for Year 1, sales, operating costs, and tax rate. Ask for: Year 1 depreciation and Year 1 cash flow.

Depreciation in Year 1 = Asset cost × Year 1 MACRS rate Then use the OCF formula

Solution structure

Compute the specific year's MACRS depreciation first.
Use that year's depreciation in EBIT.
Then compute Year 1 operating cash flow.

Type 13

Year 4 cash flow with 3-year MACRS property

Given: a 3-year MACRS asset with rates shown for Years 1 through 4, plus sales, costs, and tax rate. Ask for: Year 4 cash flow.

3-year MACRS property is depreciated over 4 tax years because of the half-year convention Depreciation in Year 4 = Asset cost × Year 4 MACRS rate

Solution structure

Do not stop depreciation after Year 3 if the MACRS schedule still shows Year 4.
Use the Year 4 MACRS percentage exactly as given.
If the problem says zero salvage, only compute the Year 4 operating cash flow unless another terminal item is stated.

Type 14

Project NPV with straight-line depreciation, zero salvage, and no new working capital

Given: WACC, initial fixed-asset cost, straight-line depreciation, annual sales, annual operating costs, and tax rate. Ask for: project NPV.

Step 1: Find annual depreciation Step 2: Find annual OCF Step 3: Discount the annual OCFs and subtract the initial outlay

Solution structure

Depreciation is the same each year under straight-line.
Compute the same annual OCF each year if sales and costs are constant.
If there is zero salvage and no working capital, the terminal year does not get extra add-ons.

Calculator: Capital budgeting / NPV calculator

Type 15

After-tax salvage value

Given: initial cost, depreciation schedule, sale price, and tax rate. Ask for: after-tax salvage value.

Book value at sale date = Initial cost − accumulated depreciation If sale price > book value: After-tax salvage = Sale price − tax on gain If sale price < book value: After-tax salvage = Sale price + tax savings from loss

Solution structure

Find total depreciation through the sale year.
Find book value at the date of sale.
Compare sale price to book value to determine gain or loss.
Then adjust the sale price for the tax effect.

Type 16

Project NPV with positive salvage value and working capital recovery

Given: fixed-asset cost, required new working capital, annual revenues and costs, depreciation, pretax salvage value, tax rate, and WACC. Ask for: project NPV.

Year 0 CF = − Fixed assets − New working capital Years 1 and 2 CF = OCF Final-year CF = OCF + after-tax salvage value + recovery of working capital

Solution structure

Set up the timeline year by year.
Do not include working-capital gains or losses in the middle years unless the problem says so.
Recover the full working capital in the final year if the problem says it is recovered.
Add the after-tax salvage value only in the terminal year.

Calculator: Capital budgeting / NPV calculator

What to practice writing out on paper

For WACC questions

Bond YTM
After-tax Kd
CAPM
Market-value weights
Final WACC

For capital budgeting method questions

Year-by-year cumulative totals
Discount each cash flow before discounted payback
Compute both project NPVs before finding value forgone

For Chapter 12 questions

OCF formula clearly written
Terminal-year parts separated
Book value shown before salvage tax adjustment
Working capital recovered only at the end if stated