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FIN 534 Week 2 Homework Set 1
Directions: Answer the following questions on a separate document.
Explain how you reached the answer or show your work if a mathematical
calculation is needed, or both. Submit your assignment using the assignment
link in the course shell. This homework assignment is worth 100 points.
Use the following information for
Questions 1 through 8: Assume that you recently graduated and have just
reported to work as an investment advisor at the one of the firms on Wall
Street. You have been presented and asked to review the following Income
Statement and Balance Sheets of one of the firm’s clients. Your boss has
developed the following set of questions you must answer.
1. What is the free cash flow for
2013?
2. Suppose Congress changed the tax
laws so that Berndt’s depreciation expenses doubled. No changes in operations
occurred. What would happen to reported profit and to net cash flow?
3. Calculate the 2013 current and
quick ratios based on the projected balance sheet and income statement data.
What can you say about the company’s liquidity position in 2013?
4. Calculate the 2013 inventory
turnover, days sales outstanding (DSO), fixed assets turnover, and total assets
turnover.
5. Calculate the 2013 debt ratio,
liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios.
What can you conclude from these ratios?
6. Calculate the 2013 profit margin,
basic earning power (BEP), return on assets (ROA), and return on equity (ROE).
What can you say about these ratios?
7. Calculate the 2013 price /
earnings ratio, price / cash flow ratio, and market / book ratio.
8. Use the extended DuPont equation
to provide a summary and overview of company’s financial condition as projected
for 2013. What are the firm’s major strengths and weaknesses?
FIN 534 Week 4 Homework Set 2
Assume that you are nearing
graduation and have applied for a job with a local bank. The bank’s evaluation
process requires you to take an examination that covers several financial
analysis techniques. The first section of the test asks you to address these
discounted cash flow analysis problems:
1.
What is the present value of the following uneven cash flow stream −$50, $100,
$75, and $50 at the end of Years 0 through 3? The appropriate interest rate is
10%, compounded annually.
2.
We sometimes need to find out how long it will take a sum of money (or
something else, such as earnings, population, or prices) to grow to some
specified amount. For example, if a company’s sales are growing at a rate of
20% per year, how long will it take sales to double?
3.
Will the future value be larger or smaller if we compound an initial amount
more often than annually—for example, every 6 months, or semiannually—holding
the stated interest rate constant? Why?
4.
What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%,
compounded semiannually? Compounded quarterly? Compounded monthly? Compounded
daily?
5.
Suppose that on January 1 you deposit $100 in an account that pays a nominal
(or quoted) interest rate of 11.33463%, with interest added (compounded) daily.
How much will you have in your account on October 1, or 9 months later?
Use the following information for
Questions 6 and 7:
A firm issues a 10-year, $1,000 par
value bond with a 10% annual coupon and a required rate of return is 10%.
6.
What would be the value of the bond described above if, just after it had been
issued, the expected inflation rate rose by 3 percentage points, causing
investors to require a 13% return? Would we now have a discount or a premium
bond?
7.
What would happen to the bond’s value if inflation fell and rd declined to 7%?
Would we now have a premium or a discount bond?
8.
What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value
bond that sells for $887.00? That sells for $1,134.20? What does a bond selling
at a discount or at a premium tell you about the relationship between rd and
the bond’s coupon rate?
9.
What are the total return, the current yield, and the capital gains yield for
the discount bond in Question #8 at $887.00? At $1,134.20? (Assume the bond is
held to maturity and the company does not default on the bond.)
FIN 534 Week 6 Homework Set 3
Use the following information for
questions 1 through 8: The Goodman Industries’ and Landry Incorporated’s stock
prices and dividends, along with the Market Index, are shown below. Stock
prices are reported for December 31 of each year, and dividends reflect those
paid during the year. The market data are adjusted to include dividends.
1.
Use the data given to calculate annual returns for Goodman, Landry, and the
Market Index, and then calculate average annual returns for the two stocks and
the index. (Hint: Remember, returns are calculated by subtracting the beginning
price from the ending price to get the capital gain or loss, adding the
dividend to the capital gain or loss, and then dividing the result by the
beginning price. Assume that dividends are already included in the index. Also,
you cannot calculate the rate of return for 2008 because you do not have 2007
data.)
2.
Calculate the standard deviations of the returns for Goodman, Landry, and the
Market Index. (Hint: Use the sample standard deviation formula given in the
chapter, which corresponds to the STDEV function in Excel.)
3.
Estimate Goodman’s and Landry’s betas as the slopes of regression lines with
stock return on the vertical axis (y-axis) and market return on the horizontal
axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent
with your graph?
4.
The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market
risk premium is 5%. What is the required return on the market using the SML
equation?
5.
If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry
stock, what would be its beta and its required return?
6.
What dividends do you expect for Goodman Industries stock over the next 3 years
if you expect you expect the dividend to grow at the rate of 5% per year for
the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 =
$1.50.
7.
Assume that Goodman Industries’ stock, currently trading at $27.05, has a
required return of 13%. You will use this required return rate to discount
dividends. Find the present value of the dividend stream; that is, calculate
the PV of D1, D2, and D3, and then sum these PVs.
8.
If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05,
what is the most you should pay for it?
Use the following information for
Question 9:
Suppose now that the Goodman
Industries (1) trades at a current stock price of $30 with a (2) strike price
of $35. Given the following additional information: (3) time to expiration is 4
months, (4) annualized riskfree rate is 5%, and (5) variance of stock return is
0.25.
9.
What is the price for a call option using the Black-Scholes Model?
FIN 534 Week 8 Homework Set 4
Use the following information for
Questions 1 through 5:
Assume you are presented with the
following mutually exclusive investments whose expected net cash
flows are as follows:
EXPECTED NET CASH FLOWS:
Year Project A Project B
0 −$400 −$650
1 −528 210
2 −219 210
3 −150 210
4 1,100 210
5 820 210
6 990 210
7 −325 210
1.
Construct NPV profiles for Projects A and B.
2.
What is each project’s IRR?
3.
If each project’s cost of capital were 10%, which project, if either, should be
selected? If the cost
of capital were 17%, what would be
the proper choice?
4.
What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint:
Consider Period 7 as
the end of Project B’s life.)
5.
What is the crossover rate, and what is its significance?
Use the following information for
Questions 6 through 8:
The staff of Porter Manufacturing
has estimated the following net after-tax cash flows and probabilities for
a new manufacturing process:
Line 0 gives the cost of the
process, Lines 1 through 5 give operating cash flows, and Line 5* contains the
estimated salvage values. Porter’s
cost of capital for an average-risk project is 10%.
Net After-Tax Cash Flows
Year
0 −$100,000 −$100,000 −$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
6.
Assume that the project has average risk. Find the project’s expected NPV.
(Hint: Use expected
values for the net cash flow in each
year.)
7.
Find the best-case and worst-case NPVs. What is the probability of occurrence
of the worst case
if the cash flows are perfectly
dependent (perfectly positively correlated) over time
8.
Assume that all the cash flows are perfectly positively correlated. That is,
assume there are only
three possible cash flow streams
over time—the worst case, the most likely (or base) case, and
the best case—with respective
probabilities of 0.2, 0.6, and 0.2. These cases are represented by
each of the columns in the table.
Find the expected NPV, its standard deviation, and its
coefficient of variation for each
probability.
Use the following information for
Question 9:
At year-end 2013, Wallace
Landscaping’s total assets were $2.17 million and its accounts payable were
$560,000. Sales, which in 2013 were
$3.5 million, are expected to increase by 35% in 2014. Total assets
and accounts payable are
proportional to sales, and that relationship will be maintained. Wallace
typically
uses no current liabilities other
than accounts payable. Common stock amounted to $625,000 in 2013,
and retained earnings were $395,000.
Wallace has arranged to sell $195,000 of new common stock in
2014 to meet some of its financing
needs. The remainder of its financing needs will be met by issuing
new long-term debt at the end of
2014. (Because the debt is added at the end of the year, there will be no
additional interest expense due to
the new debt.) Its net profit margin on sales is 5%, and 45% of
earnings will be paid out as
dividends.
9.
What were Wallace’s total long-term debt and total liabilities in 2013?
FIN 534 Week 10 Homework Set 5
Use the following information for
Questions 1 through 3:
Boehm Corporation has had stable
earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid
dividends of $2.6 million on net income of $9.8 million. However, in 2014
earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3
million in a plant expansion. This onetime unusual earnings growth won’t be
maintained, though, and after 2014 Boehm will return to its previous 8%
earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm’s total dividends
for 2014 under each of the following policies:
1.
Its 2014 dividend payment is set to force dividends to grow at the long-run
growth rate in earnings
2.
It continues the 2013 dividend payout ratio
3.
It uses a pure residual policy with all distributions in the form of dividends
(35% of the $7.3 million investment is financed with debt).
4.
It employs a regular-dividend-plus-extras policy, with the regular dividend
being based on the long-run growth rate and the extra dividend being set
according to the residual policy.
Use the following information for
Questions 5 and 6:
Schweser Satellites Inc. produces
satellite earth stations that sell for $100,000 each. The firm’s fixed costs,
F, are $2 million, 50 earth stations are produced and sold each year, profits
total $500,000, and the firm’s assets (all equity financed) are $5 million. The
firm estimates that it can change its production process, adding $4 million to
investment and $500,000 to fixed operating costs. This change will (1) reduce
variable costs per unit by $10,000 and (2) increase output by 20 units, but (3)
the sales price on all units will have to be lowered to $95,000 to permit sales
of the additional output. The firm has tax loss carry forwards that render its
tax rate zero, its cost of equity is 16%, and it uses no debt.
5.
What is the incremental profit? To get a rough idea of the project’s
profitability, what is the project’s expected rate of return for the next year
(defined as the incremental profit divided by the investment)? Should the firm
make the investment? Why or why not?
6.
Would the firm’s break-even point increase or decrease if it made the change?
Use the following information for
Questions 7 and 8:
Suppose you are provided the
following balance sheet information for two firms, Firm A and Firm B (in
thousands of dollars)
Earnings before interest and taxes
for both firms are $30 million, and the effective federal plus-state tax rate
is 35%.
7.
What is the return on equity for each firm if the interest rate on current
liabilities is12% and the rate on long-term debt is 15%?
8.
Assume that the short-term rate rises to 20%, that the rate on new long-term
debt rises to 16%, and that the rate on existing long-term debt remains
unchanged. What would be the return on equity for Firm A and Firm B under these
conditions?
9.
In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and
the dollar cost of a compact Japanese-manufactured car was $10,000. Suppose
that now the exchange rate is 120 yen per dollar. Assume there has been no
inflation in the yen cost of an automobile so that all price changes are due to
exchange rate changes. What would the dollar price of the car be now, assuming
the car’s price changes only with exchange rates?
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