FIN 515 Read, Lead, Succeed/uophelpdotcom
FIN 515 Course Project 1 and 2
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This Tutorial contains
Week 3 Course Project (3 Sets)
Week 6 Course Project (2 Sets)
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FIN 515 Entire Course
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This tutorial doesnt contain Final Exam Guide
FIN 515 Week 1 DQ 1 Accounting Versus Finance
FIN 515 Week 1 DQ 2 Financial Analysis
FIN 515 Week 1 Quiz
FIN 515 Week 1 Quiz (New)
FIN 515 Week 1 Problem Set
FIN 515 Week 2 DQ 1 TVM Pass-a-Problem
FIN 515 Week 2 DQ 2 Assumptions of the TVM Model
FIN 515 Week 2 Quiz
FIN 515 Week 2 Problem Set
FIN 515 Week 3 DQ 1 Examples of Capital Expenditure From Your Industry
FIN 515 Week 3 DQ 2 Capital Budgeting Terms and Considerations
FIN 515 Week 3 Course Project 1 (3 Papers)
FIN 515 Week 3 Quiz
FIN 515 Week 3 Problem Set
FIN 515 Week 4 DQ 1 Market Value of a Stock Versus DDM Value
FIN 515 Week 4 DQ 2 Differences in YTM of Real Life Bonds
FIN 515 Week 4 Midterm
FIN 515 Week 4 Problem Set
FIN 515 Week 5 DQ 1 Calculating WACC for a Real Firm
FIN 515 Week 5 DQ 2 Finding Stock Values for Real Stocks Using Beta and the SML
FIN 515 Week 5 problem Set
FIN 515 Week 5 Quiz
FIN 515 Week 6 DQ 1 Examples of Real Agency Problems and How They Could Have Been Prevented
FIN 515 Week 6 DQ 2 The Role of Financial Managers in Ethical Corporate Governance
FIN 515 Week 6 Problem Set
FIN 515 Week 6 Course Project 2 (2 Different Projects)
FIN 515 Week 7 DQ 1 Industry Approaches to Working Capital Financing
FIN 515 Week 7 DQ 2 Your Preference for Working Capital Management Policy
FIN 515 Week 7 Problem Set
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FIN 515 Final Exam (all 3 Sets)
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FIN 515 Final Exam Set 1
FIN 515 Final Exam Set 2
FIN 515 Final Exam Set 3
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FIN 515 Final Exam Set 1
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1. (TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5)
a. Sole proprietorship
b. C corporation
c. S corporation
d. Limited partnership
1.1) Which of the following is not a step in the WACC valuation method?
A) Compute the value of the investment, including the tax benefit of leverage, by discounting the free cash flow of the investment using the WACC.
B) Compute the weighted average cost of capital.
C) Determine the free cash flow of the investment.
D) Adjust the WACC for the firm’s current debt/equity ratio.
1. (TCO H) Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, and (c) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
2. (TCO A) Sole proprietorships have all of the following advantages except (Points : 5)
a. easy to set up.
b. single taxation of income.
c. limited liability.
d. ownership and control are not separated.
2. (TCO C) A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its nonfree trade credit? (Use a 365-day year.)
Question 2. 2. (TCO A) A sole proprietorship is owned by (Points : 5)
a. one person.
b. one or two people, but if there are two owners, they must be married to each other.
c. up to 100 owners.
d. up to 64 owners.
3. (TCO B) Which of the following would cause the present value of an annuity to decrease? (Points : 5)
a. Reducing the number of payments.
b. Increasing the number of payments.
c. Decreasing the interest rate.
d. Decreasing the liquidity of the payments.
3. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero. The company’s last dividend, D0, was $ 1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. Which is the current price of the common stock?
3. (TCO E) Your firm is planning to invest in a new power generation system. Galt Industries is an all-equity firm that specializes in this business. Suppose Galt’s equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm’s project is all equity financed, then which is your estimate of your cost of capital closest to?
4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be (Points : 5)
a. positive.
b. negative.
c. either positive or negative. It really doesn’t matter.
d. stated in time units that are different from the time units in which the interest rates are stated.
4. (TCO B)
You expect CCM Corporation to generate the following free cash flows over the next 5 years.
Year
1
2
3
4
5
FCF ($ millions)
25
28
32
37
40
Following Year 5, you estimate that CCM’s free cash flows will grow at 5% per year and that CCM’s weighted average cost of capital is 13%.
Which is the enterprise value of CCM Corporation closest to?
4. (TCO B)
You expect CCM Corporation to generate the following free cash flows over the next 5 years.
Year 1 2 3 4 5
FCF ($ millions) 25 28 32 37 40
If CCM has $200 million of debt and 8 million shares of stock outstanding, then which is the share price for CCM closest to?
Question 4. 4. (TCO B) Which of the following is an annuity due? (Points : 5)
a. A typical car loan.
b. A typical mortgage.
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FIN 515 Final Exam Set 2
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Question 1.1. (TCO A) Double taxation is a drawback for which of the following types of business organization except?
Question 2.2. (TCO A) Sole proprietorships have all of the following advantages except
Question 3.3. (TCO B) Which of the following would cause the present value of an annuity to decrease?
Question 4.4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be
Question 5.5. (TCO G) If net income, total assets, and book value of equity stayed the same, what would be the effect on the DuPont Identity of an increase in sales?
Question 6.6. (TCO D) A stock has just paid a dividend and will pay a dividend of $3.00 in a year. The dividend will stay constant for the rest of time. The return on equity for similar stocks is 14%. What is P0?
Question 7.7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid one year from today. The dividend is expected to grow at a 7% annual rate. The return on equity for similar stocks is 12%. What is P0?
Question 8.8. (TCO D) A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 6% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
Question 9.9. (TCO D) A bond currently sells for $887 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM?
Question 10.10. (TCO D) Using examples, explain the difference between systematic risk and nonsystematic risk. Explain why the distinction is important for both investors and issuers of stock.
Question 11.11. (TCO E) A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 12%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital?
Question 12.12. (TCO A) Relate how the job of the financial manager can be explained using the balance sheet.
Question 13.13. (TCO H) Other things being equal, would a firm prefer a longer or shorter Cash Conversion Cycle? What are some examples of ways a firm could attain this?
Question 14.14. (TCO F) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
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FIN 515 Final Exam Set 3
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1. (TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5)
Sole proprietorship
C corporation
S corporation
Limited partnership
Question 2.2. (TCO A) A sole proprietorship is owned by (Points : 5)
one person.
one or two people, but if there are two owners, they must be married to each other.
up to 100 owners.
up to 64 owners.
Question 3.3. (TCO B) Which of the following would cause the present value of an annuity to decrease? (Points : 5)
Reducing the number of payments.
Increasing the number of payments.
Decreasing the interest rate.
Decreasing the liquidity of the payments
Question 4.4. (TCO B) In a TVM calculation, if incoming cash flows are positive, outgoing cash flows must be (Points : 5)
positive.
negative.
either positive or negative. It really doesn’t matter.
stated in time units that are different from the time units in which the interest rates are stated.
Question 5.5. (TCO G) If you were a manager of a company, which of the three right side components of the DuPont Identity would you want to increase and which would you want to decrease, other things being equal? Give a specific example for how to do that for each of the three. (Points : 20)
Question 6.6. (TCO D) A stock pays an annual dividend of $2.50 and that dividend is not expected to change. Similar stocks pay a return of 10%. What is P0? (Points : 20)
Question 7.7. (TCO D) A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? (Points : 20)
Question 8.8. (TCO D) A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semiannual coupons are $50. What is the bonds current market price? (Points : 10)
Question 9.9. (TCO D) A bond currently sells for $887 even though it has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? (Points : 10)
Question 10.10. (TCO D) What is β and why is it important to investors and issuers of stock? Describe the behavior of stocks with βs of greater than one, less than one, and less than zero. (Points : 30)
Question 11.11. (TCO E) A company has 10 million shares outstanding trading for $7 per share. It also has $300 million in outstanding debt. If its equity cost of capital is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is its weighted average cost of capital? (Points : 30)
Question 12.12. (TCO A) What is the difference between capital structure and capital budgeting? Explain and give an example of a capital structure decision and an example of a capital budgeting decision. (Points : 25)
Question 13.13. (TCO H) What is the difference between the cash cycle and the operating cycle? Under what condition would they be the same? (Points : 30)
Question 14.14. (TCO F) A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least tw
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FIN 515 Week 1 DQ 1 Accounting Versus Finance
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Accounting Versus Finance (graded)
Much of the analysis done by financial managers is based on numbers that are different from what would seem
to the corresponding numbers presented in the financial statements. This difference is not due to any kind of cooking
the books or other attempts to mislead anyone. One example is the use of market value rather than historical cost in the valuation of assets.
What are some other examples of the differences between financial management and financial accounting?
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FIN 515 Week 1 DQ 2 Financial Analysis
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Financial Analysis (graded)
In this discussion, we will be working with the variety of financial analysis tools available to us.
Let’s start with the DuPont Identity introduced in Chapter 2 of the text. For your initial post, locate the financial statements for two firms in one industry.
Calculate all four terms of the DuPont Identity and present the results but do not analyze the results.
For an additional post, analyze the results that another student has posted.
If you were the appropriate financial manager of one of the firms that you analyzed, what would be your observations and recommendations?
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FIN 515 Week 1 Problem Set
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Chapter 1
The Corporation
1–1. What is the most important difference between a corporation and all other organizational forms?
1–2. What does the phrase limited liability mean in a corporate context?
1–3. Which organizational forms give their owners limited liability?
1–4. What are the main advantages and disadvantages of organizing a firm as a corporation?
1–5. Explain the difference between an S corporation and a C corporation.
1–6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid?
1–7. Repeat Problem 6 assuming the corporation is an S corporation.
Chapter 2
Introduction to Financial Statement Analysis
2–8. In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE’s:
a. market capitalization?
b. market-to-book ratio?
c. enterprise value?
2–11. Suppose that in 2013, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2012.
a. What is Global’s EBIT in 2013?
b. What is Global’s income in 2013?
c. If Global’s P/E ratio and number of shares outstanding remains unchanged, what is Global’s share price in 2013?
2–24. Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4 million in 30 days. Suppose your firm’s tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following:
a. Revenues
b. Earnings
c. Receivables
d. Inventory
e. Cash
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FIN 515 Week 1 Quiz (New)
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Question 1.
(TCO G) The lecture says that some ratios typically are better when they are higher and some of the ratios are better when they are lower. Pick a ratio for which a lower number typically would be preferred and describe a situation, in which a higher number for that ratio would be preferred, OR pick a ratio for which a higher number typically would be preferred and describe a situation in which a lower number for that ratio would be preferred.
Question 2.
(TCO G) As of December 31, 20XX, David Corp’s accounts payable were $4,000,000. Its accounts receivable were $2,200,000, and its sales for 20XX were $32,000,000. What was its days sales outstanding?
Question 3.
(TCO G) As of December 31, 2015, Michael Corp’s current assets were $2,000,000. Its current liabilities were $2,000,000. Its sales for 2015 were $50,000,000. As of December 31, 2016, Michael Corp’s current assets were $3,000,000. Its current liabilities were $3,000,000. Its sales for 2016 were $65,000,000. Management has asked you to comment on these numbers.
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FIN 515 Week 1 Quiz
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Question 1
(TCO G) Which do you think provides a more valid measure of how a company is doing, comparison of current results with historical results or comparison of current results with the current results of another company?
Question 2
(TCO G) Barnes Corp’s total assets at the end of last year were $415,000,000 and its net income after taxes was $17,750,000. What was its return on total assets?
Question 3
(TCO G) Between December 31, 2016 and December 31, 2017, ROE at Bobcat Industries decreased even though sales increased. Using the DuPont Identity, explain what else could have happened to cause this.
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FIN 515 Week 1–7 DQs
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FIN 515 Week 1 DQ 1 Accounting Versus Finance
FIN 515 Week 1 DQ 2 Financial Analysis
FIN 515 Week 2 DQ 1 TVM Pass-a-Problem
FIN 515 Week 2 DQ 2 Assumptions of the TVM Model
FIN 515 Week 3 DQ 1 Examples of Capital Expenditure From Your Industry
FIN 515 Week 3 DQ 2 Capital Budgeting Terms and Considerations
FIN 515 Week 4 DQ 1 Market Value of a Stock Versus DDM Value
FIN 515 Week 4 DQ 2 Differences in YTM of Real Life Bonds
FIN 515 Week 5 DQ 1 Calculating WACC for a Real Firm
FIN 515 Week 5 DQ 2 Finding Stock Values for Real Stocks Using Beta and the SML
FIN 515 Week 6 DQ 1 Examples of Real Agency Problems and How They Could Have Been Prevented
FIN 515 Week 6 DQ 2 The Role of Financial Managers in Ethical Corporate Governance
FIN 515 Week 7 DQ 1 Industry Approaches to Working Capital Financing
FIN 515 Week 7 DQ 2 Your Preference for Working Capital Management Policy
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FIN 515 Week 2 DQ 1 TVM Pass-a-Problem
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TVM Pass-a-Problem (graded)
• This week, the lecture provided some examples of TVM problem scenarios. For your first post, provide a story problem that can be solved using one or more of the TVM calculations.
• Your second post can be a description of how the problem posed by another student can be solved. Your professor may provide an example.
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FIN 515 Week 2 DQ 2 Assumptions of the TVM Model
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Assumptions of the TVM Model (graded)
What are some of the assumptions behind the TVM calculations? How do these assumptions limit our application of these calculations?
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FIN 515 Week 2 Problem Set
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3.Calculate the future value of $2000 in
a. five years at an interest rate of 5% per year;
b. ten years at an interest rate of 5% per year; and
c. five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?
4.What is the present value of $10,000 received
a. twelve years from today when the interest rate is 4% per year;
b. twenty years from today when the interest rate is 8% per year; and
c. six years from today when the interest rate is 2% per year?
5.Your brother has offered to give you either $5,000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
6.Consider the following alternatives.
i. $100 received in 1 year
ii. $200 received in 5 years
iii. $300 received in 10 years
a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year.
b. What is your ranking if the interest rate is only 5% per year?
c. What is your ranking if the interest rate is 20% per year?
8.Your daughter is currently 8 years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 3% per year, how much money do you need to put into the account today to ensure that you will have $100,000 in 10 years?
9.You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 5 years after the date of your retirement. Which alternative should you choose if the interest rate is
14.You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10 years from now.
a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?
b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it now?
36.You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 7% per year. What will your annual payment be if you sign up for this mortgage?
37.You would like to buy the house and take the mortgage described in Problem 36. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining balance on the mortgage. How much will this balloon payment be?
38.You have just made an offer on a new home and are seeking a mortgage. You need to borrow $600,000.
a. The bank offers a 30-year mortgage with fixed monthly payments and an interest rate of 0.5% per month. What is the amount of your monthly payment if you take this loan?
b. Alternatively, you can get a 15-year mortgage with fixed monthly payments and an interest rate of 0.4% per month. How much would your monthly payments be if you take this loan instead?
*A.1. This problem is from the Appendix to Chapter 4.
Your grandmother bought an annuity from Rock Solid Life Insurance Company for $200,000 when she retired. In exchange for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The interest rate is 5%. How long must she live after the day she retired to come
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FIN 515 Week 2 Quiz
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FIN 515 Week 2 Quiz
Question 1
(TCO B) You are a trust fund baby. Your trust fund is currently worth $1,234,000. The problem is the terms of the trust don’t allow you to receive any of the money until you are 27. You are now 21. The fund is earning 7.7% per year. How much will the fund be worth when you are 27 and too old to enjoy it?
Ignore taxes. Show your work. If you use Excel, show the formula with the parameters, and the answer. If you use a formula, provide the standard formula, the formula with terms substituted, and the answer. If you use a calculator, show the inputs and the answer.
Question 2
(TCO B) You have a student loan of $75,000. The interest rate is 8.6% per year. You have been out of school for 6 months and are ready to start making payments. You want to use the maximum allowed of 10 years to pay off the loan by making equal monthly payments. How much are the monthly payments?
Ignore taxes. Show your work. If you use Excel, show the formula with the parameters, and the answer. If you use a formula, provide the standard formula, the formula with terms substituted, and the answer. If you use a calculator, show the inputs and the answer.
Question 3
(TCO B) You want to have $1,000,000 in 30 years. You already have $50,000. You think you can get a 7% annual return on your money. How much per year will you have to save to get to $1,000,000?
Ignore taxes. Show your work. If you use Excel, show the formula with the parameters, and the answer. If you use a formula, provide the standard formula, the formula with terms substituted, and the answer. If you use a calculator, show the inputs and the answer.
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FIN 515 Week 3 Course Project 1 (3 Papers)
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This Tutorial contains 3 Different Course Projects
First Course Project
The purpose of this project is to help you develop skills not only in performing the calculations behind financial analysis but interpreting the numbers as well.
You are to pick a company. You should pick one either from the industry in which you are currently working or an industry in which you are interested. You could also pick a division of a company. It is imperative to use that sufficient data about your company and that it is available. One way to do this is to pick a publicly held company. If you pick a privately held company or a division of a company, make sure that the data necessary to do a significant financial analysis is available.
If you use data that is not publicly available, be sure to talk to your manager and to make absolutely sure that revealing that data is not a problem.
You will also need to find a standard against which to compare your findings. This could be a different company in the same industry. This could also be the same company at a different time. Additionally, average or benchmark numbers are available for several industries. If you decide to use a different company in the same industry or the same company at a different time, make sure that there are enough differences between the two to make an analysis meaningful.
After you have selected a company, put yourself in the place of an analyst who has been asked to perform an analysis of the company and provide a recommendation to management.
Use ratio analysis, common size analysis, or other techniques to determine areas in which the company is doing well as well as areas that management should look at. Then, present your analysis and recommendations in the form of a paper.
A good place to start would be to perform a complete DuPont analysis of the company and compare it to the standard. The DuPont analysis might provide guidance as to what particular areas of the company should be examined next and what ratios should be calculated. If the DuPont analysis does not reveal anything useful, you might wish to calculate several of the ratios that are available to you.
Deliverable
The completed paper should be about 1,000 words long. In the paper, you do not have to explain the ratios in depth. You may assume that the reader has a basic understanding of finance and knows what ratio analysis is, although he or she might not be able to list all the ratios and how to calculate them from memory. The reader is not going to want a lot of background about financial analysis. He or she really wants information that he or she can apply to the given situation, which is the company that you have selected.
If you like, you can write the paper in the form of a memo to management. You do not have to cite your source for how to calculate the ratios. You do need to provide a reference to where you got that data not only for your subject company but for the other company or standard to which you compared your company.
•The spirit of this assignment is for you to calculate and interpret the results. The purpose is not for you to find calculations and interpretations that have been done by someone else.
•The paper is expected to conform to the standards for graduate school writing.
•The purpose of your analysis is internal evaluation. Refrain from using stock market valuation ratios.
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FIN 515 Week 3 DQ 1 Examples of Capital Expenditure From Your Industry
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FIN 515 Week 3 DQ 1 Examples of Capital Expenditure From Your Industry (graded)
Describe a potential capital expenditure project from the industry in which you now work or an industry in which you are interested.
What is the project? Describe and provide an approximate value of the initial cash flow. Describe and provide an approximate value
of the annual cash flows. Provide an estimation of the life of the project, as well as the exit costs.
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FIN 515 Week 3 DQ 2 Capital Budgeting Terms and Considerations
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Capital Budgeting Terms and Considerations
Our textbook and lecture discuss some considerations that should be taken into account when doing capital budgeting.
How will these considerations affect the project you described in the other topic? Incremental earnings, interest expenses,
taxes, opportunity costs, externalities, sunk costs, cannibalization or erosion, depreciation, and salvage value; as well as others
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FIN 515 Week 3 Problem Set
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Week 3 Problem Set
1.
Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
8.
You are considering an investment in a clothes distributor. The company needs $100,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 20%. What does the IRR rule say about whether you should invest?
19.
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback period?
21.
You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.
· a. Which investment has the higher IRR?
· b. Which investment has the higher NPV when the cost of capital is 7%?
c. In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
Chapter 8 (260–262)
1.
Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $20 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 40% will come from customers who switch to the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?
6.
Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.
12.
A bicycle manufacturer currently produces 300,000 units a year and
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FIN 515 Week 3 Quiz
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Company A has a beta of 2.77. Company B has a beta of .73. Company C has a beta of .90. The risk free rate is 6% and the market risk premium is 4%. What is the expected return of investing in Company B?
stock portfolio consists of only two stocks. You have $15,000 in Company A and $25,000 in Company B. Company A has an actual return of -8% and Company B has a return of 12%. What is the return on your portfolio?
A company has a capital structure of 40% debt and 60% equity. The YTM on the company’s bonds is 9%, and the company’s effective tax rate is 40%. The CFO has estimated the company’s WACC to be 9.96%. What is the company’s cost of equity?
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FIN 515 Week 4 DQ 1 Market Value of a Stock Versus DDM Value
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Market Value of a Stock Versus DDM Value (graded)
Select a stock in which you are interested. Calculate its per share value using the DDM or another method discussed in Chapter 9.
Then find the current market value of a share of the stock. Compare that two. Can you explain the similarity or difference?
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FIN 515 Week 4 DQ 2 Differences in YTM of Real Life Bonds
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Differences in YTM of Real Life Bonds (graded)
Do some research, probably on the Web, and find some bonds with differing yields to maturity (YTM). How do you explain the difference?
Both the lecture and the textbook discuss some factors that may lead to this difference.
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FIN 515 Week 4 Midterm
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Question 1.
Question :
(TCO G) The firm’s asset turnover measures
Question 2.
Question :
(TCO G) If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin?
Question 3.
Question :
(TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you will need $1,000,000 to retire. Assuming you don’t deposit any additional money into the account, what annual return will you need to earn to meet this goal?
Question 4.
Question :
(TCO B) You take out a 4 year car loan for $18,000. The loan has a 4% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work.
Question 5.
Question :
(TCO B) You currently have $10,000 in your retirement account. If you deposit $500 per month and the account pays 5% interest, how much will be in the account in 10 years? Show your work.
Question 6.
Question :
(TCO B) You have a two children, A and B. Child A is not going to college but is working in a business to learn the ropes. Child A plans on opening a business someday. Child B is attending college. You put a certain amount of money into an account. From this account, Child B will receive $2,000 per month for the next four years. Whatever is left at that time will go to Child A to help start the business. You want Child A to receive $96,000 at that time. The account pays 7% annually, compounded monthly. How much money do you need to start the account? Show your work.
Question 7.
Question :
(TCO F) A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s NPV? Show your work.
Question 8.
Question :
(TCO F) A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s payback period? Show your work.
Question 9.
Question :
(TCO F) A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s IRR? Show your work.
Question 10.
Question :
(TCO F) A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work.
Question 11.
Question :
(TCO F) Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. Projects A and C can be done together. Projects B and C can be done together. But Projects A and B are mutually exclusive. The company has a cost of capital of 18%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
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FIN 515 Week 4 Problem Set
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Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?
Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
Bond-6. A given bond has five years left to maturity. Interest is paid annually and the annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells for $1,000. What is the yield to maturity?
Chapter 9 (pages 303–203):
1.
Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in 1 year in order to justify its current price?
5.
NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?
6.
Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?
7.
Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.
a. What is the expected growth rate of Dorpac’s dividends?
b. What is the expected growth rate of Dorpac’s share price?
12.
Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
A certain bond pays a semiannual coupon rate at a 10% annual
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FIN 515 Week 5 DQ 1 Calculating WACC for a Real Firm
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Calculating WACC for a Real Firm (graded)
The Weighted Average Cost of Capital (WACC) for a firm can be calculated or found through research.
Select two firms in the same industry. The industry may be that in which you currently work or it may be an industry in which you are interested.
Calculate or find the WACC for the two firms. How do the WACCs compare? Are the WACCs what you would expect?
What causes the differences between the two firms’ WACCs?
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FIN 515 Week 5 DQ 2 Finding Stock Values for Real Stocks Using Beta and the SML
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Finding Stock Values for Real Stocks Using Beta and the SML (graded)
Our second discussion topic concerns the calculation of stock values using the Capital Asset Pricing Model (CAPM).
We will start with a discussion of risk and work towards practical application of the model. The textbook provides a list of betas for a selection of stocks.
Choose a few firms from that list and discuss whether the betas are what you would expect. Be sure to explain why or why not.
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FIN 515 Week 5 problem Set
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Chapter 10 (pages 345–348):
4.
You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from capital gain
20.
Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?
22.
Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together — in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent — one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.
30.
What does the beta of a stock measure
35.
Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6 (also shown above), calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.
Chapter 11 (pages 390–396):
2.
You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at the new prices?
50.
Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?
Chapter 12 (page 431):
26.
Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
· a. What is Unida’s unlevered cost of capital?
· b. What is Unida’s after-tax debt cost of capital?
· c. What is Unida’s weighted average cost of capital?
27.
You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?
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FIN 515 Week 5 Quiz
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Question 1
(TCO C) Company A has a beta of 2.77. Company B has a beta of .73. Company C has a beta of .90. The risk free rate is 6% and the market risk premium is 4%. What is the expected return of investing in Company B? Show your wor
Question 2.
(TCO C) Your stock portfolio consists of only two stocks. You have $30,000 in Company A and $35,000 in Company B. Company A has an actual return of -8% and Company B has a return of 12%. What is the return on your portfolio? Show your work.
Question 3.
(TCO E) A company has a capital structure of 40% debt and 60% equity. The YTM on the company’s bonds is 9%, and the company’s effective tax rate is 40%. The CFO has estimated the company’s WACC to be 9.96%. What is the company’s cost of equity? Show your work.
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FIN 515 Week 6 Course Project 2 (2 Different Projects)
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This Tutorial contains 2 Different Course Projects
Second Project
The purpose of this project is for you to have some practice working with financial concepts in the real world. This will involve integrating some material from throughout the course. The project will also involve the development of your own approach to doing the work. The project does not provide a step-by-step procedure for you to follow.
Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data.
Assumptions
As you recall, the formula for WACC is
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is
ri= rf + βi * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk Premium is 4% unless you can develop a better number.
rf is the risk free rate. The YTM on 10 year US Treasury securities is a good approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company.
There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter. To find data for a particular company’s bonds, find the Quick Search feature, then be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company.
Deliverable
Write a two or three page report that contains the following elements:
1.Your calculated WACC.
2.How data was used to calculate WACC. This would be the formula and the formula with your values substituted.
3.Sources for your data.
4.A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any.
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FIN 515 Week 6 DQ 1 Examples of Real Agency Problems and How They Could Have Been Prevented
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Examples of Real Agency Problems and How They Could Have Been Prevented (graded)
Do some research and find some historical or current real life examples of agency problems.
Will the measures discussed in the text help to prevent problems like your examples in the future? What else would you advise?
You may provide examples of agency problems from your own experience. If you do that, be careful to provide enough anonymity that you won’t get in trouble
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FIN 515 Week 6 DQ 2 The Role of Financial Managers in Ethical Corporate Governance
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The Role of Financial Managers in Ethical Corporate Governance (graded)
Does the financial manager have a greater responsibility or a lesser responsibility for maintaining ethical corporate governance?
Why or why not? What is or will be your approach to ethical corporate governance now or in the future?
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FIN 515 Week 6 Problem Set
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Chapter 29 (pages 983–984)
1.What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
2. What are some examples of agency problems?
3.What are the advantages and disadvantages of the corporate organizational structure?
4.What is the role of the board of directors in corporate governance?
1.What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
2.What are some examples of agency problems?
3.What are the advantages and disadvantages of the corporate organizational structure?
Managing Agency Conflict
4.Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable?
5.Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%.
• a.What is Alcatel-Lucent’s WACC?
• b.If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows?
c. Alcatel-Lucent’s debt-to-value ratio is d = (14.4–10.8) / 14.4 = 0.25. The project’s debt capacity is equal to d times the levered value of its remaining cash flows at each date.
10.Is it necessarily true that increasing managerial ownership stakes will improve firm performance?
11.How can proxy contests be used to overcome a captured board?
12.What is a say-on-pay vote?
13.What are a board’s options when confronted with dissident shareholders?
Illustrate how management focus on forecasting, planning, and business strategy can create wealth for a company in your industry.
Explain how it’s possible for sales growth to decrease the value of a profitable company.
What are some actions an entrenched management might take that would harm shareholders?
Singal Inc. is preparing its cash budget. It expects to have sales of $50,000 in January, $60,000 in February, and $70,000 in March. If 50% of sales are for cash, 30% are credit sales paid in the month after the sale, and another 20% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
The Chadmark Corporation’s budgeted monthly sales are $10,000. In the first month, 20% of its customers pay and take the 5% discount. The remaining 80% pay in the month following the sale and don’t receive a discount.
What is the average cash gain or (loss) during a typical month for the Chadmark Corporation?
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FIN 515 Week 7 DQ 1 Industry Approaches to Working Capital Financing
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Industry Approaches to Working Capital Financing (graded)
Do some research on two firms in your industry or an industry in which you are interested.
Can you get an idea of their working capital management policies from publicly available information?
How do the two companies differ in their apparent working capital management policies? Which policy do you think is better and why?
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FIN 515 Week 7 DQ 2 Your Preference for Working Capital Management Policy
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Your Preference for Working Capital Management Policy (graded)
Consider the company you work for or a company in which you are interested. Also, do some research to find some current cost
estimates for various means of financing working capital. What would be your recommendation to the company for financing its
working capital needs? If the information is publicly available, or if you have access to it AND have permission to discuss it,
how does your recommendation compare what the firm is actually doing?
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FIN 515 Week 7 Problem Set
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Chapter 26 (page 903):
1. Answer the following questions
a. What is the difference between a firm’s cash cycle and its operating cycle?
2. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?
2. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal?
4.The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
a- Calculate The Greek Connection’s net working capital in 2012.
2. Calculate the cash conversion cycle of The Greek Connection in 2012.
2. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?
5.Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.
Chapter 27 (page 925):
1.Which of the following companies are likely to have high short-term financing needs? Why?
a. A clothing retailer
b. A professional sports team
c. An electric utility
d. A company that operates toll roads
e. A restaurant chain
2.Sailboats Etc. Is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm’s seasonal working capital needs the greatest? When does it have surplus cash?
