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FIN 534 Financial Management – FIN534 Homework

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%.

1. 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?
2. 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?
3. 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?
4. 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.

1. 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?

1. 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.)

1. 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

1. 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.)

1. 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

1. 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.

1. 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.

1. 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?
2. 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%.

1. 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%?
2. 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?
3. 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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