FIN 534 Homework Set #1
HelphereFIN 534 Homework Set #1
Use the following information for Questions 1 through 4:
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 2014 ?
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 2014 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. Use the extended DuPont equation to provide a summary and overview of company’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?
FIN 534 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.
Use the following information for Questions 1 through 2
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. 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 3 and 4:
A firm issues a 10 - year, $1,000 par value bond with a 10% annual coupon and a required rate of return is 10%.
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 # 3 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 Homework Set # 3
Use the following information for questions 1 through 4:
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. Goodman Industries Landry Incorporated Market Index
Year Stock Price Dividend Stock Price Dividend Includes Dividends
2013 $25.88 $1.73 $73.13 $4.50 17495.97
2012 22.13 1.59 78.45 4.35 13178.55
2011 24.75 1.50 73.13 4.13 13019.97
2010 16.13 1.43 85.88 3.75 9651.05
2009 17.06 1.35 90.00 3.38 8403.42
2008 11.44 1.28 83.63 3.00 7058.96
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. What dividends do you expect for Goodman Industries stock over the next 3 years if 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.
4. Assume that Goodman Industries’ stock has a required return of 13%. You will use this required return rate to discount the dividends calculated earlier. 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?
FIN 534 Week 8 Homework Set 4
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 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 P = 0.2 P = 0.6 P = 0.2
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 and 2:
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 one - time 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. (a) Its 2014 dividend payment is set to force dividends to grow at the long - run growth rate in earnings.
(b) It continues the 2013 dividend payout ratio.
2. (a) 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).
(b) 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 3 and 4:
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 carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.
3. 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?
4. Would the firm’s break-even point increase or decrease if it made the change?
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