FIN 534 Homeworkset 1,2,3 and 4

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.

Income Statements and Balance Sheet

Balance Sheet 2012 2013 Cash $9,000 $7,282 Short-term investments 48,600 20,000 Accounts receivable 351,200 632,160 Inventories 715,200 1,287,360 Total current assets $1,124,000 $1,946,802 Gross fixed assets 491,000 1,202,950 Less: Accumulated depreciation 146,200 263,160 Net fixed assets $344,800 $939,790 Total assets $1,468,800 $2,886,592

Liabilities and Equity Accounts payable $145,600 $324,000 Notes payable 200,000 720,000 Accruals 136,000 284,960 Total current liabilities $481,600 $1,328,960 Long-term debt 323,432 1,000,000 Common stock (100,000 shares) 460,000 460,000 Retained earnings 203,768 97,632 Total equity $663,768 $557,632 Total liabilities and equity $1,468,800 $2,886,592 Income Statements 2012 2013 Sales $3,432,000 $5,834,400 Cost of goods sold except depr. 2,864,000 4,980,000 Depreciation and amortization 18,900 116,960 Other expenses 340,000 720,000 Total operating costs $3,222,900 $5,816,960 EBIT $209,100 $17,440 Interest expense 62,500 176,000 EBT $146,600 ($158,560) Taxes (40%) 58,640 -63,424 Net income $87,960 ($95,136) Other Data 2012 2013 Stock price $8.50 $6.00 Shares outstanding 100,000 100,000 EPS $0.88 ($0.95) DPS $0.22 0.11 Tax rate 40% 40% Book value per share $6.64 $5.58 Lease payments $40,000 $40,000 Ratio Analysis 2012 2013 Current 2.3 1.5 Quick 0.8 0.5 Inventory turnover 4 4 Days sales outstanding 37.3 39.6 Fixed assets turnover 10 6.2 Total assets turnover 2.3 2 Debt ratio 35.60% 59.60% Liabilities-to-assets ratio 54.80% 80.70% TIE 3.3 0.1 EBITDA coverage 2.6 0.8 Profit margin 2.60% −1.6% Basic earning power 14.20% 0.60% ROA 6.00% −3.3% ROE 13.30% −17.1% Price/Earnings (P/E) 9.7 −6.3 Price/Cash flow 8 27.5 Market/Book 1.3 1.1

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 – Homework Set #2

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 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 – 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.

Goodman Industries Landry Incorporated Market Index

Year Stock Price Dividend Stock Price Dividend Includes Dividends

2013 $25.88 $1.73 $73.13 $4.50 17.49 5.97

2012 22.13 1.59 78.45 4.35 13.17 8.55

2011 24.75 1.50 73.13 4.13 13.01 9.97

2010 16.13 1.43 85.88 3.75 9.65 1.05

2009 17.06 1.35 90.00 3.38 8.40 3.42

2008 11.44 1.28 83.63 3.00 7.05 8.96

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. 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) annularized risk

free 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 – 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?FIN 534 – Homework Set #4

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?