| Finance 3910 | | | | | | | | Fall 2015 |
| Directions: Rename this file by entitling it "Name_#.xls" Example --> Beauchamp_Exam_3.xls. Complete all questions found below. Assesment will be based on the following: |
| | · Whether the question is answered correctly. |
| | · Does the sheet answer the question or is the question completed as instructed |
| | · Correctness of the formulas used in completing each question |
| | · Flow of the Sheet (do all formulas flow through the sheet correctly, in other words, |
| | minimize the number of direct numerical inputs required by the user) |
| | · Correctly label the sheet |
| | · Presentation (Do not create sloppy sheets) |
| | · Include assumptions (only when needed) |
| | · Follows all directions |
| Make sure your exam prints correctly on 8.5 x 11.0” paper either portrait or landscaped. Upon completion (after scanning for viruses), upload your file into the dropbox in D2L (see Dropbox for the deadline). DO NOT ENLARGE THE COLUMNS. |
| | | Student Name: |
| | | Replace with Student's Name |
| Part 1 Below |
| 1. Briefly explain the concept of weighted average capital. |
| 2. Using the information below, calculate the weighted average cost of capital. |
| | Capital Component | | Cost/Quantity/Value |
| | Bonds Outstanding | | 350 |
| | Bond Price | | $1,200 |
| | Bond YTM | | 6% |
| | Bank Loan Amount | | 250,000 |
| | Bank Loan Rate | | 4% |
| | Pref Stock Outstanding | | 1,200 |
| | Pref Stock Price | | $50 |
| | Pref Stock Cost | | 8% |
| | Cm Stock Outstanding | | 8,000 |
| | Cm Stock Price | | $42 |
| | Cm Stock Cost | | 10% |
| | Tax Rate | | 35% |
| | | MVd |
| | | MVp |
| | | MVc |
| | | Wd |
| | | Wp |
| | | Wc |
| | | WACC |
| 3. Will the inclusion of flotation costs increase of decrease the WACC? |
| | | increase or decrease? |
| 4. Use the following information to answer the following questions: |
| 4a: What is the concept of capital structure and what is this firm's capital structure? |
| 4b: Assuming the capital structure above is optimal, what does this accomplish and imply for the firm with respect to cost and value? |
| 4c: Explain what the concept behind the number pointed to by the letter A. Make sure to incorporate the value into your answer. |
| 4d: What is the cost of capital (i.e.WACC) if the firm raises up to $7.2m in capital? |
| 5. Use the following information to complete the following questions: |
| | | | Project |
| | | | A | B |
| | Cost of Capital | | 8.0% | 8.0% |
| | Reinvestment Rate | | 6.0% | 6.0% |
| | Year | | CFs | CFs |
| | 0 | | (100,000) | (100,000) |
| | 1 | | 6,250 | 45,000 |
| | 2 | | 18,750 | 33,750 |
| | 3 | | 35,000 | 25,000 |
| | 4 | | 43,750 | 18,750 |
| | 5 | | 50,000 | 12,500 |
| 5a: Calculate the following: |
| | NPV |
| | PI |
| | IRR |
| | MIRR |
| 5b: If projects A and B are independent which project(s) should be accepted and rejected? |
| 5c: If projects A and B are mutually exclusive which project(s) should be accepted and rejected? |
| 6. Use the information below to calculate the following: |
| ~ in the blue spaces simply TYPE out what your solver inputs were. |
| 6a: Solve for the combination of projects that maximizes NPV while remaining in the bound of the contraint(s). Keep the solution. Write out your solver inputs in the blue area below. |
| | | XYZ Firm |
| | | Optimal Capital Budget |
| | | Under Capital Rationing |
| | | Project | Cost | NPV | Include | Scratch |
| | | A | 922,775 | 106,728 |
| | | B | 488,486 | 50,524 |
| | | C | 1,432,913 | 244,053 |
| | | D | 892,192 | 77,709 |
| | | E | 166,844 | 15,277 |
| | | F | 1,159,674 | 66,922 |
| | | G | 2,697,950 | 107,166 |
| | | H | 239,625 | 69,015 |
| | | I | 1,777,453 | 52,614 |
| | | J | 884,841 | 49,296 |
| | | Total |
| | | Constraint | 5,000,000 |
| | Target Cell |
| | Changing Cells |
| | Constraints |
| 6b: Solve for the combination of projects that maximizes NPV while remaining in the bound of the contraint(s). Keep the solution. Write out your solver inputs in the blue area below. |
| | | XYZ Firm |
| | | Optimal Capital Budget |
| | | Under Capital Rationing |
| | | Project | Cost | NPV | Include | Scratch |
| | | A | 922,775 | 106,728 |
| | | B | 488,486 | 50,524 |
| | | C | 1,432,913 | 244,053 |
| | | D | 892,192 | 77,709 |
| | | E | 166,844 | 15,277 |
| | | F | 1,159,674 | 66,922 |
| | | G | 2,697,950 | 107,166 |
| | | H | 239,625 | 69,015 |
| | | I | 1,777,453 | 52,614 |
| | | J | 884,841 | 49,296 |
| | | Total |
| | | Constraint | 5,000,000 |
| | | Constraint | Project E must be included in the solution |
| | Target Cell |
| | Changing Cells |
| | Constraints |
| 6c: Solve for the combination of projects that maximizes NPV while remaining in the bound of the contraint(s). Keep the solution. Write out your solver inputs in the blue area below. |
| | | XYZ Firm |
| | | Optimal Capital Budget |
| | | Under Capital Rationing |
| | | Project | Cost | NPV | Include | Scratch |
| | | A | 922,775 | 106,728 |
| | | B | 488,486 | 50,524 |
| | | C | 1,432,913 | 244,053 |
| | | D | 892,192 | 77,709 |
| | | E | 166,844 | 15,277 |
| | | F | 1,159,674 | 66,922 |
| | | G | 2,697,950 | 107,166 |
| | | H | 239,625 | 69,015 |
| | | I | 1,777,453 | 52,614 |
| | | J | 884,841 | 49,296 |
| | | Total |
| | | Constraint | 5,000,000 |
| | | Constraint | Project E must be included |
| | | Constraint | Projects A & H are mutually exclusive |
| | | Constraint | Projects C & D are mutually exclusive |
| | Target Cell |
| | Changing Cells |
| | Constraints |
| Part 2 Below |
| 7: As an investor, you are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in eight years, and have a coupon rate of 4.5% on a face value of $1,000. Currently, the bonds are selling for $900. |
| 7a: If your required return is 5.75% for bonds in this risk class, what is the highest price you would be willing to pay? |
| 7b: What is the current yield of these bonds? |
| 7c: What is the yield to maturity on these bonds if you purchase them at the current price? |
| 7d: If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn? Why is this different from the current yield and YTM? |
| 7e: If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call on these bonds? |
| 7f: If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? |
| | Front Range Electric Company Bonds |
| | Price | | $ 900.00 | | Settlement Date | | | | Note: These dates are not part of the problem, but you can include hypothetical dates if you wish. |
| | Face Value | | $ 1,000.00 | | Maturity Date |
| | Call Premium % | | 4.00% | | First Call Date |
| | Coupon Rate | | 4.50% |
| | Frequency | | 2 |
| | Maturity (Years) | | 8 |
| | Years to first call | | 3 |
| | Required Return | | 5.75% |
| | Value | | | a |
| | Current Yield | | | b |
| | Yield to Maturity | | | c |
| | One year rate of return | | | d |
| | Yield to Call | | | e |
| | From question d: Why is this different from the current yield and YTM? Simply delete this text and replace with your answer. |
| | Question 8f answer. Simply delete this text and replace with your answer. |
| 7g: Calculate the duration and modified duration of the bond. |
| | Duration |
| | M. Duration |
| 7h: Using the modified duration measure, estimate the price change for a -0.35% change in yield. |
| | Est. Price Change |
| 7i: Calculate the convexity of the bond using the approximation formula. |
| | Est. Price Change |
| 7j: Using the convexity measure in Part i, estimate the price change for -0.35% change in yield. |
| | Est. Price Change |
| 7k: Considering the answers in parts h & j, which is more accurate and why? |
| | Replace with your answer |
| | | | | | | | | | | DON'T FORGET YOUR NAME AT THE TOP |
| THE END |
Hammam14
excel_3.xls
