Finance Take Home

INSTRUCTIONS

The following pages contain the take home midterm for Finance 201. The exam is due no later than 6:30 PM on Wednesday, July 20th, 2016. Failure to do so will result in a grade of zero. By submitting the exam, you are attesting to the following. Please READ carefully.

1. I understand that this is an examination and attest that the work presented is my own; that it is done without outside assistance of any kind (except that provided by the instructor). I understand that the penalty for cheating or collusion of any kind is a grade of F for the course.

2. Spreadsheet solutions will be appropriately formatted and developed in a logical, readable, coherent fashion. Confusing or unformatted spreadsheets may result in a reduction of points.

3. I will provide the instructor with a hard copy of the exam, even if I submit all or part of the exam electronically. The hard copy will be free of scribbles and the paper neatly trimmed.

4. I understand that it is my responsibility to place the solutions to the problems in the original order and that out-of-order problems will not be graded.

5. I understand that the due date and time for the exam is 6:30 PM on Wednesday, July 20th, 2016. I understand that the exam may be submitted electronically or in hard copy. I understand that exams passed in after that time will be considered late and will incur a minimum penalty of 1 point lost per minute late.

6. If submitted electronically, the file name should contain your name.

7. Make sure you pass in the right exam, not a homework assignment. I don’t have time to hunt you down.

8. The exam is being made available to you on July 12th . That means you have time to ask questions in class, during office hours, via email, or through myriad other means. If you don’t understand a question, ask BEFORE the exam is due for clarification. Misunderstood questions leading to wrong answers will count against you.

9. Each problem is worth 10 points.

10. If you do more than ten problems, your score will be based on your 10 best answers.

11. The bonus is only available to students who answer at least ten questions.

12. Good luck!

1. Offal Offal Trash Collections has Sales of $1.8B, Net Income of $341M, Current Assets of $900M, Long-term Assets of $600M, and Debt of $610M. USING THE DuPont equation, calculate the return on equity.

2. Suppose you deposited $75,000 per year for eleven years in an account paying 7.5% interest. You then want to withdraw the money in five equal installments, a year apart, starting one year after the last deposit. You wish there to be $350,000 in the account TWO YEARS after your last withdrawal. How much can you withdraw per year?

3. Suppose the bank lends you $500,000 for six years at an interest rate of 4.0% per year. The loan requires equal annual payments starting in one year. What is your annual payment? Construct a loan amortization table.

4. MWH Associates is partially financed two bond issues. The first has 10,000 bonds with a $1,000 face value, 10 years to maturity, a coupon rate of 4% and offering a yield to maturity of 3.5%. The second is 18,000 bonds with a $1,000 face value, five years to maturity, a coupon rate of 4% and a yield to maturity of 3.25%. What is the market value of the firm’s outstanding bonds?

5. Candylever Construction’s common stock costs $14.00 per share. Next year’s dividend is expected to be $1.00 per share, and dividends are growing at 3%. The company is considering an investment that would require that they skip NEXT YEAR’S DIVIDEND ENTIRELY. If they do so, the next dividend (in two years) will be $1.00 per share, but dividend growth will increase to 5%. (assume all growth rates are perpetuities). Would TODAY’S shareholders approve of the investment? Show numerical proof of your response.

6. Puff Adders – a line of pneumatic calculators is expected to pay a dividend of $3.00 per share next year, $3.50 per share in two years, $4.25 per share in three years, and $5.00 per share in four years. Investors expect to be able to sell the stock for $75.00 per share in four years (after the dividend is paid). Assume that the expected return to the market is 13.7%, the risk-free rate is 2.5% and the beta of the stock is 0.95. The stock is available for $58.00 per share. Is this a good investment or not? Show numerical support for your answer.

7. Nox-US Gas Company is financed by common stock, preferred stock, and common equity. The company has outstanding 150,000 bonds with a $1,000 face value, 10 years to maturity, a coupon rate of 5% and offering a yield to maturity of 5.5%. The company has outstanding 3 Million shares of $100 par value preferred paying a $4 per share dividend. Investors are presently demanding a required return of 12.5%. Finally, the company has outstanding 30 Million shares of $1 par common. The stock is expected to pay a dividend of $1.50 per share next year and dividend growth is 4%. Assume the firm’s beta is 1.34, the Expected return to the market is 14%, and the risk-free rate is 3%. The firm faces a tax rate of 40%. What is Nox-US’ WACC?

8. Consider the following probability distribution for two stocks:

What is the expected return and standard deviation to a portfolio of 70% stock A and 30% Stock B? (The correlation, if you need it is -0.9747)

9. Consider the following portfolio:

What should be the portfolio return be if rf = 4% and rm = 15%?

10. Consider a capital budgeting project costing $200,000. It will be depreciated using three year MACRS factors and have no salvage value after 5 years. The firm forecasts the following revenues and expenses associated with the project (before tax)

The firm faces a tax rate of 40% and a discount rate of 12%. What are the project’s payback period, discount payback period, NPV, and MIRR assuming a reinvestment rate of 12%.

11. Hamster Power Company is considering the investment in a battery device for storing excess power. The device costs $500,000 and is expected to be used for four years. It can be sold for $50,000 before taxes in year 5. The device will be depreciated using 5 year MACRS factors (0.20, 0.32, 0.192, 0.1152 in years 1-4 respectively). The firm expects that the device will enable them to increase sales by $700,000 in year 1, and sales are expected to grow at 10% per year. Cost of Goods Sold amount to 60% of sales. Fixed costs are expected to be $25,000 per year. Working capital investment amounts to 7% of sales, starting in year 1, and can be recovered in year 5. The firm faces a tax rate of 40% . What are the initial outlay, operating cash flows and terminal cash flows (all after-tax)?

12. Zia Manufacturing has asked your help in calculating their weighted average cost of capital, using the information provided below. Assume the company faces a 35% tax rate.

13. Golden Gates Company is considering the purchase of a cooler costing $600,000 and will have a useful economic life of four years. It can be depreciated over three years using MACRS depreciation. (0.3333, 0.4444, 0.1482, and 00741) The machine has an estimated salvage value of $50,000 (before tax) which can be recovered in year 5. The analyst has indicated that the company will need to increase working capital in year 1, but can recover it in year 5. Working capital amounts to 10% of sales. The machine will enable the firm to increase sales by $600,000 in year 1, and sales are expected to increase by 5% per year. Cost of goods sold amount to 59% of sales, fixed costs are $50,000 per year, and the company faces a tax rate of 40%. Calculate the Initial Outlay, Operating Cash Flows, and Terminal Cash Flows for this project.

14. Lincoln Corporation has a weighted average cost of capital of 13% for projects of average risk. Projects of below-average risk have a cost of capital of 9%, while projects of above-average risk have a cost of capital equal to 17%. Projects A and B are mutually exclusive (that is, the company will choose A or B, but not both), whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows and risk of each of the projects. Which (if any) projects should be accepted? Show proof.

[***10 Point Bonus Opportunity***]Hollywood Park Industries is financed by 40% debt paying 4% and 60% equity paying 15%. The company is considering an expansion project costing $1,500,000 and lasting 5 years. The project will be depreciated using straight line depreciation and have no salvage value. Cost of goods sold are 65% of sales, fixed costs are $100,000 per year and the firm faces a tax rate of 40%. What minimum level of sales is needed to justify the project? (Note, the project’s cash flows are an annuity.)