MANAGERIAL FINANCE BMMF5103

Question 1 Suppose that VINAMILKs balance sheet at December 31, 2011 shows the following: Current assets Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Current liabilities Note payable Accounts payable Accrued expenses Income taxes payable Total current liabilities Long term liabilities 1. Calculate net working capital We have the formual: Net working capital (NWC) = current assets current liabilities For this case, NWC = $233,000 - $176,000 = $57,000 2. Calculate current ratio Current assets Current liabilities $5,000 150,000 20,000 1,000 $176,000 $340,000 $4,000 8,000 100,000 120,000 1,000 $233,000

We have the formual: CR=

Therefore, CR =

$ 233,000 = 1.32 $176,000

3. Calculate quick ratio 1

MANAGERIAL FINANCE BMMF5103 We have the formula of Quick Ratio QR= Current assets Inventory Current liabilities

Therefore, QR=

($233,000 $120,000) = 0.64 $176,000

4. Does VINAMLK have good or poor liquidity if industry average for current ratio is 1.29 and quick ratio is 1.07? We have Current ratio descrease is calculate as 1.32 1.29 = 0.03 Quick ratio increases is calculate as 1.07 0.64 = 0.43 We can see the increasing of quick ratio is much higher than the decreasing of current ratio. Thus, Vinamilk has good liquidity if industry average for current ratio is 1.29 and quick ratio is 1.07 Question 2 1. Compute the future value of (a) an initial $2,000 compounded annually for 10 years at 8%; (b) an initial $2,000 compounded annually for 10 years at 10%; (c) an annuity of $2,000 for 10 years at 8%; and (d) an annuity of $2,000 for 10 years at 10%. (a) an initial $2,000 compounded annually for 10 years at 8% We have PV = $2,000; I = 8%; n = 10; FVn = PV ( 1+ i ) n => FV 10 = PV (1+0.08 )10 => FV 10 = 2,000 (1.08)10 = $4,319 (b) an initial $2,000 compounded annually for 10 years at 10% we have I = 10% FVn = PV(1+i)n = > FV10 = PV(1+0.1)10 = 2000(1.1)10 = $5,187.5 2

MANAGERIAL FINANCE BMMF5103 (c) an annuity of $2,000 for 10 years at 8% FVAn = PMT (1+i)n -1 i PMT = $2,000, i=8%,n=10 years FVA10 = $2,000 (1+0.08)10 -1 0.08 = $28,973 (d) an annuity of $2,000 for 10 years at 10%. FVAn = PMT (1+i)n -1 i FVA10 = $2,000 = $31,875 2. Calculate how much you would have in a savings account 5 years from now if you invest $1,000 today, given that the interest paid is 8% compounded: (a) annually; (b) semiannually; (c) quarterly; and (d) continuously. (a) compounded annually (1+0.1)10 -1 0.1 = $2,000 (1.1)10 -1 0.1 = $2,000 (1.08)10 -1 0.08

FVAn = PV

1+ inom m

mxn

m : periods of compound a year n : years PV=$1,000, inom =8%, m=1,n=5 years FVA5 = $1,000 1+ 0.08 1
1x5

MANAGERIAL FINANCE BMMF5103 = $1,000(1.08)5 = $1,469.3 (b) semiannual compounding (m=2)

FVAn =

PV

1+ inom m

mxn

m : periods of compound a year n : years FVA5 = $1,000 1+ 0.08 2 = $1,000(1.04)10 = $1,480.2 (c) quarter compounding (m=4)
2x5

FVAn =

PV

1+ inom m

mxn

m : periods of compound a year n : years FVA5 = $1,000 1+ 0.08 4 = $1,000(1.02)20 = $1,485.9 (d) continuous compounding FVn = p.e ixn ; ei.n = 2.71828 0.08x5 FV5 = 1,000 (2.71828) 0.08x5 = $1,000(2.71828)0.4 = $1,491.8 Question 3 4
4x5

MANAGERIAL FINANCE BMMF5103 A 55-year-old executive will retire at age 65 and expects to live to age 75. Assuming a 10% rate of return, calculate the amount he must have available at age 65 in order to receive $10,000 annually from retirement until death PMT = $10,000, n=10 years, i=10%

1
PVA n = PMT 1(1 + i) n i

PVA10 = $10,000

1
1(1 + 0.1) 0.1
10

= $61,446.67

Question 4 Set up an amortization schedule for a $5,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10%.

MANAGERIAL FINANCE BMMF5103

PVA=$5,000,i=10%,n=3years

1
PVAn = PMT 1(1 + i) i
n

PVA10 = $5,000

1
1(1 + 0.1) 3 0.1

= $2,010.45

An amortization schedule is set up as below: Year Principal Amorbization PMT 2,010 2,010 2,011.9 6,031.9 Interest Repayment principal 1 2 3 Question 5 Stock A and B have the following probability distributions of possible future returns: Probability 0.1 0.2 0.4 0.2 0.1 -15 0 5 10 25 A (%) -20 10 20 30 50 B (%) 5,000 3,490 1,829 500 349 182.9 1,031.9 1,510 1,661 1,829 5,000 Remaining principal 3,490 1,829 0

MANAGERIAL FINANCE BMMF5103

1. Calculate the expected return for each stock and the standard deviation (SD) of returns for each stock.

Stock A: r = Pi.ri
i =0 ^ n

Expected return

r = 0.1 (-15)+0.2(o)+0.4(5)+0.2(10)+0.1(25) = (-1.5) +0+2+2+2.5 = 5%

= Variance =
2

= SD2

ri r Pi . i =1

(15 5) 2 0.1 + (0 5) 2 0.2 + (5 5) 2 0.4 + (10 5) 2 0.2 + (25 5) 2 0.1 = 90 90 => SD = 9.5% Stock B: Expected return
^

r = Pi.ri
i =0

r = 0.1(-20)+0.2(10)+0.4(20)+0.2(30)+0.1(50) = 19% SD= = SD = = ( 20 19) 2 0.1 + (10 19) 2 0.2 + (20 19) 2 0.4 + (30 19) 2 0.2 + (50 19) 2 0.1 = 289 289 = 17%

2. Calculate the coefficient of variation. 7

MANAGERIAL FINANCE BMMF5103

We have the formula for coefficient of variation as CV =

SD r^

Stock A: CV= Stock B: CV = SD = 17%/ 19% = 0.89 r^ SD = 9.5%/5% = 1.9 r^

3. Which stock is less risky? Explain your answer. The stock B is less risky than stock A. Because the coefficient of variation of B is smaller than A Question 6 Son must decide which of two securities is best for him. By using probability estimates, he computed the following statistics: Statistics Expected return Standard deviation SDx 20 = = 1.666 r ^ x 12 SDy 10 = = 1.25 r^ y 8 Security X 12% 20% Security Y 8% 10%

1. Compute the coefficient of variation for each security. CVx= CVy=

2. Explain why the standard deviation and coefficient of variation give different rankings of risk. Which method is superior and why?

The standard deviation is only an obsolete measure of dispersion (risk), it does not consider the dispersion of outcomes in relationship to an expected value (return), but the coefficient of variation is used to measure expected returns, so the rankings of risk are different.

MANAGERIAL FINANCE BMMF5103

The coefficient of variation is superior, because the coefficient of variation will be given the result more accuracy than standard deviation.

Question 7 1. The VINAMILK paid a $2.5 dividend per share at the end of the year. The dividend is expected to grow by 10% each year for the next 3 years, and the stocks market price per share is expected to be $50 at the end of the third year. Investors require a rate of return of 14%. At what price per share should the VINAMILK sell? We have: D0=$2.5; g=10%; r=14%;P1=$50 (market price per share) Po = D1 / (1+rs) + D2/(1+rs)2+D3/(1+rs)3+P1/(1+Rs)3 D1= D0 (1+g ) = 2.5(1+0.1)= $ 2.75 D2= D1 (1+g ) = 2.75(1+0.1)=3.025 D3= D2 (1+g ) = 3.025(1+0.1)=3.3275 Po = 2.75 / (1+0.14) + 3.025/(1+0.14)2+3.3275/(1+0.14)3+50/(1+0.14)3 Po=(3.58+3.42+3.33+50)/1.48 = $ 40.76 Vinamilk should sell $40.76 per share 2. Hung invests in a stock of company X which expects no growth in dividends. The company paid a $2.75 dividend per share. If Hung requires a rate of return of 10%, what would be the value of the stock? We have D=$2.75, r = 10% Po= D r 2.75 = $ 27.5 0.1

Po=