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Week 1 Problem Set
Answer the following questions and solve the following problems in the
space provided. When you are done, save the file in the format
flastname_Week_1_Problem_Set.docx, where flastname is your first
initial and you last name, and submit it to the appropriate dropbox.
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other
organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a
corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You
may also find table 2.5 on page 53 of your text and all questions on pages 56
57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70
billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peets
Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7
million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peets.
b. Compare the net profit margins for Starbucks and Peets.
allow you to pay this amount each year, yet still borrow $300,000. At the end
of the mortgage (in 30 years), you must make a balloon payment; that is, you
must repay the remaining balance on the mortgage. How much will this
balloon payment be?
38. You have just made an offer on a new home and are seeking a mortgage.
You need to borrow $600,000. a. The bank offers a 30-year mortgage with
fixed monthly payments and an interest rate of 0.5% per month. What is the
amount of your monthly payment if you take this loan? b. Alternatively, you
can get a 15-year mortgage with fixed monthly payments and an interest rate
of 0.4% per month. How much would your monthly payments be if you take
this loan instead?
*A.1. This problem is from the Appendix to Chapter 4. Your grandmother
bought an annuity from Rock Solid Life Insurance Company for $200,000
when she retired. In exchange for the $200,000, Rock Solid will pay her
$25,000 per year until she dies. The interest rate is 5%. How long must she
live after the day she retired to come out ahead (that is, to get more in value
than what she paid in)?
FIN 515 Week 2 DQ1
This week, the lecture provided some examples of TVM problem scenarios.
For your first post, provide a story problem that can be solved using one or
more of the TVM calculations
Your second post can be a description of how the problem posed by another
student can be solved. Your professor may provide an example
FIN 515 Week 2 DQ2
What are cash flows? Discuss the decisions and transactions that create cash
flows for a project over its lifetime.
FIN 515 Week 2 Quiz
Question 1
(TCO B) Your daughter has just given birth to your first grandchild. You decide
to start a college fund for the child. You want the fund to have $300,000 in it
when the child turns 18. You think you can get a return of 10% per year on
your investment. How much should you deposit in the fund? Ignore taxes.
Show your work. If you use Excel, show the formula with the parameters, and
the answer. If you use a formula, provide the standard formula, the formula
with terms substituted, and the answer. If you use a calculator, show the
inputs and the answer.
Question 2
(TCO B) You have a student loan of $75,000. The interest rate is 8.6% per
year. You have been out of school for 6 months and are ready to start making
payments. You want to use the maximum allowed of 10 years to pay off the
loan by making equal monthly payments. How much are the monthly
payments? Ignore taxes. Show your work. If you use Excel, show the formula
with the parameters, and the answer. If you use a formula, provide the
standard formula, the formula with terms substituted, and the answer. If you
use a calculator, show the inputs and the answer.
Question 3
(TCO B) Your cousin wants to buy a car but he really cant afford it. He needs
a loan of $22,000. The finance manager at the dealership offers him
something like a loan in which your cousin will get the $22,000 and will pay
$413 per month for the next 60 months with an additional payment of $3,000
(which the car will surely be worth!) in the 60th month. What interest rate is
your cousin really going to pay? Ignore taxes. Show your work. If you use
Excel, show the formula with the parameters, and the answer. If you use a
formula, provide the standard formula, the formula with terms substituted, and
the answer. If you use a calculator, show the inputs and the answer.
Week 3 Problem Set
Answer the following questions and solve the following problems in the
space provided. When you are done, save the file in the format
flastname_Week_3_Problem_Set.docx, where flastname is your first
initial and you last name, and submit it to the appropriate dropbox.
Chapter 7 (pages 225228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you
back $12,000 in a year. If the cost of capital of this investment opportunity is
10%, what is its NPV? Should you undertake the investment opportunity?
Calculate the IRR and use it to determine the maximum deviation allowable in
the cost of capital estimate to leave the decision unchanged.
8. You are considering an investment in a clothes distributor. The company
needs $100,000 today and expects to repay you $120,000 in a year from now.
What is the IRR of this investment opportunity? Given the riskiness of the
investment opportunity, your cost of capital is 20%. What does the IRR rule
say about whether you should invest?
19. You are a real estate agent thinking of placing a sign advertising your
services at a local bus stop. The sign will cost $5,000 and will be posted for
one year. You expect that it will generate additional revenue of $500 per
month. What is the payback period?
21. You are deciding between two mutually exclusive investment
opportunities. Both require the same initial investment of $10 million.
Investment A will generate $2 million per year (starting at the end of the first
year) in perpetuity. Investment B will generate $1.5 million at the end of the
first year and its revenues will grow at 2% per year for every year after that.
Chapter 8 (260262)
1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier
version of its pizza that will be low in cholesterol and contain no trans fats.
The firm expects that sales of the new pizza will be $20 million per year. While
many of these sales will be to new customers, Pisa Pizza estimates that 40%
will come from customers who switch to the new, healthier pizza instead of
buying the original version.
a. Assume customers will spend the same amount on either version. What
level of incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizzas
original pizza to its healthier pizza will switch to another brand if Pisa Pizza
does not introduce a healthier pizza. What level of incremental sales is
associated with introducing the new pizza in this case?
6. Cellular Access, Inc. is a cellular telephone service provider that reported
net income of $250 million for the most recent fiscal year. The firm had
depreciation expenses of $100 million, capital expenditures of $200 million,
and no interest expenses. Working capital increased by $10 million. Calculate
the free cash flow for Cellular Access for the most recent fiscal year.
12. A bicycle manufacturer currently produces 300,000 units a year and
expects output levels to remain steady in the future. It buys chains from an
should look at. Then, present your analysis and recommendations in the form
of a paper.
A good place to start would be to perform a complete DuPont analysis of the
company and compare it to the standard. The DuPont analysis might provide
guidance as to what particular areas of the company should be examined next
and what ratios should be calculated. If the DuPont analysis does not reveal
anything useful, you might wish to calculate several of the ratios that are
available to you.
Deliverable
The completed paper should be about 1,000 words long. In the paper, you do
not have to explain the ratios in depth. You may assume that the reader has a
basic understanding of finance and knows what ratio analysis is, although he
or she might not be able to list all the ratios and how to calculate them from
memory. The reader is not going to want a lot of background about financial
analysis. He or she really wants information that he or she can apply to the
given situation, which is the company that you have selected.
If you like, you can write the paper in the form of a memo to management. You
do not have to cite your source for how to calculate the ratios. You do need to
provide a reference to where you got that data not only for your subject
company but for the other company or standard to which you compared your
company.
The spirit of this assignment is for you to calculate and interpret the
results. The purpose is not for you to find calculations and interpretations
that have been done by someone else.
The paper is expected to conform to the standards for graduate school
writing.
The purpose of your analysis is internal evaluation. Refrain from using
stock market valuation ratios.
When you have completed the project, place it in one Word document and
place that document in the appropriate dropbox.
FIN 515 Week 3 DQ1
Describe a potential capital expenditure project from the industry in which you
now work or an industry in which you are interested. What is the project?
Describe and provide an approximate value of the initial cash flow. Describe
and provide an approximate value of the annual cash flows. Provide an
estimation of the life of the project, as well as the exit costs
should the company do and why? You must use at least two capital budgeting
methods. Show your work. Explain your answer thoroughly.
Week 5 Problem Set
Answer the following questions and solve the following problems in the
space provided. When you are done, save the file in the format
flastname_Week_5_Problem_Set.docx, where flastname is your first
initial and you last name, and submit it to the appropriate dropbox.
Chapter 10 (pages 345348):
4. You bought a stock one year ago for $50 per share and sold it today for $55
per share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from
capital gain?
20. Consider two local banks. Bank A has 100 loans outstanding, each for $1
million, that it expects will be repaid today. Each loan has a 5% probability of
default, in which case the bank is not repaid anything. The chance of default is
independent across all the loans. Bank B has only one loan of $100 million
outstanding, which it also expects will be repaid today. It also has a 5%
probability of not being repaid. Explain the difference between the type of risk
each bank faces. Which bank faces less risk? Why?
22. Consider the following two, completely separate, economies. The
expected return and volatility of all stocks in both economies is the same. In
the first economy, all stocks move togetherin good times all prices rise
together and in bad times they all fall together. In the second economy, stock
returns are independentone stock increasing in price has no effect on the
prices of other stocks. Assuming you are risk-averse and you could choose
one of the two economies in which to invest, which one would you choose?
Explain.
30. What does the beta of a stock measure?
35. Suppose the market risk premium is 5% and the risk-free interest rate is
4%. Using the data in Table 10.6 (also shown above), calculate the expected
return of investing in
a. Starbucks stock.
b. Hersheys stock.
c. Autodesks stock.
Chapter 11 (pages 390396):
2. You own three stocks: 600 shares of Apple Computer, 10,000 shares of
Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share
prices and expected returns of Apple, Cisco, and Colgate-Palmolive are,
respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and
Colgate-Palmolive falls by $13. What are the new portfolio weights?
d. Assuming the stocks expected returns remain the same, what is the
expected return of the portfolio at the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a
beta of 0.69. If the risk-free interest rate is 4% and the expected return of the
market portfolio is 10%, what is the expected return of a portfolio that consists
of 60% Autodesk stock and 40% Costco stock, according to the CAPM?
Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading for $10 per
share. In addition, Unida has $100 million in outstanding debt. Suppose
Unidas equity cost of capital is 15%, its debt cost of capital is 8%, and the
corporate tax rate is 40%.
27. You would like to estimate the weighted average cost of capital for a new
airline business. Based on its industry asset beta, you have already estimated
an unlevered cost of capital for the firm of 9%. However, the new business will
be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If
its corporate tax rate is 40%, what is your estimate of its WACC?
FIN 515 Week 5 DQ1
This discussion topic concerns the calculation of stock values using the
Capital Asset Pricing Model (CAPM). We will start with a discussion of risk
and work towards practical application of the model. The textbook provides a
list of betas for a selection of stocks. Choose a few firms from that list and
discuss whether the betas are what you would expect. Be sure to explain why
or why not
FIN 515 Week 5 DQ2
The Weighted Average Cost of Capital (WACC) for a firm can be calculated or
found through research. Select two firms in the same industry. The industry
may be that in which you currently work or it may be an industry in which you
are interested. Calculate or find the WACC for the two firms. How do the
WACCs compare? Are the WACCs what you would expect? What causes the
differences between the two firms' WACCs?
FIN 515 Week 5 DQ3
What are possible capital components in the WACC equation? Select two
firms in the same industry. Calculate or find the WACC for the two firms. How
do the WACCs compare? Are the WACCs what you would expect? What
causes the differences between the two firms' WACCs?
FIN 515 Week 5 DQ4
What is the relevant risk of a stock, and how is it measured? The textbook
provides a list of betas for a selection of stocks. Choose a few firms from that
list and discuss whether the betas are what you would expect. Be sure to
explain why or why not.
FIN 515 Week 5 DQ5
Suppose a firm estimates it's overall cost of capital for the coming year to be
10%. What might be reasonable costs of capital for average-risk, high-risk,
and low-risk projects?
FIN 515 Week 5 DQ6
In the real world, is it possible to construct a portfolio of stocks that has an
expected return equal to the risk-free rate? Provide examples
FIN 515 Week 5 Quiz
(TCO C) Company A has a beta of 2.77. Company B has a beta of .73.
Company C has a beta of .90. The risk free rate is 6% and the market risk
With the help of your professor, you have selected a company for which to
research and find the WACC. Your research is to be independent from any
information you may find at thatswacc.com or similar sites although you might
want to use such sites to provide a reasonableness check on the WACC you
calculate.
Assumptions
As you recall, the formula for WACC is
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is
ri= rf + i * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the
Market Risk Premium is 4% unless you can develop a better number.
rf is the risk free rate. The YTM on 10 year US Treasury securities is a good
approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their
equity is http://finance.yahoo.com. By looking around this site, you should be
able to find the market capitalization (E) as well as the for any publicly
traded company.
There are not many places left where data about corporate bonds is still
available. One of them is http://finra-markets.morningstar.com/BondCenter.
To find data for a particular companys bonds, find the Quick Search feature,
then be sure to specify corporate bonds and type in the name of the issuing
company. This should give you a list of all of the companys outstanding bond
issues. Clicking on the symbol for a given bond issue will lead you to the
current amount outstanding and the yield to maturity. You are interested in
both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the
pre-tax cost of debt for the company.
Deliverable
Write a two or three page report that contains the following elements:
1.
1.
2.
3.
4.
2. How data was used to calculate WACC. This would be the formula
and the formula with your values substituted.
3. Sources for your data.
4. A discussion of how much confidence you have in your answer.
What were the limiting assumptions that you made, if any.
a. What is the difference between a firms cash cycle and its operating cycle?
b. How will a firms cash cycle be affected if a firm increases its inventory, all
else being equal?
c. How will a firms cash cycle be affected if a firm begins to take the discounts
offered by its suppliers, all else being equal?
4. The Greek Connection had sales of $32 million in 2012, and a cost of
goods sold of $20 million. A simplified balance sheet for the firm appears
below:
a. Calculate The Greek Connections net working capital in 2012.
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
c. The industry average accounts receivable days is 30 days. What would the
cash conversion cycle for The Greek Connection have been in 2012 if it had
matched the industry average for accounts receivable days?
5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net
30. Calculate the cost of the trade credit if your firm does not take the discount
and pays on day 30.
Chapter 27 (page 925):
1. Which of the following companies are likely to have high short-term
financing needs? Why?
a. A clothing retailer
b. A professional sports team
c. An electric utility
d. A company that operates toll roads
e. A restaurant chain
2. Sailboats Etc. is a retail company specializing in sailboats and other sailingrelated equipment. The following table contains financial forecasts as well as
current (month 0) working capital levels. During which months are the firms
seasonal working capital needs the greatest? When does it have surplus
cash?
FIN 515 Week 7 DQ1
6. (TCO D) A stock pays an annual dividend of $2.50 and that dividend is not
expected to change. Similar stocks pay a return of 10%. What is P0? (Points :
20)
7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid
one year from today. The dividend is expected to grow at a 7% annual rate.
The return on equity for similar stocks is 12%. What is P0? (Points : 20)
8. (TCO D) A particular bond has 8 years to maturity. It has a face value of
$1,000. It has a YTM of 7% and the coupons are paid semiannually at a 10%
annual rate. What does the bond currently sell for? (Points : 10)
9. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was
issued two years ago and had a maturity of 10 years. The coupon rate is 7%
and the interest payments are made semiannually. What is its YTM? (Points :
10)
10. (TCO D) Using examples, explain the difference between systematic risk
and nonsystematic risk. Explain why the distinction is important for both
investors and issuers of stock.(Points : 30)
11. (TCO E) A company has 10 million shares outstanding trading for $7 per
share. It also has $300 million in outstanding debt. If its equity cost of capital
is 15%, and its debt cost of capital is 9%, and its effective corporate tax rate is
40%, what is its weighted average cost of capital? (Points : 30)
12. (TCO A) Relate how the job of the financial manager can be explained
using the balance sheet. (Points : 25)
13. (TCO H) Other things being equal, would a firm prefer a longer or shorter
Cash Conversion Cycle? What are some examples of ways a firm could attain
this? (Points : 30)
14. (TCO F) A company has the opportunity to do any of the projects for which
the net cash flows per year are shown below. The company has a cost of
capital of 12%. Which should the company do and why? You must use at least
two capital budgeting methods. Show your work