BAm313 all 4 unit essays

300-500 words. You only have to choose one of the three easays under each of the four essays

Essay 1

1. One of the causes of the recent financial crisis in the United States has been excessive?risk taking due to underestimation of risk. Examine how this relates to financial leverage. Can overestimation of risk also be detrimental?
2. Examine if it is possible for a company that has negative net income and negative operating cash flow to end the year with an increase in cash and an increase in stock price. Explain your answer.
3. Documents uncovered after the Exxon Valdez oil spill in Alaska revealed that Exxon could have used double-hulled oil tankers that would have prevented the spill, but the cost of refitting their fleet of single-hulled tankers was considered too high. Exxon determined that the cost?of cleaning up an oil spill would be less than the cost of refitting the ships, thus increasing shareholder value. Several years after the oil spill, however, Exxon was fined billions of?dollars for the spill. How do the costs of the clean up and the fines pertain to a discussion of maximizing shareholder value and ethical responsibility?

Essay 2

1. Bay Land, Inc. has the following distribution of returns:

State Return Probability

Boom 0.3 0.25 Normal 0.4 0.15 Bust 0.3 0.30

Assuming that these returns are normally distributed, what is the probability that Bay Land, Inc. will return less than 7.25%? Show all work, and clearly explain and state your answer.

1. You want to invest in bonds. Examine whether or not each provision listed will make thebonds more or less desirable as an investment: call provision, convertible bond provision, subordinated debt.
2. The price of DDS Corporation stock is expected to be $45 in 5 years. Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of $1.00. If your required rate of return is 15 percent, how much are you willing to pay for DDS stock?

Essay 3

1. Company K is considering two mutually exclusive projects. The cash flows of the projects are as follows:

Year

0 1 2 3 4 5 6 7

Project A Project B

-$2,000,000 -$2,000,000 500,000
500,000
500,000

500,000
500,000
500,000
500,000 5,650,000

1. Compute the NPV and IRR for the above two projects, assuming a 13% required rate of return.
2. Discuss the ranking conflict.
3. What decision should be made regarding these two projects?

1. J.B. Corporation is considering the purchase of equipment that has an invoice price of $450,000. The equipment was recommended by a consulting firm that did an analysis for J.B. Corporation. J.B. paid the consulting firm $12,000 for its report. The cost of shipping and installation is $50,000. The equipment will be depreciated on a straight-line basis over its useful life of 10 years, assuming no salvage value. The equipment will replace existing assets that have a current book value of $100,000 and which could be sold for $150,000. Additional net working capital of $15,000 will be required to maintain the equipment and to support higher sales. J.B.’s marginal tax rate is 40%. Calculate the initial outlay required to fund this project.
2. Toto and Associates’ preferred stock is selling for $27.50 a share. The firm nets $25.60 after issuance costs. The stock pays an annual dividend of $3.00 per share. What is the cost of existing, and new, preferred stock respectively?

Essay 4

1. Coppell Timber Company had total earnings last year of $5,000,000, but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has $4,000,000 worth of investments to undertake this year. The company finances 40 percent of its investments with debt and 60 percent with equity capital. The company paid $3.00 per share in dividends last year.

1. If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year?
2. If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year?
3. If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?

1. Lindsey Insurance Co. has current sales of $10 million and predicts next year’s sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm’s net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.
1. What are Lindsey’s total financing needs for the upcoming year?
2. Given the above information, what are Lindsey’s discretionary financing needs?
2. The effective interest rate on short-term loans from Bank A is 12.5 percent per year. Bank B claims that their interest rate is only 11 percent per year. However, Bank B charges interest on a discount basis. Which bank is charging the lowest effective rate of interest on a one-year loan?