What are some of the most important financial management decisions? Can you provide some real-life examples?
Do you believe that the firm’s social responsibilities conflict with the ultimate goal of shareholder’s wealth maximization? Consider issues such as the protection of the environment and the creation of jobs.
Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of time value of money?
What is the difference between the annual percentage rate (APR) and the effective annual rate (EAR)? Which rate do you believe is more relevant for financial decisions and why?
Discuss the pros and cons of net present value.
WEEK 1Homework (graded)
Please complete the following exercises from Chapter 2 of your textbook and post them in the Dropbox.
Chapter 2: 8, 14, and 19
Problem 8
Calculating OCF. Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
14. Calculating Cash Flows. Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs = $88,600; other expenses = $4,900; depreciation expense = $11,600; interest expense = $8,700; taxes = $18,620; dividends = $9,700. In addition, you’re told that the firm issued $2,900 in new equity during 2014, and redeemed $4,000 in outstanding long-term debt.
a. Calculating Cash Flows. What is the 2014 operating cash flow?
b. What is the 2014 cash flow to creditors?
c. What is the 2014 cash flow to stockholders?
d. If net fixed assets increased by $23,140 during the year, what was the addition to NWC?
Problem 19
Net Income and OCF. During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,535,000, $465,000, and $520,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)
a. What is Belyk’s net income?
a. What is its operating cash flow?
a. Explain your results in (a) and (b).
Homework (graded)
Please complete the following exercises from Chapters 4 and 5 of your textbook and post them in the Dropbox.
Chapter 4: 8, 17, and 18
Chapter 5: 1, 4, and 12
@) Calculating the Number of Periods. Calculating Rates of Return. In 2011, an 1880-O Morgan silver dollar sold for $13,113. What was the rate of return on this investment?
Problem 17
Calculating Present Values. Suppose you are still committed to owning a $150,000 Ferrari (see Question 9). If you believe your mutual fund can achieve a 10.25 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?
18)
Calculating Future Values. You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 10.1 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest an investment strategy?)
Chapter 5: 1, 4, and 12
Present Value and Multiple Cash Flows. Rooster Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent?
Year Cash Flow
1 $ 830
2 610
3 1,140
4 1,390
2)
Calculating Annuity Present Values. An investment offers $6,700 per year for 15 years, with the first payment occurring 1 year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
3)
Calculating EAR. Find the EAR in each of the following cases:
figure
Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)
10% Quarterly
17 Monthly
13 Daily
9 Semiannually Homework (graded)
Chapter 6: 16
Chapter 7: 11 and 12
Homework (graded)
Chapter 6: 16
Interest Rate Risk. Both Bond Bill and Bond Ted have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond Ted? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?
Chapter 7: 11 and 12
Problem 11
Valuing Preferred Stock. E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay today?
Problem 12
Stock Valuation. Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will you pay for the stock? What if you want a return of 8 percent? What does this tell you about the relationship between the required return and the stock price?
Please complete the following exercises from Chapter 8 of your textbook and post them in the Dropbox.
Chapter 8: 3, 4, 5, and 6
3. Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?
Year Cash Flow (A) Cash Flow (B)
0 ?$55,000 ?$ 95,000
1 19,000 18,000
2 27,000 26,000
3 24,000 28,000
4 9,000 260,000
LO 2 4. Calculating AAR. You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the project’s average accounting return (AAR)?
LO 3 5. Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?
Year Cash Flow
0 ?$153,000
1 78,000
2 67,000
3 49,000
LO 4 6. Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent?
WEEK 5
Chapter 11: 4, 7, 17, and 29
Problem 4
Portfolio Expected Return. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much money will you invest in Stock X? In Stock Y?
Problem 7
7. Calculating Returns and Standard Deviations. Based on the following information, calculate the expected return and standard deviation for the two stocks.
Problem 17
Using CAPM. A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset currently earns 3.8 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .7, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta?
d. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.
Problem 29
29. SMLSuppose you observe the following situation:
a. Calculate the expected return on each stock.
b. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expected market risk premium?
WEEK 6
Chapter 12 problem
Problem 3
Bond Prices. Lycan, Inc., has 6 percent coupon bonds on the market that have 9 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8 percent, what is the current bond price?
Problem 5
Coupon Rates. Merton Enterprises has bonds on the market making annual payments, with 12 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on Merton’s bonds?
Problem 6
Bond Prices. App Store Co. issued 20-year bonds one year ago at a coupon rate of 6.1 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current bond price?
Problem 15
Bond Price Movements. Bond X is a premium bond making annual payments. The bond has a coupon rate of 9 percent, a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7 percent, a YTM of 9 percent, and also has 13 years to maturity. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in one year? In three years? In eight years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.
WEEK 7 Please complete the following exercises from Chapter 17 of your textbook and post them in the Dropbox.
Chapter 17: 6, 7, and 14
6. Calculating Net Float. Each business day, on average, a company writes checks totaling $19,500 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $37,200. The cash from the payments is available to the firm after two days.
a. Calculate the company’s disbursement float, collection float, and net float.
b. How would your answer to part (a) change if the collected funds were available in one day instead of two?
LO 2 7. Size of Accounts Receivable. Essence of Skunk Fragrances, Ltd., sells 6,500 units of its perfume collection each year at a price per unit of $270. All sales are on credit with terms of 1/10, net 30. The discount is taken by 40 percent of the customers. What is the amount of the company’s accounts receivable? In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 3/10, net 30 to preserve its market share. How will this change in policy affect accounts receivable?
LO 3 14. EOQ. The Trektronics store begins each month with 740 phasers in stock. This stock is depleted each month and reordered. If the carrying cost per phaser is $26 per year and the fixed order cost is $340, what is the total carrying cost? What is the restocking cost? Should the company increase or decrease its order size? Describe an optimal inventory policy for the company in terms of order size and order frequency.
Intermediate (Question 15)
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