EMBERY MBAA518 All modules Problem Sets
Question 1
5 / 5 pts
Ernie Inc. has current assets of $73,000, net fixed assets of $25,000, current liabilities of $12,000, and long term debt of $27,000. What is the value of shareholder’s equity for the firm?
83,000
87,000
assets = liabilities + owner's equity, solve for owner's equity
No answer text provided.
Question 2
0 / 10 pts
During 2014, Eagle Beach Company (EBC) had sales of $575,000, cost of goods sold of $425,000, administrative and selling expenses of $95,000, depreciation expense of $140,000 and interest expense of $70,000. The tax rate is 35 percent. Ignore any tax loss carryback or carry forward provisions. What is the operating cash flow for EBC?
$55,500
-$15,000
Your taxable income if calculated correctly is negative (-155,000) so check how you handled taxes. Do you have to pay taxes on negative taxable income? No, so what would your taxes be?
Question 3
10 / 10 pts
If UARE, Inc. has sales of 8,500, total assets of 6000, a debt to equity ratio of 1.3 and a return on equity of 12 percent, what is UARE’s net income?
1020.00
313.04
This is a two-step problem where you had to find the profit margin by using the DuPont Identity and then use the profit margin and sales to calculate net income.
628.26
Question 4
0 / 5 pts
A firm has net income of 325,000, profit margin of 9.3%, accounts receivables of 175,000 and a percentage of sales on credit of 80 percent. What is the firm’s days sales in receivables?
22.85 days
196.54 days
18.28 days
Incorrect. Use credit sales not total sales when calculating the receivables turnover. Then calculate days in sales as 365/Receivables Turnover.
Question 5
5 / 5 pts
Elddir, Inc. has net income of net income of 2500, a tax rate of 34%, interest expense of 4500 and deducted depreciation expense of 3500. What is Elddir’s cash coverage ratio?
2.62
1.84
3.41
EMBERY MBAA518 2.5 - Problem Set 2
5 / 5 pts
Calculate the present value of:
PV Years Interest Rate FV
6 3 (pct) 5200
6209.07
4,366.02
4354.92
Question 2
5 / 5 pts
Calculate the EAR given the following:
Stated Rate (APR, pct) Compounding Period EAR
6 monthly ?
6.17%
5.84%
6.15%
Question 3
5 / 5 pts
FASM Bank has designed a security that will pay a dividend of $10.00 in perpetuity. The dividend will be paid semi-annually and the initial dividend will be paid one half year from today. What is the price of the security if the stated annual interest rate is 5.5 percent, compounded semi-annually?
$181.82
$363.64
$1090.91
Question 4
10 / 10 pts
You have just been offered a job. Your base salary will be $75,000 per year and the first year’s annual salary will be received one year from the day you start working. You receive a bonus immediately of $12,500. Your salary will grow 4 percent per year and you will receive a bonus of 10 percent of your salary. You expect to work 30 years. Your discount rate is 10 percent. What is the present value of your offer?
$1,130,786.31
$1,131,922.67
$1,135,484.47
Question 5
10 / 10 pts
A European bond has a par value of 1000 Euros, a coupon rate of 4.5 percent and a yield to maturity of 5.2 percent. The bond has 19 years to maturity. Coupons are made annually. What is the value of the bond?
968.39
916.77
948.38
Question 6
0 / 10 pts
ABC Inc. has 7.0 percent coupon bonds on the market with 9 years to maturity. The bonds make semi-annual payments and currently sell for 110 percent of par. What is the YTM?
5.56%
6.36%
The bond holder will receive the par value plus the coupon for the last payment, not the current price plus the coupon payment.
EMBERY MBAA518 3.4 - Problem Set 3
10 / 10 pts
DBP Inc. just paid a dividend of $1.00. The expected growth rate of dividend is 8 percent. The required return for investors in the first three years is 20 percent and 15 percent for the following three years. After those six years the required return is 10 percent. What is the current share price of the stock?
$36.98
$29.91
$28.94
Question 2
0 / 15 pts
Ernie Manufacturing has projected sales of $100 million next year. Costs are expected to be $90 million and net investment is expected to be $5 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent where it will remain. There are 5.5 million shares of stock outstanding. Investors require a return of 13 percent and the corporate tax rate is 40 percent. What is your estimate of the current stock price?
$3.06
$2.81
. The terminal value needs to be calculated for year 6 using the cash flows in year 7 and the growing perpetuity formula. You have mistakenly placed the terminal value in year 7.
$0.93
Question 3
5 / 5 pts
Given the following cash flows and a discount rate of 13 percent, calculate the NPV.
Year 0 1 2 3 4 5
-75000 25000 27500 30000 32500 35000
$28,381.29
$57,743.36
$75,000.00
Question 4
5 / 5 pts
Given the following cash flows calculate the IRR:
Year 0 1 2 3
-4500 1100 1800 1200
-4.47%
-23.36%
15.89%
EMBERY MBAA518 4.4 - Problem Set 4
15 / 15 pts
Tocserp is considering the purchase of a new machine that will produce widgets. The widget maker will require an initial investment of $12,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 1,600 widgets per year with each costing $2.00 to make. Each will be sold at $4.50. Assume Tocserp uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should Tocserp make the purchase.
No, NPV = -135.27
No, NPV = -2240.54
Yes, NPV = 1732.32
Question 2
20 / 20 pts
Your firm’s discount rate is 15 percent. You are considering the purchase of Truck A or Truck B. Truck A costs $100, has a useful life of 3 years, no salvage value and maintenance costs of $10 per year. Truck B costs $80, has a useful life of 2 years, no salvage value and maintenance costs of $15 per year. Which truck should you select and why?
Truck A because the EAC of -53.8 is less than Truck B’s EAC of -64.2
Truck A because the NPV of 123 if larger than B’s NPV of 104
Truck B because the EAC of 64.2 is greater than Truck A’s EAC of 53.8
Question 3
0 / 25 pts
A business opportunity has presented itself to you and one of your classmates. Your opportunity is to enter the fast growing craft beer industry. Your projected sales in the first year is 8300 kegs. Your projected growth rate is 5 percent. Entering the business will require $35,000 of net working capital. Total fixed costs are $95,000. Variable production costs are $36 per keg and keg sales are priced at $57 each. The equipment to begin production is $175,000. The equipment will be depreciated using straight line depreciation over a five year life and has no salvage value. The tax rate is 35 percent and the required return is 25 percent. What is the NPV of the project and should you pursue the project?
- $2,082.17 No, do not take the project.
$17,422.51 Yes, take the project.
You did not include the growth of your variable costs.
EMBERY MBAA518 5.4 - Problem Set 5
5 / 5 pts
A firm you are analyzing has had the following returns the past 5 years: 27.0%, 13.0%, 18.0%, -14.0% and 9.0 %. What are the standard deviation and variance of the past five year returns?
0.1531, 0.0234
0.1369, 0.0187
0.1531, 0.0187
Question 2
5 / 5 pts
A stock has had returns of 16.12%, 22.11%, -25.00%, 26.14%, and 16.00% over the past five years. What was the holding period return for the stock?
55.61%
155.61%
50.67%
Question 3
10 / 10 pts
You are constructing a two stock portfolio based on the information provided below. What dollar amount will you invest in each stock to achieve the desired return goal?
Stock X Stock Y
Expected Return 14.0% 9.0%
Goal Return of Portfolio: 12.90%
Dollar Amount to Invest: $10,000
X = $7,800; Y = $2,200
X = $2,200; Y = $7,800
X = $6,800; Y = $3,200
Question 4
10 / 10 pts
Your stock portfolio contains 4 stocks with the following betas and weight as a percentage of your portfolio. What is the portfolio beta?
Weight Beta
Stock A 10 pct. 0.75
Stock B 35 pct. 1.90
Stock C 20 pct. 1.38
Stock D 35 pct. 1.16
1.42
1.30
1.36
Question 5
10 / 10 pts
Based on the following information determine the covariance and correlation between the returns of the two stocks.
State of Economy Probability of State of Economy Return of X Return of Y
Bear 0.35 -0.02 0.034
Normal 0.60 0.138 0.062
Bull 0.05 0.218 0.092
Cov = 0.001243, Corr=0.9794
Cov = 0.001243, Corr=0.00025
Cov= 0.001469, Corr=0.9610
EMBERY MBAA518 6.4 - Problem Set 6
10 / 10 pts
Eaglet Corporation has the following target and costs associated with its capital structure. Based on these parameters what is Eaglet Corporations weighted average cost of capital?
Target common equity weight: 50 percent
Target debt weight: 50 percent
Cost of equity: 12 percent
Cost of debt: 4 percent
Tax rate: 35 percent
WACC = 7.3 percent
WACC = 5.2 percent
WACC = 8.0 percent
Question 2
15 / 15 pts
Riddle Industries has the following parameters related to its stock and firm.
Beta: 1.1
Recent Dividend 1.05 dollars
Dividend Growth Rate 4.5 percent
Expected return on market 11.0 percent
Treasury Bills Yield 4.3 percent
Most recent stock price 64.00 dollars
What is the cost of equity using DDM? What is the cost of equity using SML?
6.21 percent, 11.67 percent
6.01 percent, 7.37 percent
4.5 percent, 11.00 percent
Question 3
15 / 15 pts
Given the following information for UARE Inc. Find the WACC.
Tax rate 35 percent
Debt:
Bonds outstanding: 6000
Coupon on bonds: 4 percent
Par value of bonds: $1000
Bonds selling at what percent of par: 105
Bonds make coupon payments: semi-annually
Years to maturity of bonds 25
Common Stock:
Shares Outstanding: 185,000
Current price/share: $58.00
Beta: 1.10
Market Information:
Risk premium: 7 percent
Risk-free rate 5 percent
WACC = 8.89%
WACC = 8.45%
WACC = 9.37%
EMBERY MBAA518 7.4 - Problem Set 7
20 / 20 pts
Lindbergh Company has the following date related to its capital structure:
CASE A CASE B
EBIT (in perpetuity): $175,000 EBIT (in perpetuity): $175,000
Rate on debt: 4.0 % Rate on debt: 4.0 %
Cost of Equity: 13.0% Cost of Equity: 13.0%
Tax Rate: 35.0% Tax Rate: 35.0%
Debt: 0 Debt: Borrow $135,000 to buy share
Will have debt in perpetuity
What is the value of unlevered firm (Case A) and the levered firm (Case B)
Vu = 875,000; Vl = 922,250
Vu = 875,000; Vl = 880,400
Vu = 1,346,153.85; Vl = 922,250
Question 2
20 / 20 pts
Prescott Inc. has the following data regarding its financial structure:
Market value of outstanding debt: $2,500,000
Value of firm if financed with all equity: $14,450,000
Number of shares outstanding: 250,000
Current price per share: $38.00
Tax rate: 35 %
What is the decrease in firm value due to expected bankruptcy costs?
$3,325,000
$4,950,000
$875,000
EMBERY MBAA518 8.4 - Problem Set 8
10 / 10 pts
RRM Incorporated has just declared a dividend of $7.50 per share. The tax rate of dividends is 15 percent. The tax rate on capital gains is zero. The tax laws require the taxes to be withheld when the dividend is paid. RRM currently sells for $83 per share and the stock is about to go ex-dividend. What do you calculate the ex-dividend price will be?
76.63
75.50
76.93
Question 2
0 / 10 pts
The firm you are CEO if has a current period cash flow of 1.75 million and pays no dividend. The present value of the company’s future cash flows is $25.0 million. The company is entirely financed with equity and there are 500,000 shares outstanding. Assume the dividend tax rate is zero.
What is the share price of your firm?
Suppose you and the board announce a plan to pay out 40 percent of the current cash flows as a dividend to its shareholders. How can a shareholder, who owns 1000 shares, achieve a zero pay-out policy on their own?
Share price = $53.50, purchase 26.87 shares
Share price = $50.00, purchase 28.81 shares
You did not calculate the current share price correctly. I should be the (current period cash flows + pv of future cash flows)/shares outstanding
Share price = $53.50, purchase 26.17 shares
embry mbaa518 9.5 - Problem Set 9
10 / 10 pts
An investor buys a European put on a share for $3. The stock price is currently $42 and the strike price is $40. When does the investor make a profit?
Price is less than $39
Price is less than $40
Price is less than $37
Question 2
10 / 10 pts
Suppose a European call option to buy a share for $22.00 costs $1.50. The stock currently trades for $19.00. If the option is held to maturity under what conditions does the holder of the option make a profit? Note: ignore time value of money.
When the price of the stock is greater than $22.00.
When the price of the stock is greater than $20.50.
When the price of the stock is greater than $23.50.
Question 3
0 / 10 pts
The market price of ZYX stock has been volatile and you expect that volatility to continue for a few weeks based on recent news. Due to this belief you decide to purchase calls and puts to manage your exposure. You purchase a one-month call option with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option with a strike price of $25 and an option price of $0.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?
-$180
Take a look at the profits from your put and call positions and not the current value of the position.
-$140
$40
Question 4
10 / 10 pts
Use two-state option pricing model to find the value of a call option and the intrinsic value given the following parameters:
T-bills yield: 3.8 pct.
Current stock price: $25.00
No possibility stock will be worth less this amount in one year: $22.00
Exercise Price: $12.00
Value of call = $10.44, Intrinsic Value = $13.00
Value of call = $13.44, Intrinsic Value = $3.00
Value of call = $13.44, Intrinsic Value = $13.00
Question 5
0 / 10 pts
Given the following option quote information:
Calls
Puts
Option and NY Close
Expiration
Strike Price
Volume
Last
Volume
Last
XYZ
February
112
85
7.55
40
0.60
March
112
61
8.55
22
1.55
May
112
22
10
11
2.85
August
112
3
12.5
3
4.70
The current stock price is $114.00 and the stock price on the expiration date is $120.00. How much is your options investment worth? (ignore commissions)
$80.00
Incorrect. How many shares does each contract represent? You need to go review that.
$6,000.00
$8,000.00
Question 6
10 / 10 pts
Given the following parameters use put-call parity to determine the price of a put option with the same exercise price.
Current stock price: $48.00
Call option exercise price: $50.00
Sales price of call options: $3.80
Months until expiration of call options: 3
Risk free rate: 2.6 percent
Compounding: continuous
Price of put option = $6.13
Price of put option = $4.52
Price of put option = $5.48
Question 7
10 / 10 pts
Given the following parameters use risk-neutral valuation to value a call option.
Current stock price: $73.00
Stock will increase or decrease next year by: 15 pct.
Call Option strike price: $70.00
Time to expiration: 1 year
Risk free rate: 8 pct.
Value of call: $8.19
Value of call: $12.92
Value of call: $9.90
Question 8
0 / 10 pts
A bond has 4 years to maturity, a coupon of 3 percent paid annually and currently sells at par. What is the duration of the bond?
3.83 years
3.91 years
The problem states coupons are paid annually no semiannually
4.30 years
Question 9
0 / 10 pts
You have entered into a forward contract with the following parameters:
Bond: 5 year, zero coupon bond
Issuance: Will be issued in 1 year
Face Value: $1000
1 year spot rate: 3 pct.
10 year spot rate: 6 pct.
Forward price = $704.96
Forward price = $726.11
Forward price = $769.68
Incorrect. You appear to have calculated the current bond price using a 5 year period instead of the correct 6 year period (5 year bond issued one year from now).
Question 10
0 / 10 pts
Use Black Scholes to Value the put and call given the following criteria. The stock price six months from the expiration of an option is $13.50, the exercise price of the option is $13, the risk free interest rate is 10 percent per annum, and the volatility is 20% per annum.
c = 0.50, p = 0.63
c = 1.09, p = 0.44
Incorrect, you appear to have switched K and S when calculating Ke-rT (the-rT are exponents)
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Rating:
/5
Solution: EMBERY MBAA518 All modules Problem Sets