02 Jan a firm’s cost of capital

EMBERY MBAA518 MODULE 1 DISCUSSION

1.7 – Discussion

5454 unread replies.114114 replies.

You have seen the word greed come up in the videos. You have seen Gordon Gekko explain the benefits of greed and Milton Friedman as well. Friedman makes you think about greed in ways you probably have not. Greed seems to come with a negative connotation but should it? So it is your chance to answer the question is “greed good”? Explain and provide an applicable example as part of your explanation.

It is highly recommended that you submit your initial post the 4th day of the module week. After your initial post, be sure to reply to at least two of your classmates by the end of the module week.

Review the Discussion Rubric for detailed grading criteria.

Note: Discussion rubrics may be accessed by selecting the gear icon above and choosing “show rubric” from the drop-down menu.

EMBERY MBAA518 MODULE 4 DISCUSSION

4.6 – Discussion

1818 unread replies.103103 replies.

P/E ratio is used regularly as a valuation metric and you will often hear it discussed in the business news media (i.e. CNBC, Bloomberg, Fox Business, etc). You have just had the opportunity to apply P/E in a relatively easy assignment. Based on this assignment and other valuation techniques used in this class what do you think about the use of P/E? Easy? Good idea? Would you rely on it for your valuation purposes? Any other thoughts?

It is highly recommended that you submit your initial post the 4th day of the module week. After your initial post, be sure to reply to at least two of your classmates by the end of the module week.

EMBERY MBAA518 MODULE 6 DISCUSSION

6.5 – Discussion

5656 unread replies.9393 replies.

The supplemental materials describe the process of calculating WACC (PDF) and go on to apply the results to valuing a firm both unlevered (no debt) and levered (debt). The levered firm is shown to be more valuable. Two identical firms (see the supplemental materials) and the firm with debt is more highly valued. Does this make sense? Why or Why not? Why not use 100 percent debt financing if debt increases value?

It is highly recommended that you submit your initial post the 4th day of the module week. After your initial post, be sure to reply to at least two of your classmates by the end of the module week..

EMBERY MBAA518 MODULE 7 DISCUSSION

7.5 – Discussion

3131 unread replies.8686 replies.

In Activity 6.2.4 you were exposed to the Cost of Capital by Sector (Links to an external site.). One of the columns provides the percentage of debt financing by industry (D/(D+E)). There are several industries with low percentages of debt financing. Take a look and identify some with a low percentage of debt financing and do the same with firms that have a high percentage of debt financing (the average according to the data in the link is about 42 percent).

Note: Do not use the banking financial services industries.

Based on the types of firms that use a small amount of debt and those that use higher amounts of debt, what can you conclude? What is it about the firms that use low amounts of debt? More debt would lower their cost of capital so what is holding these firms back form taking on more debt? You need to think a little, do not simply say the firms with low debt are all in industry x or industries similar to x. That is obvious, what is the economic intuition? What is the story?

EMBERY MBAA518 MODULE 9 DISCUSSION

9.6 – Discussion

7474 unread replies.8686 replies.

Should firms hedge? A number of firms practice hedging and use derivatives to manage risk and change risk exposure. Some people argue firms should stick with their core business (i.e airlines should concentrate and on operating airlines). What do you think, should firms hedge? Why or why not?

It is highly recommended that you submit your initial post the 4th day of the module week. After your initial post, be sure to reply to at least two of your classmates by the end of the module week.

EMBERY MBAA518 2.4 – Asignment: Financial Ratios

MBAA 518 – Managerial Finance

1

Financial Ratios Assignment and Research Activity

Note:This activity will be submitted as Activity 2.4. However, it is recommended you begin to start work on this activity in Module 1. Most of the content necessary to complete the assignment is provide in Module1. Submission of the assignment will occur in Module 2.

This assignment will require you to perform some analysis of financial ratios and some research to further your understanding of financial ratios from other sources. You will select an industry and two firms within the industry as described below and analyze the Return on Equity (ROE) of both firms and the market valuation ratios.

To retrieve the data you will need to do the following steps:

Go to the Hunt Library website
Select the “Articles” tab (Databases)
Select “List All Research Databases”
Select “S” in the alphabetical tabs
Select “Standard and Poor’s Industry Surveys (S&P NetAdvantage)”
There are several different reports that can be found here.
For this assignment you will be looking at a number of ratios for a firm and comparing to industry averages.

To get information on the industry, you can use the Industry Surveys, click on the dropdown menu, then select the industry you are interested in, and then click the gold colored box with the play button in the box. There are a number of reports here and also a number of different reports.

The report will come up in the html format which is (in my opinion) the least useful. The PDF format provides a very good easy to use/read report with a large amount of information about the industry.If you click on Downloadable Company Data an excel spreadsheet will be available for firms in the industry.

The excel spreadsheet (Downloadable Company Data) includes a number of tabs each with different information of each of the firms some of which are ratios. Here you can get a quick overview of how a given firm is performing relative to peers; you could quickly calculate some averages for the industry etc. This could be helpful for use as you analyze projects, need an estimate for a similar project etc.

For this assignment we are going to focus on one ratio which can actually be calculated using three other ratios. That ratio is the Return on Equity. Return on Equity can be calculated in the following manor:

May 2015

MBAA 518 – Managerial Finance

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ROE

= net profit margin

x

asset turnover

/ equity ratio

= earnings to owners

x

revenues

/ common equity

revenues

assets

assets

= earnings to owners

x

revenues

x assets

revenues

assets

common equity

look at what cancels and you are left with

earnings/equity which is ROE ROE is comprised of:

Profit Margin (bottom line)

Turnover (asset utilization)

Equity ratio (financial cushion)

A note on equity ratio: (equity/assets)

Say a firm had $100 in assets and $37 dollars in equity The equity ratio would be 37/100 or 0.37

What does that mean? How can a firm be financed?

How much came from equity (owners)? How much from creditors?

In this case for every dollar of assets, owner have funded 0.37 cents and creditors 0.63 cents.

The second set of ratios you will need to consider are market value ratios. How does the firm you selected compare to industry averages, main competitor(s) etc.

For this assignment, you will need to select an industry using the S&P Net advantage database and download the data. Select two firms one with a relatively high ROE and one with a relatively low ROE in the industry. Analyze each of the firms taking into consideration the components of ROE as identified above. This will require you to do some additional research regarding ROE analysis.

The information you will need is not all here or in the textbook. There are times in the workplace where you will be performing or asked to perform tasks that require some learning/teaching yourself. This assignment will require you to do that.

May 2015

MBAA 518 – Managerial Finance

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Hints:You may want to look at each of the components of ROE and compare those. You maywant to look up (another book, online, etc) DuPont Identity or DuPont Analysis. Realize the components you need to analyze may or may not be in the spreadsheet you download form net advantage. If not find what you need but make sure you document where you find any data used. (Yahoo finance is a good site and there are others.)

Some thoughts to keep in mind:

Marginsreflect the firm’s production function. If margins are low what could be done toimprove them?

Total asset turnoverdeals with the marketing function. If turnovers are low what mighta firm wish to consider to improve its performance?

Equity ratiois the finance province. Issues to consider are if you are being tooconservative (not employing enough cheap debt)?

For your deliverable:

Include the downloaded industry spreadsheet for the industry you selected.

Identify the firms you selected within the spreadsheet by changing the color of the font for that firm on each tab to red.

Prepare a table that calculates the ROE for each firm using the three components. Make sure each column is labeled. (You should have columns that are labeled ROE, Net Profit Margin, Asset Turnover, Equity Ratio) Create a similar table for the market value measures.

Write a brief paper; about two pages maximum (2 plus/minus a half page). Paper should address the reasons why one firm has a high ROE, why one firm has a low ROE and what could be done to improve the lower performing firm based on ROE (if it is really performing at a lower level). Perform similar contrast and comparisons for the market value ratios.

Be sure to address issues such as marketing, asset utilization, financing and if your chosen firm appears to be under or overvalued.

May 2015

EMBERY MBAA518 4.5 – Assignment: Valuation of Stock

MBAA 518 – Managerial Finance Activity 3.5 (Due in Activity 4.5)

Valuation of Stock using PE ratios

Note:This activity will be submitted as Activity 4.5. However, it is recommended you begin to startwork on this activity in Module 3. Most of the content necessary to complete the assignment is provide in Module 3.

Submission of the assignment will occur in Module 4.

There is also a discussion question in activity 4.6 related to this assignment.

For this activity, you will need to select a publicly traded firm and a major competitor. Firms from any industry can be used.

Go to reuters.com and for the firm you have selected obtain the trailing twelve-month P/E ratio for the firm, industry, and sector. (You can use other sources if you wish)

Use information about your company’s earnings and industry and sector’s P/E s based on the P/E ratio value your selected firm as indicated in the example. If there is no earnings estimate, or the earnings estimate is negative, use earnings for a previous year. If that’s also negative, pick another company for this assignment. There is an example of a partially completed table found here.Note:the example is only complete for one of thetwo firms indicated. Your submission must include the data for both firms. Boeing’s data is included; therefore, Boeing cannot be used by any student. Lockheed-Martin is indicated as a competitor but no information is provided. Lockheed-Martin could still be used.

Once you have completed the above write a short report discussing the valuation of your selected firm and competitor. Note if the current price is very close to “Estimated share price based on TTM P/E and Earnings past 12 months.” This should be very close if not you have likely done something wrong. How does the valuation of your firm compare to that of the competitors based on the P/E ratio? Why might this be the case? How does you firm’s current price compare to the estimated price using the industry and sector P/E’s compare both for the TTM and estimated year end? Is it higher or lower? Why might that be (provide one rational reason why)? Based on simple analysis which of the two firms (your selected firm and its competitor) appears to be undervalued? Why did you draw that conclusion? What do you suspect is the reason?

Your submission will only need to be a single page to page and a half formatted with single-spaced, Times New Roman, 12 point font. Include a citation for where you retrieved the data and the date retrieved. A table following the example must be included in your submission but is not considered as part of the page to page and a half write-up. Get to the point in your write-up. There is no need for extra “baggage.”

May 2015 1

EMBERY MBAA518 8.5 – Assignment: Payout Strategy

In the supplemental readings you saw some examples of firms that have announced dividends, stock splits, and reverse stock splits. The assigned research paper reading looked at firm’s decisions and what factors appear to affect payout decisions. For this activity you will write a short one page to one and a half page paper on a firm of your choosing meeting the following criteria:

Publicly traded
You can provide a link to the firm’s profile and financial summary (similar to what can be found in.yahoo.com/q?s=MSFT&ql=1″>Yahoo finance (Links to an external site.)).Note:this can be other websites and non U.S. stocks can be used as well

An announcement that a firm has split, repurchased, dividend, or other payout discussed in the module’s readings in the past 3 months. The announcement could include the announcement of a firm cancelling their dividend payments as well as the various payouts.

For the selected firm provide a brief profile of the firm including the primary businesses/industry of the firm. Provide an overview of the industry. Address issues such as whether the firm is considered being in a growth industry, mature industry and the role/impact your firm has on the industry.

Discuss the payout strategy selected by your firm. What did the firm announce? Why did the firm make the announcement? Based on your study of dividends and other payouts does the strategy make sense? What signals is management sending with the announcement? Do you agree with the decision? As a shareholder would you be pleased with the announcement? Why or why not?

This activity is due at the end of the module week. Attach the announcement to your submission.
Please save your file using the following naming convention:LastName_FirstName_PayOut_Strategy.docx

EMBERY MBAA518 8.6 – Final Paper

MBAA 518 – Managerial Finance

1

In Module 8, you will submit your Final Paper:

For your final project you will write a short concise stock recommendation report for a firm in which you would recommend as a buy. You are correct that this is not an investments class but as you take a look at the examples provided you will see the application of various topics studied in this course. You will see ratios discussed, discounted cash flow valuation applied, growth opportunities analyzed and ultimately whether or not the investment opportunity is one that should be pursued. This investment opportunity and determining the risk, reward and valuation all are discussed throughout this course.

Your paper will be in the range of 2 to 3 pages formatted similarly to the examples provided. References must be included and those should be referenced using the latest APA guidelines.

The examples are not all the same but there are some common themes. Most include a brief discussion of the industry and industry outlook and where the firm being analyzed stands and performs in the industry. You will not that ratio analysis is often used but the ratios may vary by industry. In other words the key ratios used to analyze firms in industry “A” are not the same ratios used to analyze firms in industry “B”.

Valuation is often considered using more than one method. Discounted cash flows may be used in conjunction with an appropriate ratio (again the ratio likely varies across industry). How does the current share price compare to what your analysis values the stock?

Risk, growth potential, payout policy, and other factors are other items that may be discussed in the reports. These all play a role in analyzing a firm and may signal management’s belief on future value of the firm. Those may be items you will want to discuss in your report. Do not forget the threats that the firm faces as well. There is no firm that does not face competition. Those threats should be considered. You have been provided with a list of supplemental sources in the course content. This includes sources available through the Hunt Library one of which is S&P Net Advantage. S&P Net Advantage provides some very useful industry reports which may help you determine how firms in a particular industry are analyzed. There are other sources you can feel free to use as well.

The big question is why buy the stock you have selected. You do not have a lot of space to complete this project. You will need to be concise and to the point in your writing. Provide tables as you see fit and other graphs/charts that support you position. Note, the examples may include recommendations to buy, sell, or hold. Your report must be for an opportunity you believe is a buy.

Note on the examples: Value Line has a very unique format. The data is there is some discussion of key factors. The other example(s) better reflect what your submission should be similar to.

When submitting your Word document using the following naming convention: lastname_firstinitial_MBAA518_firmticker_final_project.

(example: Jones_M_MBAA518_firmticker_final_project.docx)

Font size should be no smaller than 10 nor larger than 12 point font. Headings should be bold (not a larger font). Again, be concise; you do not have room for a lot of “fluff.”

May 2015

MBAA 518 – Managerial Finance

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Examples can be found at these links:

ValueLine.MSFT

Mergent.WebReports.MSFT

Please note that these links are through the ERAU Hunt Library, so you may need to log in with your ERNIE username and password.

EMBERY MBAA518 1.6 – Problem Set 1

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

Question 1

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

Question 1

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

Question 1

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

Question 1

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

Question 1

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

Question 1

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

Question 1

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

Question 1

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)

embry mbaa518 – 1.4 – Readings and Videos Quiz 1

Question 1

2 / 2 pts

The corporate document that sets forth the business purpose of a firm is the:

state tax agreement.

corporate bylaws.

articles of incorporation.

indenture contract.

debt charter.

Question 2

2 / 2 pts

Agency costs refer to:

the total dividends paid to stockholders over the lifetime of a firm.

the costs that result from default and bankruptcy of a firm.

the costs of any conflicts of interest between stockholders and management.

the total interest paid to creditors over the lifetime of the firm.

corporate income subject to double taxation.

Question 3

2 / 2 pts

Which one of the following is a capital budgeting decision?

Deciding when to repay a long-term debt

Determining how much debt should be borrowed from a particular lender

Determining how much money should be kept in the checking account

Determining how much inventory to keep on hand

Deciding whether or not to open a new store

Question 4

2 / 2 pts

Which one of the following statements is correct?

Both partnerships and corporations incur double taxation.

Both partnerships and corporations have limited liability for general partners and shareholders.

Both sole proprietorships and partnerships are taxed in a similar fashion.

All types of business formations have limited lives.

Partnerships are the most complicated type of business to form.

Question 5

2 / 2 pts

The rules by which corporations govern themselves are called:

bylaws.

articles of incorporation.

indenture provisions.

indemnity provisions.

charter agreements.

embry mbaa518 – 2.3 – Readings and Videos Quiz 2

Question 1

2 / 2 pts

Which one of the following statements concerning the annual percentage rate is correct?

The rate of interest you actually pay on a loan is called the annual percentage rate.

The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

The annual percentage rate considers interest on interest.

The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

Question 2

2 / 2 pts

Paying off long-term debt by making installment payments is called:

funding the debt.

foreclosing on the debt.

calling the debt.

amortizing the debt.

None of these.

Question 3

2 / 2 pts

An annuity stream of cash flow payments is a set of:

increasing cash flows occurring each time period forever.

level cash flows occurring each time period for a fixed length of time.

arbitrary cash flows occurring each time period for no more than 10 years.

increasing cash flows occurring each time period for a fixed length of time.

level cash flows occurring each time period forever.

Question 4

2 / 2 pts

Which of the following statements concerning the effective annual rate are correct?

I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.

II. The more frequently interest is compounded, the higher the effective annual rate.

III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.

IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual rate.

I, II, and III only

I, II, III, and IV

I and II only

I and IV only

II, III, and IV only

Question 5

2 / 2 pts

A perpetuity differs from an annuity because:

annuity payments never cease.

perpetuity payments vary with the market rate of interest.

perpetuity payments vary with the rate of inflation.

perpetuity payments are variable while annuity payments are constant.

perpetuity payments never cease.

embery mbaa518 3.3 – Readings and Videos Quiz 3

Question 1

2 / 2 pts

Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:

retained earnings.

net income.

redistributions.

infused equity.

dividends.

IncorrectQuestion 2

0 / 2 pts

The constant dividend growth model is:

based on the assumption Dow 30 represents a good estimate of the market index.

generally used in practice because most stocks have a constant growth rate.

generally not used in practice because the constant growth rate is usually higher than the required rate of return.

generally not used in practice because most stocks grow at a non constant rate.

generally used in practice because the historical growth rate of most stocks is constant.

Question 3

2 / 2 pts

The rate at which a stock’s price is expected to appreciate (or depreciate) is called the _____ yield.

total

current

dividend

earnings

capital gains

Question 4

2 / 2 pts

The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

must still declare each dividend before it becomes an actual company liability.

is obligated to continue paying $1 per share per year.

must always show a current liability of $1,000 for dividends payable.

has a liability which must be paid at a later date should the company miss paying an annual dividend payment.

will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.

Question 5

2 / 2 pts

Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:

dividend growth rates to increase to offset this change.

market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.

stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.

market values of all stocks to increase, all else constant.

market values of all stocks to decrease, all else constant.

embery mbaa518 4.3 – Readings and Videos Quiz 4

Question 1

2 / 2 pts

The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

net present value

incremental

after-tax

erosion

stand-alone

Question 2

2 / 2 pts

The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation expense is called the:

depreciable basis.

after-tax salvage value.

after-tax depreciation savings.

depreciation tax shield.

operating cash flow.

Question 3

2 / 2 pts

The pro forma income statement for a cost reduction project:

will generally reflect no incremental sales.

will always reflect a negative project operating cash flow.

has to be prepared reflecting the total sales and expenses of a firm.

will reflect a reduction in the sales of the firm.

cannot be prepared due to the lack of any project related sales.

Question 4

2 / 2 pts

One purpose of identifying all of the incremental cash flows related to a proposed project is to:

isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm.

make each project appear as profitable as possible for the firm.

identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.

include both the proposed and the current operations of a firm in the analysis of the project.

IncorrectQuestion 5

0 / 2 pts

The cash flow from projects for a company is computed as the:

sum of the incremental operating cash flow and after-tax salvage value of the project.

net income generated by the project, plus the annual depreciation expense.

sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project.

sum of the sunk costs, opportunity costs, and erosion costs of the project.

net operating cash flow generated by the project, less any sunk costs and erosion costs.

embry mbaa518 5.3 – Readings and Videos Quiz 5

Question 1

2 / 2 pts

Based on the period of 1926 through 2011, _____ have tended to outperform other securities over the long-term.

small company stocks

long-term corporate bonds

U.S. Treasury bills

large company stocks

long-term government bonds

Question 2

2 / 2 pts

The average squared difference between the actual return and the average return is called the:

standard deviation.

risk premium.

excess return.

variance.

volatility return.

Question 3

2 / 2 pts

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2011?

small company stocks

long-term government bonds

large company stocks

U.S. Treasury bills

long-term corporate bonds

Question 4

2 / 2 pts

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

arithmetic average return.

risk premium.

time premium.

inflation premium.

geometric average return.

Question 5

2 / 2 pts

The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant, then:

the capital gains yield will increase.

the dividend yield will increase.

neither the capital gains yield nor the dividend yield will change.

the dividend yield will also remain constant.

the capital gains yield will decrease.

embery mbaa518 6.3 – Readings and Videos Quiz 6

Question 1

2 / 2 pts

The use of WACC to select investments is acceptable when the:

NPV is positive when discounted by the WACC.

correlations of all new projects are equal.

risks of the projects are equal to the risk of the firm.

firm is well diversified and the unsystematic risk is negligible.

None of these.

Question 2

2 / 2 pts

The beta of a security provides an:

estimate of the slope of the Capital Market Line.

estimate of the slope of the Security Market Line.

None of these.

estimate of the market risk premium.

estimate of the systematic risk of the security.

Question 3

2 / 2 pts

The following are methods to estimate the market risk premium:

use the bond valuation model to estimate growth in bond prices with different costs of capital.

use historical data to estimate future risk premium and use the dividend discount model to estimate risk premium.

use the dividend discount model to estimate risk premium.

use historical data to estimate future risk premium.

use historical data to estimate future risk premium and use the bond valuation model to estimate growth in bond prices with different costs of capital.

Question 4

2 / 2 pts

If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:

a smaller change in EBIT for the firm versus the other firms.

no effect in any way on the firms, as volume does not affect fixed costs.

None of these.

a decreasing effect on the cyclical nature of the business.

a larger change in EBIT for the firm versus the other firms.

Question 5

2 / 2 pts

For a multi-product firm, if a project’s beta is different from that of the overall firm, then the:

CAPM can no longer be used.

project should be discounted using the overall firm’s beta.

project should be discounted at the market rate.

project should be discounted at the T-bill rate.

project should be discounted at a rate commensurate with its own beta.

embery mbaa518 7.3 – Readings and Videos Quiz 7

IncorrectQuestion 1

0 / 2 pts

A key assumption of MM’s Proposition I without taxes is:

that individuals can borrow on their own account at rates less than the firm.

All of these.

that financial leverage increases risk.

managers are acting to maximize the value of the firm.

that individuals must be able to borrow on their own account at rates equal to the firm.

Question 2

2 / 2 pts

The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

personal offset.

dividend recapture.

private debt placement.

the weighted average cost of capital.

homemade leverage.

Question 3

2 / 2 pts

A manager should attempt to maximize the value of the firm by:

changing the capital structure if and only if the value of the firm increases to the benefit of inside management.

changing the capital structure if and only if the value of the firm increases.

changing the capital structure if and only if the value of the firm increases although it decreases the stockholders’ value.

changing the capital structure if and only if the value of the firm increases only to the benefits of the debtholders.

changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.

Question 4

2 / 2 pts

In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the equity ray. The debt ray has a lower intercept because:

the break-even point is higher with debt.

a fixed interest charge must be paid even at low earnings.

the amount of interest per share has only a positive effect on the intercept.

the higher the interest rate the greater the slope.

more shares are outstanding for the same level of EBI.

Question 5

2 / 2 pts

MM Proposition I with taxes supports the theory that:

the value of a firm is inversely related to the amount of leverage used by the firm.

a firm’s cost of capital is the same regardless of the mix of debt and equity used by the firm.

the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.

a firm’s weighted average cost of capital increases as the debt-equity ratio of the firm rises.

there is a positive linear relationship between the amount of debt in a levered firm and its value.