Вы находитесь на странице: 1из 4

___You plan on sending your three children to college and your first child will begin school in exactly

10 years at which point you have to pay $45,000. Tuition will then grow at the rate of 3%. If your second child will start exactly two years after the first, and the third starts two years after the second how much will you have to put into your account monthly if your account pays 12% compounded annually? Assume that your first deposit is made today and your last deposit is made one month before you must pay your first tuition payment. First, we must determine how much we will need at the beginning of year 10 to send all your children to school. For years 12 through 15 you will pay twice the tuition since in these years you will have two children in college. So the total payments will be: n=10 EAR=0.12 -= 45,000 in year 10; =101,295.79 in year 14; = 45000 (1+g) =$46,350 in year 11; =104,334.67 in year 15; = [45000 ] 2=$95,481.00 in year 12; = 53,732.35 in year 16; = [45000 ] 2=$98,345.43 in year 13; =45000 =55,344.32 in year 17. We must get the time 10 value for each these cash flows. =45000+[ ]+[95481/( )]+[98345.43/( )]+[101295.79/( )]+[104334.67/( ]+[53723.35/( )]+[55344.33/( )]=408,336.18 Now we want to have 408,336.18 in your account by the end of year 10. Recall that we are making monthly payments so we need to get a monthly EPR. The APR of a rate compounded annually is the same as the EAR. EPR= PMT= *

-1= +

-1=0.00949 *

P=

=1210=120 + 1822.48 are what must be saved per month.

___You are saving for the college education of your two children. One child will enter college in 5 years, while the other child will enter college in 7 years. College costs are currently $10,000 per year and are expected to grow at a rate of 5 percent per year. All college costs are paid at the beginning of the year. You assume that each child will be in college for four years. You currently have $50,000 in your educational fund. Your plan is to contribute a fixed amount to the fund over each of the next 5 years. Your first contribution will come at the end of this year, and your final contribution will come at the date at which you make the first tuition payment for your oldest child. You expect to invest your contributions into various investments which are expected to earn 8 percent per year. How much should you contribute each year in order to meet the expected cost of your children's education? --College Cost Today = $10,000, Inflation = 5%. = $10,000 = $12,762.82 1 = $12,762.82. = $10,000 = $14,774.55 2 = $29,549.10. = $10,000 = $13,400.96 1 = $13,400.96. = $10,000 = $15,513.28 1 = $15,513.28. = $10,000 = $14,071.00 2 = $28,142.00. = $10,000 = $16,288.95 1 = $16,288.95. Find PV of college costs in Year 5: PV = $12,762.82 + $13,400.96(0.9259) + $28,142(0.8573) +$29,549.10(0.7938) + $15,513.28(0.7350) + 16,288.95(0.6806) = $95,241.50. Find FV of educational fund in 5 years: Now, find net amount needed in Year 5: $50,000 = $73,466.40. $95,241.50 $73,466.40 = $21,775.10. = PMT (* + $21,775.10 = PMT (5.8666) PMT = $3,711.71

Finally, find PMT needed to accumulate $21,775.10 in Year 5:

___A firm is considering investing in a project. The cost the project is $100,000. The project will pay out $20,000 in year 1; $70,000 in year 2; $40,000 in year 3; $50,000 in year 4; and $30,000 in year 5. The project is scale enhancing. --The firm must pay 7% floatation costs on its preferred stock. The preferred stock has a dividend rate of10%. FC%=0.07 Par=M=100 DR=0.1 --The firm issues only zero coupon bonds. It has 5 year zero coupon bonds outstanding, and these are the only type of bonds that it will issue in the future. Floatation costs on the bonds are 9%. The firms tax rate is 34%. FC%=0.09 t=0.34 --The firm paid out $1,500,000 in dividends last year out of $5,000,000 of net income available to common stockholders. The book value of total owners equity is $25,000,000. Floatation costs on the firms common stock is 12%. The firm will have enough from retained earnings that it need not issue new shares. TD=1,500,000 SO=250,000 Net Income Available to Common=5,000,000 Shares outstanding Market Value Book Value Price Weight Bonds 10,000 6,410,500 5,000,000 641.05 18.91% Common Equity=Book value=15.000.000 Preferred Stock($100 par) 100,000 12,500,000 10,000,000 125 36.86% TE=5,000,000
Common Stock 250,000 15,000,000 33,910,500 15,000,000 60 44.23% 1

2) NP=

(1-F) =641.05 (1-0.09=583.36)

=2[(

]=2[( =

]=20.05537=11.075% =8.6% = r= =20.31% = =0.7 g=ROE r= 0.7= 0.233

= (1-t) = (1-0.34) 0.11075=7.31% 3) D=MDR=1000.1=10 NP= (1-F) =125(1-0.07) =116.25 = 4) =Total Dividends at T=0/Shares Outstanding = 1,500,000/250,000 = 6 ROE= = 5) WACC= +g= = +0.233=35.63% =

6) PV= =123721.209 7) NPV=PV-Cost=123721.209-100000=23721.209 > 0 8) so Accept 9) New MVE= old market value of common stock +NPV= 15000000+23721.209=15023721.209 10) New Price= 15023721.209/250000=60.09 ___The project is pays an indefinite stream of cash flows of $1,000,000 per year. The cost of the project is $15,000,000. D=3 E=5 FC%=0.14 SO=200,000 Common Equity=Book value --The firms common stock is currently selling for $56, last year the firm paid a dividend of $3 per share. The book value of shareholders equity is $5,000,000. The firms earning per share was $5. The firms floatation cost for common equity is 14%. The firm has 200,000 shares of common shares outstanding. The firm will not have to issue new common equity. --The firm pays out 12% dividends on its preferred stock. Floatation costs are $3 per share. The price of the firms preferred stock is $30 per share. DR=0.12 FC=3 --The firms 10 year zero coupon bonds are currently selling for $678 and the firm has a 35% marginal tax rate and a 25% average tax rate. T=0.35 Book Value Market Value Price Weight Bonds 3,000,000 3,500,000 678 21.88% Preffered Stock($25 par) 2,500,000 2,500,000 30 15.62% Common Stock 2,500,000 10,000,000 56 62.5% 16,000,000 1 2) NP= -FC=678-2=676 3) D=MDR=250.12=3 4) ROE= = +g= =2[( ) ]=2[( = = = ) ]=20.01977=3.95% = (1-t) = (1-0.35) 0.0395=2.57%

NP= -FC=30-3=27 +0.16=22.21%

=11.11% = = =0.4 g=ROE r= = 0.16

5) WACC= = =16.18% 6) PV= =6180469.72 7) NPV=PV-Cost=6180469.72-15,000,000=-8819530.284 < 0 8) so Reject 9) New MVE= old market value of common stock +NPV= 10,000,000 8,819,530.284=1,180,469.72 10) New Price= 1,180,469.72/200,000=5.90 ___There are three securities that you can either buy or sell. Security A pays out $250 every month indefinitely with the first payment made two months from today. Security B pays out $250 every month indefinitely with the first payment starting 62 periods from today. Security C pays out 250 starting two months from now with the last payment made in month 61. If security A and B are fairly priced and security C sells for $3500, what should you do and why? Assume that you can earn 12% compounded annually on similar investments. --First, we must get the effective periodic rate (EPR). Recall an APR that is annually compounded is exactly equal to its EAR. EPR = = = 0.00949 If security is fairly priced then Market Value = Present Value A: First cash flow is at time 2, therefore we can either use the Regular Perpetuity Present Value formula (will give price at time 1) or the Perpetuity Due Present Value formula (will give price at time 2). In this case we will use the regular perpetuity formula. (A)= = = 26,346.87 However we need the present value at time 0 not at time 1. So we utilize the following: (A)= = =26,099.22 = B: First cash flow is received at time 62, so we will price as of time 61. (B)= = = 26,346.87 However we need the present value at time 0 not at time 61. So we utilize the following (B)= C: = + = 250* = =11,289.82 > =14,809.40 = + = 11,396.95 so C is underpriced Buy C Sell A Buy B

(C) =PMT* (C)=

___A 4 year bond has a coupon rate of 12% and its yield to maturity is 13%. What is the price of the bond? What is the Macaulay duration of the bond? What is the modified duration of the bond? If the yield-to maturity changes to 15% what is the estimated new price of the bond? Is this a good estimate? CR=12%=0.12 CR/2=0.12/2=0.06=6% M=1000 n=4 P=m n=42=8 EPR=0.13/2=0.065 DF= =0.15-0.13=0.02 Period 1 2 3 4 5 6 7 8 Coupon 60 60 60 60 60 60 60 60 Payment 60 60 60 60 60 60 60 1060 Discount Factor 0.93897 0.88166 0.82785 0.77732 0.72988 0.68533 0.64351 0.60423 Present Value 56.33803 52.89956 49.67095 46.63939 43.79285 41.12005 38.61037 640.48506 969.56 Weight 0.05811 0.05456 0.05123 0.04810 0.04517 0.04241 0.03982 0.66060 1 Weight*Period 0.05811 0.10912 0.15369 0.19242 0.22584 0.25447 0.27876 5.28477 6.56 SM=6.56 SMD =6.16 =3.28 M= = MD= = =3.08 Price = $969.56 Change in Price= -MD = -59.72 NP = OP + Change in price = 969.56 59.72 = $909.84 Two possible answers to the final question: Any change over .5% is too large to estimate with modified duration. Or calculate the price with the new interest rate $912.14. The estimated price is off by .25%. This is not so bad.

___Below is the distribution of returns for two stocks. In a world in which you can only hold one security which is the better investment and why? Now assume that you can hold any combination of securities. Furthermore, the beta for Stock A is .8, the Beta for stock B is .4, expected inflation is 1.1%, and the real rate of return is 1.1%. The market risk premium is 4%. State of the Economy Probability Stock A Returns Stock B Returns P*A A^2 P*A^2 P*B B^2 P*B^2 Recession 30%(0.3) -10% 1% -3 100 30 0.3 1 0.3 Moderate 20%(0.2) 5% 2% 1 25 5 0.4 4 0.8 Boom 50%(0.5) 18% 5% 9 324 162 2.5 25 12.5 7 V (A) =197 =197-49=148 No security is better. = =12.166 V (B) =13.6 =197-49=3.36 = 197 =1.833 3.2 A 7% 12.17% A is underpriced and B is overpriced, so prefer A 13.6 B 3.20% 1.83%

___A Company just declared earnings of $1,000,000. Its earnings will grow 40% in year 1, 35% in year 2, 55% in year 3, 20% in year 4, and 5% thereafter. If the company has a payout ratio of 40% and a required rate of return of 14% what is the value of the stock today? (12 Points) What is the value of the stock at the end of year 10? Assume that there are 250,000 shares outstanding. 1) Or 2)

You can only do this over the constant growth period

___Balance Sheet Cash Accounts Receivable Inventory Total Current Assets Net Plant Property and Equipment Total Assets Accounts Payable Notes Payable Total Current Liabilities 2006 104 455 553 1112 1644 2756 232 196 428 200 160 688 555 1403 1709 3112 266 123 389 Income Statement 2007 Net Sales 1509 Cost of Goods Sold 750 Depreciation 65 Interest Paid 70 Taxable Income 624 Taxes 212 Net Income 412

Long Term Debt Common Stock and Paid in Surplus Retained earnings Total Liabilities and Owners Equity

408 600 1320 2756

454 640 1629 3112

1) Current Ratio = Current Assets / Current Liabilities = 1403 / 389 = 3.61 2) Quick Ratio = (Current Assets Inventory)/Current Liabilities = (1403-555)/389 = 2.18 3) Average Collection Period = Accounts Receivable/Days Credit Sales Days Credit Sales = Credit Sales/365 = 1509/365 = 4.13 Average Collection Period = 688/4.13 167 4) Inventory Turnover = Cost of Goods Sold/Inventory = 750/555=1.35 5) Efficiency Ratios: Operating Income Return on Investment = Operating Income/Total Assets = 694/3112 =22.3% Operating Profit Margin = Operating Income / Sales = 694/1509 =45.99% Total Asset Turnover = Sales / Total Assets = 1509/3112 = .485 Account Receivable Turnover = Sales/Accounts Receivable = 1509/688 = 2.19 Net Fixed Assets Turnover = Sales/Net Fixed Assets = 1509/1709 =.883 Leverage Ratios: Total Debt=Total Liabilities / Total Assets = (454+389)/3112 = 27.1% Interest Coverage (time-interest-earned) = Operating Income/Interest = 694/70 =9.91 Profitability Ratio: Return on Equity =Net Income Available to Common / Common Equity = 412/2269 =18.16% ___Calculate the following ratios from the financial statements below: 1) current ratio; 2) acid-test ratio; 3) debt ratio; 4) times interest earned ratio; 5) average collection period; 6)inventory turnover; 7) gross profit margin; 8)operating income return on investment; 9) fixed asset turnover; and 10) return on equity. Income Statement 2007 Balance Sheet 2007 Sales 5390 Cash 2694 Cost of Goods Sold 1961 Accounts Receivable 3928 Other Expenses 343 Inventory 6370 Depreciation 723 Current Assets 12992 Interest 386 Net Fixed Assets 22614 Earnings before Taxes 1977 Total Assets 35606 Taxes 672.18 Current Assets 12992 Net Income 1304.82 Notes Payable 478 Current Liabilities 3161 Long Term Debt 10290 Owner's Equity 22155 Total Liabilities & Owner's Equity 35606 --Liquidity Ratios Current Ratio = Current Assets / Current Liabilities = 12992 / 3161 = 4.11 Quick Ratio = (Current Assets Inventory)/Current Liabilities = (12992-6370)/3161 = 2.095 --Average Collection Period = Accounts Receivable/Days Credit Sales Days Credit Sales = Credit Sales/365 = 5390/365 = 14.77 Average Collection Period = 3928/14.77 _ 266 --Inventory Turnover = Cost of Goods Sold/Inventory = 1961/6370= .308 --Efficiency Ratios Operating Income Return on Investment = Operating Income/Total Assets = 2363/35606 =6.64% Operating Profit Margin = Operating Income / Sales = 2363/5390 =43.84% Total Asset Turnover = Sales / Total Assets = 5390/35606 = .15 --Account Receivable Turnover = Sales/Accounts Receivable = 5390/3928 = 1.37 --Net Fixed Assets Turnover = Sales/Net Fixed Assets = 5390/22614 =.238 --Leverage Ratios Total Debt=Total Liabilities / Total Assets = (35606-22155)/35606 = 37.8% Interest Coverage = Operating Income/Interest = 2363/386 =6.12 --Profitability Ratio Return on Equity =Net Income Available to Common / Common Equity = 1304.82/22155 =5.89% -----CH3: Operating Income= Sales- cost of goods sold- Expense (depreciation) Total equity=Total Asset-Total liability Net income =net profit e fi gi I e e i i i ie i e e e e y e -----CH12: * Common Stock: + ----Annual retained earnings new common stock issue: * + 2) CAPM: -----Semi Internal common equity External common equity

-----CH2: --Gross profit=sales-cost of goods sold --Operating income (EBIT) =gross profit-operating expense= Sales Cost of Goods Sold- Expense (depreciation) --Earnings before tax (EBT) =EBIT-interest expense --Earnings after tax (EAT) =EBT-Income tax expense --Net income=EAT-preferred stock dividends --EBIT is not affected by how the firm is financed. --Retained earning=RE from last year + net income-dividend --Net working capital=Current assets-current liabilities. -----CH7: --When discount rate (required rate of return) falls, bond price rises When discount rate (required rate of return) rises, bond price falls. --If the coupon rate = required rate of return, the bond will sell for par value. If the coupon rate> required rate, the bond will sell for a premium (bond price>par value) If the coupon rate< required rate, the bond will sell for a discount (bond price < par value) -----CH 5: Compounding Formula: n = number of years (periods) Non annual Compounding: i Solving for Time:

Solving for I: i e

i = the annual interest (or discount) rate Continuous Compounding: Solving for n:

i: nominal or stated interest rate for the year Solving for I : i

Present Value with Continuous Compounding: Present Value of a Regular Perpetuity:

EPR=i/M

p=m*n

Present Value of a Perpetuity Due:

Present Value of an Annuity: Future Value of an Annuity: APR=EPR m * ( + )

Present Value of an Annuity Due: i [ i

i ( ) i i [ i ] i

] Future Value of an Annuity Due:

APR-

With continuous compounding: Fisher Effect: : Nominal risk-free Interest Rate

e I I : Real risk-free Interest Rate I IRP: Inflation Rate I A 10% 3% A 20% 5% B 10% 5% B 10% 5%

For Treasury security: Required rate of return= Risk-free rate of return For Corporate stock or bond: Expected return: The CAPM equation: If Risk premium on the market: = the required return on security j = the risk-free rate of interest, = the beta of security j = the return on the market index. Beta of stock A = 1 Beta of stock B = 2 Stock of firm A = $10, Stock of firm B = $15 If buy 7 stocks of firm A and buy 2 stocks of firm B we invest $70 in firm A and $30 in firm B portfolio = 0.7 (1) + 0.3 (2) = 1.3 If every stock is on the SML, investors are being fully compensated for risk If a security is above the SML, it is underpriced. If a security is below the SML, it is overpriced Simple Return Calculations: HPR=(Pt+1 Pt)/Pt Risk--The possibility that an actual return will differ from our expected return The greater the standard deviation, the greater the uncertainty, and, therefore, the greater the risk. [ ] Variance Variance Investing in more than one security to reduce risk. If two stocks are perfectly positively correlated, diversification has no effect on risk. If two stocks are perfectly negatively correlated, the portfolio is perfectly diversified. Market risk (systematic risk) is non-diversifiable. This type of risk cannot be diversified away. Company-unique risk (unsystematic risk) is diversifiable. This type of risk can be reduced through diversification Be i e u e f he e i ivi y f i dividu c eu ch ge i he e A firm that has a beta = 1 has average market risk. The stock is no more or less volatile than the market. A firm with a beta > 1 is more volatile than the market. (ex: technology firms) A firm with a beta < 1 is less volatile than the market. (ex: utilities) A stock with Beta = 0 has no systematic risk

1. Your company is considering an investment in a project which would require an initial outlay of $300,000 and produce expected cash flows in Years 1 through 5 of $87,385 per year. You have determined that the current after- x c f he fi c i equi ed e f e u f e ch source of financing is as follows: Cost of debt 8% Cost of preferred stock 12% Cost of common stock 16% Long-term debt currently makes up 20% of the capital structure, preferred stock 10%, and common stock 70%. What is the net present value of this project? a. $463 b. -$.22 c. $1,241 d. $1,568 Answer: B 2. As the size of a financing issue increases, the _____ decreases. a. weighted cost of capital b. flotation cost of the issue c. effective tax rate d. both a and b Answer: D 3. Sonderson Corporation i u de i g c i udge i g y i The fi e i The rate on six-month T-bills is 5%, and the return on the S&P 500 index is 12%. What is the i ec f e i ed e i g i de e i i g he fi c fc i ? a. 13.1% b. 15.5% c. 17.7% d. 19.9% Answer: B 4. Sputter Motors has sales of $3,450,000, total assets of $1,240,000, cost of goods sold of $ d i ve y u ve f Wh i he u fS u e inventory? a. $421,054 b. $638,112 c. $543,000 d. $399,687 Answer: D 5. GAAP, Inc. has total assets of $2,575,000, sales of $5,950,000, total liabilities of $1,855,062, and e fi gi f Wh i G eu equi y? A. 8.62% b. 23.97% c. 16.41% d. 4.48% Answer: B Give he f wi g i f i f e i de e i e he c y weigh ed ve ge c f capital. Value Cost of Capital Restaurant Division $5 Billion 13% Snack Foods Division $7 Billion 12% Beverages Division $13 Billion 8% a. 10.12% b. 11.00% c. 12.10% d. 13.00% Answer: A 7. An example of liquidity ratio is the: a. quick ratio. b. debt ratio. c. times-interest-earned. d. return on assets. Answer: A 8. The cost of capital for a firm which uses 45% debt at an after-tax cost of 10% and 55% common stock at a 15% cost is: a. 12.25%. b. 12.50%. c. 12.75%. d. 13.00%. Answer: C 9. Which of the following is he e i dic f ge e ' effec ive e gi g he fi balance sheet? a. Debt ratio b. Total asset turnover c. Times-interest-earned d. Operating profit margin Answer: B 10. Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $ which c i ic y f e y e The fi e i g fi margin is 16.1%, d i y e fi e e i e y e H w uch i he fi i e -interest earned? a. 15.6 b. 45.3 c. 20.2 d. 3.0 Answer: C 1) Which of the following statements is true? a. Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment. b. The quick ratio i e e ic ive e u e f fi iquidi y h he cu e i c. For the average firm, inventory is considered to be more "liquid" than accounts receivable d ucce fu fi cu e i i i ie h u d w y e g e e h i cu e ssets. Answer: B 5) The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of: a. liquidity ratios. b. profitability ratios. c. coverage ratios. d. leverage ratios. Answer: B 6) Cost of capital is: a. the coupon rate of debt. b. a hurdle rate set by the board of directors. c. the rate of return that must be earned on additional investment if firm value is to remain unchanged. d he ve ge c f he fi e Answer: C