Compute the future value in year 9 of a $2,000 deposit in year 1 and another

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Complete the following problem sets from Chapter 5 in Microsoft^® Excel^®:

•   5-1

•   5-3

•   5-5

•   5-7

•   5-12

•   5-15

5-39 (Calculate monthly payment only)

5-1   FutureValue Compute the future value in year 9 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10 percent interest rate. (LG5-1)

5-3   Future Value of an Annuity What is the future value of a $900 annuity payment over five years if interest rates are 8 percent? (LG5-2)

5-5   Present Value Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent. (LG5-3)

5-7   Present Value of an Annuity What’s the present value of a $900 annuity payment over five years if interest rates are 8 percent? (LG5-4)

5-12   Present Value of an Annuity Due If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what’s the present value of the same annuity due? (LG5-6)

5-15   Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What’s the loan’s effective annual rate (EAR)? (LG5-7)

5-39   Loan Payments You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be? 

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The following table shows your stock positions at the beginning of the year, the dividends that each

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Fin 370 week 3

Complete the following problem sets from Chapter 7 in Microsoft^® Excel^®:

•    7-21

•    7-27 

Complete the following problem sets from Chapter 8 in Microsoft^® Excel^®:

•    8-19

•    8-21

Complete the following problem sets from Chapter 9 in Microsoft^® Excel^®:

•    9-31

7-21 Compute Bond Price Compute the price of a 3.8 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond? (LG7-4)

7-27 Yield to Maturity A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are semiannual.) (LG7-6)

8-19   Value a Constant Growth Stock Financial analysts forecast Safeco Corp.’s (SAF) growth rate for the future to be 8 percent. Safeco’s recent dividend was $0.88. What is the value of Safeco stock when the required return is 12 percent? (LG8-5)

8-21   Expected Return Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are expecting? (LG8-5)

9-31  Portfolio Return The following table shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio dollar return and percentage return? (LG9-7)

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The scenario is designed to help you determine and evaluate the payment amount of a car loan

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The scenario is designed to help you determine and evaluate the payment amount of a car loan and a mortgage, based on the assumption that your household income is $36,000 per year or $3,000 per month.

Based on your income, you may spend 28% of your monthly income on housing, and 10% on a car loan. You are to put a 3% down payment on the house and a 10% down payment on the car.

Required:

Using Microsoft Excel, address the following issues:

1. What is the maximum car payment and mortgage payment you can afford with the following conditions: your monthly household income, 10% for the car payment, and 28% for the mortgage payments?

2. Assume a 10% down payment on the car and a 3% down payment on the house. Also, assume that you can get financing for the car at 7% for 60 months, and the house can be financed at 5% for 30 years. How much could you spend on the car and the house? You must submit your calculations in a Microsoft Excel document showing how answers were reached.

3. Create a complete amortization schedule for the car, using the information in questions 1 and 2.

4. Discuss the distributions of principal, interest and the balance over the life of the loan.

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A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk

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FINC600 WEEK 4

Problem 9-2

A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5.

Risk Free Debt	Interest Rate	Market Risk Premium	Beta	Taxes
40%	10%	8%	0.5	35%

a.          What is the company cost of capital?

b.         What is the after-tax WACC, assuming that the company pays tax at a 35% rate?

Problem 9-16

What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe the process step by step.

Problem 10-2

Explain how each of the following actions or problems can distort or disrupt the capital budgeting process. 

a. Over optimism by project sponsors.

b. Inconsistent forecasts of industry and macroeconomic variables.

c. Capital budgeting organized solely as a bottom-up process.

Problem 10-14

Suppose that the expected variable costs of Otobai’s project are ¥33 billion a year and that fixed costs are zero.                                                                                                                                                                                                                                                        a. How does this change the degree of operating leverage (DOL)?                                                          b. Now recompute the operating leverage assuming that the entire ¥33 billion of costs are fixed.

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Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant

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(22-1) Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandell’s operations? If Vandell has $10.82 million in debt, what is the current value of Vandell’s stock? (Hint: Use the corporate valuation model from Chapter 7.)

 

(22-2) Hastings estimates that if it acquires Vandell, interest payments will be $1.5 million per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell, and what is the value of its tax shields? What is the per share value of Vandell to Hastings Corporation? Assume that Vandell now has $10.82 million in debt.

 

(22-5) Marston Marble Corporation is considering a merger with the Conroy Concrete
Company. Conroy is a publicly traded company, and its beta is 1.30. Conroy has been
barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt; its target ratio is just 25%, with the cost of debt 9%. If the acquisition were made, Marston would operate Conroy as a separate, wholly owned subsidiary. Marston would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. Marston also would increase the debt capitalization in the Conroy subsidiary to wd = 40%, for a total of $22.27 million in debt by the end of Year 4, and pay 9.5% on the debt. Marston’s acquisition department estimates that Conroy, if acquired, would generate the following free cash flows and interest expenses (in millions of dollars) in Years 1–5: In Year 5, Conroy’s interest expense would be based on its beginning-of-year (that is, the end-of-Year-4) debt, and in subsequent years both interest expense and free cash flows are projected to grow at a rate of 6%. These cash flows include all acquisition effects. Marston’s cost of equity is 10.5%, its beta is 1.0, and its cost of debt is 9.5%. The risk-free rate is 6%, and the market risk premium
is 4.5%.

Year Free Cash Flows Interest Expense
1 $1.30 $1.2
2 1.50 1.7
3 1.75 2.8
4 2.00 2.1
5 2.12 ?

 

a. What is the value of Conroy’s unlevered operations, and what is the value of Conroy’s tax shields under the proposed merger and financing arrangements?
b. What is the dollar value of Conroy’s operations? If Conroy has $10 million in debt outstanding, how much would Marston be willing to pay for Conroy?

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Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013

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FIN 534 – HOMEWORK SET #5

Use the following information for Questions 1 and 2:

Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one - time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

Calculate Boehm’s total dividends for 2014 under each of the following policies:

1.       (a)   Its 2014 dividend payment is set to force dividends to grow at the long - run growth rate in earnings.

(b) It continues the 2013 dividend payout ratio.

2. (a) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

(b) It employs a regular – dividend – plus - extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.

Use the following information for Questions 3 and 4:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

3.       What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? 
4.       Would the firm’s break-even point increase or decrease if it made the change?

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Corporate finance: Core principles and applications (4th ed.) given question tutorial in excel

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• Chapter 7, problem 1b (page 221).
• Chapter 7, problem 2 (page 221).
• Chapter 7, problem 8 (page 222).
• Chapter 7, problem 9 (page 222).
• Chapter 8, problem 1 (page 249).
•    Corporate finance: Core principles and applications (4th ed.)

CHAPTER 7: PROBLEM 1b
	Project A	Project B
Discount Rate	15%	15%
Year 0	($14,500)	($9,800)
Year 1	$8,500	$4,700
Year 2	$6,800	$4,200
Year 3	$2,800	$4,100
NPV =	#NAME?	#NAME?	(Note: You will choose the project that has the highest NPV since it creates the most wealth)
CHAPTER 7: PROBLEM 2
Year	A.	B.	C.
0	$3,200	$4,600	$7,900
1	$825	$825	$825
2	$825	$825	$825
3	$825	$825	$825
4	$825	$825	$825
5	$825	$825	$825
6	$825	$825	$825
7	$825	$825	$825
8	$825	$825	$825
Payback Period =	#NAME?	#NAME?	#NAME?
CHAPTER 7: PROBLEM 8
Year	Project A	Project B
0	($5,200)	($3,600)
1	1,800	1,300
2	3,200	2,100
3	2,200	1,800
IRR =	#NAME?	#NAME?
CHAPTER 7: PROBLEM 9
Discount Rate	15%
Year
0 (Initial Cost)	($185,000)	$185,000
1	62,000
2	62,000
3	62,000
4	62,000
5	62,000
6	62,000
7	62,000
First find the NPV	#NAME?	(Use the built-in NPV formula in Excel but exclude using the Year 0 cash outflow)
Now calculate the Profitability Index	#NAME?	(Use the positive amount of the initial cost in cell C44 in the formula. You would only accept the project if the Profitability Index is above 1)
CHAPTER 8: PROBLEM 1
Cost of Souffle Maker	$27,000	($27,000)
Economic Life	6	years
# of Souffles produced per year	2,300
Cost to make each Souffle	$2
Price of each Souffle	$7
Discount Rate	14%
Tax Rate	34%
Step 1: First calculate the Operating Cash Flow	#NAME?
Step 2: Place the answer you get for your Operating Cash Flow in the year 1 thru year 6 cells below
Year 1	#NAME?
Year 2	#NAME?
Year 3	#NAME?
Year 4	#NAME?
Year 5	#NAME?
Year 6	#NAME?
Step 3: Now find the NPV. Be sure to include the initial cost by using cell C58 as it is negative
NPV =	#NAME?	(You will accept the pro

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What generalizations about bond prices, interest rates and maturity periods can be made based

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1-

Bond Valuation and Yield

A bond has a par value of $1,000, pays $50 semiannually and has a maturity of 10 years.

If the bond earns 12% per year, what is the price of the bond?

Rate

Nper

PMT

FV

Type

PV

What is the yield to maturity for the bond?

Nper

PMT

PV

FV

Type

Rate

What would be the bond's price if the rate earned declined to 8% per year?

Rate

Nper

PMT

FV

Type

PV

If the maturity period is reduced to 5 years and the required rate of return is 8%, what would be the price of the bond?

Rate

Nper

PMT

FV

Type

PV

What is the yield to maturity for the bond when the maturity is 5 years and the required rate of return is 8%?

Nper

PMT

PV

FV

Type

Rate

What generalizations about bond prices, interest rates and maturity periods can be made based on the calculations made above?

2- Callable Bonds                                   The following bonds have a par value of $1,000 and the required rate of return is 10%.                      Bond XY: 5¼ percent coupon, with interest paid annually for 20 years       Bond AB: 14 percent coupon, with interest paid annually for 20 years                         What is each bond's current market price?                                 Bond XY Bond AB             Rate                 Nper                 PMT                 FV                 Type                 PV                                                     If current interest rates are 9%, which bond would you expect to be called? Explain.

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