Fin 3010 Final Exam

Compute the future value in year 4 of a $500 deposit in year 1 and another $1,000 deposit at the end of year 3 using a 5% interest rate.

$1,628.81

If the present value of an ordinary, 7-year annuity is $10,000 and interest rates are 4 percent, what's the present value of the same annuity due?

$10,400.00

Consider a $500 deposit earning 5 percent interest per year for 5 years. How much total interest is earned on interest (excluding interest earned on the original deposit)?

$13.14

Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?

$2.09 * 11.02 = $23.03

A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars?

$21.55

Determine the interest payment for the following three bonds: 5 percent coupon corporate bond (paid semi-annually), 5.85 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

$25.00, $29.25, $0, respectively

A firm is expected to pay a dividend of $1.50 next year and $1.65 the following year. Financial Analysts believe the stock will be at their target price of $35.00 in two years. Compute the value of this stock with a required return of 12 percent.

$30.56

What is the present value of a $500 deposit in year 1 and another $100 deposit at the end of year 4 if interest rates are 5 percent?

$558.46

What's the present value, when interest rates are 10 percent, of a $75 payment made every year forever?

$750.00

2 ways to account for flotation costs

1. Increase costs as percentage of WACC 2. Adjust initial project investment upwards

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

13.26%, accept

Compute the MIRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -175 75 0 100 75 50

15.73%, accept

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years. Time: 0 1 2 3 4 5 Cash flow: -1000 500 480 400 300 150

2.49 years, accept

Compute the standard deviation of the past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.75 percent.

3.53%

The Dow Jones Industrial Average (DJIA) includes

30 of the largest (market capitalization) and most active companies in the U.S. economy.

J&Co stock has a beta of 1.3, the current risk-free rate is 4, and the expected return on the market is 14.5 percent. What is J&Co's cost of equity

4 + 1.3 * (14.5 - 4) = 16.35%

A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually.)

6.00%

WC Inc. has a $10 million (face value), 10 year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?

9.16%

You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $200,000, Accounts receivable = $800,000, Inventory = $1,000,000, Accrued wages and taxes = $250,000, Accounts payable = $400,000, and Notes payable = $300,000. What are Blue Jay's Current ratio, Quick ratio, and Cash ratio, respectively?

Answer= 2.10526, 1.05263, 0.21053 $200,000 + $800,000 + $1,000,000 Current ratio = ---------------- = 2.10526 times $250,000 + $400,000 + $300,000 $200,000 + $800,000 + $1,000,000 - 1,000,000 Quick ratio (acid-test ratio) = ---------------------- = 1.05263 times $250,000 + $400,000 + $300,000 $200,000 Cash ratio = -------------- = 0.21053 times $250,000 + $400,000 + $300,000

Market Value

Assets listed at value if sold in today's market

Assets=

Assets= Liabilities + Equity

Outside monitors

Auditors Analysts Banks Credit Rating Agencies

Inside monitors

Board of directors -Hire CEO -Evaluate Management

Which of the following will diversify your portfolio the most?

Buy hundreds of stocks from around the world that have little correlation to each other

The asset pricing theory based on a beta, a measure of market risk.

Capital Asset Pricing Model

CAPM

Capital Asset Pricing Model -Best known capital asset pricing model -Starts with modern portfolio theory

Cash Flow analysis Inflow=

Cash Received (Positive #)

Cash Flow Analysis Outflow=

Cash going out (Negative #)

CFO

Chief Financial Officer -Highest level financial officer

This ratio measures the percentage of total assets financed by debt.

Debt

Future Value

FV1= PV x (1+i) Compounding

Future Value in N years

FVn= PV x (1+i)^n

Systematic risk is affected by:

Factors that affect the entire economy

The use of debt to increase an investment position.

Financial Leverage

Annual Report

Four Basic Financial Statements -Balance Sheet -Income Statement -Statement of Cash Flows -Statement of retained earnings

Assume that today at 3 PM the European Union and the U.K. jointly announced that they will put a 50% tariff on all imported goods and services. The USA's strongest export market is Europe. Soon after the announcement the U.S. stock market will likely

Go down

If the volatility of your stock portfolio is high and your portfolio's returns are strongly correlated to the market returns (that is Beta is greater than 1) you can expect returns

Greater than the market

Subprime Mortgage Borrowers

Higher-risk borrowers charged higher interest rates due to higher risk of default

Rule of 72

How much time for an amount to double. 72/(interest rate)

Assume you are a wealth maximizing person with sufficient wealth to invest as you choose. You would (choose the answer that is correct most often)

Invest in all projects that offer positive net present value

Which of the following is an advantage of the IRR method of project evaluation?

It is intuitive and so it is easy to explain

The Cargill Company is a wholesale supplier of grains and foods. Their business is steady through economic booms and recessions and its stock price has almost no correlation to the stock market. This indicates that Cargill has

Low systematic risk relative to the stock market

Beta

Measures the sensitivity of a stock or portfolio to market risk.

These feature debt securities or instruments with maturities of one year or less.

Money Markets

Assume you have sufficient money and you are given a choice between choosing projects based on NPV, IRR, and payback. Which method should you use?

NPV

You are evaluating the balance sheet for Cypress Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $600,000, Accounts receivable = $800,000, Inventory = $500,000, Accrued wages and taxes = $50,000, Accounts payable = $200,000, and Notes payable = $1,000,000. What is Cypress's net working capital?

Net working capital = current assets - current liabilities. Cypress's current assets = Cash and marketable securities = $600,000 Accounts receivable = $800,000 Inventory = $500,000 Total current assets $1,900,000 and current liabilities = Accrued wages and taxes = $ 50,000 Accounts payable = $200,000 Notes payable = $1,000,000 Total current liabilities $1,250,000 So the firm's net working capital was $650,000 ($1,900,000 - $1,250,000).

Sole Proprietorship

Not legally separate from owner -unlimited liability -easy to startup single taxation at personal tax rate

Friction

Occurs when not all cash is returned to investors -returned earnings -taxes

Financial Management

Organizations approach to valuation

Financial Asse

Ownership in cash flow represented by securities like stocks, bonds, and other assets.

Present Value

PV= FV/ ((1+i)^N) Discounting

General Partnership

Partners own the business together -single taxation -personally liable for legal actions and debts of firm -partners share unlimited liability

HillCom Corp stock was $75.00 per share at the end of last year. Since then, it paid a $2.50 per share dividend last year. The stock price is currently $78.00. If you owned 200 shares of HillCom, what was your percent return?

Percentage Return = $1100 ÷ ($75×200) = .0733 = 7.33%

Year to date, Company Y had earned a 9.25 percent return. During the same time period, Company R earned 11 percent and Company C earned -2.55 percent. If you have a portfolio made up of 10 percent Y, 65 percent R, and 25 percent C, what is your portfolio return?

Portfolio Return is 0.1×9.25% + 0.65×11% + 0.25×-2.55% = 7.4375

If the risk-free rate is 3 percent and the marekt risk premium is 8 percent, what is the required return for the market?

Required return = 3% + 8% = 11%

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Required return = 5% + 0.50 × (12% - 5%) = 8.5%

Security Market Line

Shows relationship between risk and return for any stock or portfolio

Assume systematic risk is the same among projects and the projects have the same cash inflows but have different required investments. What do wealth maximizing investors prefer?

The project offering the greatest total dollar return

Time Value of Money (TVM)

Theory and application of valuing cash flows at various points

JAK Industries has 5 million shares of stock outstanding selling at $25 per share and an issue of $40 million in 8 percent, annual coupon bonds with a maturity of 15 years, selling at 108 percent of par. If JAK's weighted average tax rate is 34 percent and its cost of equity is 15 percent, what is JAK's WACC?

To calculate Rd: FV = 1000, PMT = 80, PV = -1080, N = 15, I = 7.12 To calculate weights: Common Stock: 5,000,000 x $25 = $125,000,000, so 125,000,000/168,200,000 = .7432 Preferred Stock: $0 = 0 Bonds: 40,000,000 x 1.08 = $43,200,000, so 43,200,000/168,200,000 = .2568 Total = $168,200,000 To calculate WACC: .7432 x 15% + .0 x 0% + .2568 x 7.12% x (1 - .34) = 12.35475%

RIsk

Uncertainty of future cash flows due to timing and size

Income Statement Bullseye, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $900,000, Interest expense = $85,000, and Net income = $570,000. What is the 2008 Taxes reported on the income statement?

Using the setup of an Income Statement in Table 2.2: EBIT $900,000 Interest expense -85,000 EBT 815,000 Taxes -245,000 Net income $570,000 Answer= $245,000

Book Value

assets listed on balance sheet at purchase price

The practice generally known as double taxation is due to

corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends.

Which of the following statements is true? a. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. b. Interest payments paid to corporate bond holders are not taxed at the federal level. c. Interest payments paid to corporate bond holders are not taxed at the state level. d. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

d. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

Financial institutions and markets

facilitate flow of capital between investors and companies

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 2.75 percent. The security's liquidity risk premium is 0.45 percent and maturity risk premium is 0.25 percent. The security has no special covenants. What is the security's equilibrium rate of return?

ij* = 1.75% + 2.75% + 3.00% + 0.45% +0.25% = 8.20%

Investments

involves methods and techniques for making decisions about what kinds of securities to own

WACC- Weighted Average Cost of Capital

is the average cost per dollar of capital raised

Public Corporations

legally independent entity entirely separate from its owners -limited liability for owners -easy to transfer ownership -double taxation

Securitization

loan originators sell the loan repayment rights to other financial institutions or investors

For corporations, maximizing the value of owner's equity can also be stated as

maximizing the stock price.

Real Assets

physical property gold, machinery, equipment

Real Markets

places that facilitate real asset trading

The longer money can earn interest,

the greater the compounding effect.

Finance applies specific value to?

things owned, services used, decisions made

Accounting

tracks what happened to the firms money in the past

Firm WACC

use for evaluating typical projects

Project WACC

use with atypical projects such as those with higher or lower risk

WACC Tax Rate

weighted average of marginal tax rates on income shielded by interest