...Mini Case a. Corporate finance is a basic component of how a business is run. All managers should keep this in mind to direct funds to the optimal division or product in a company. In addition, managers should understand how their company is financed and whether it has a risk of bankruptcy. Conversely, managers should understand if the equity in the business is undervalued and has the potential to grow. Corporate finance provides the skills managers need to: (1) identify and select the corporate strategies and individual projects that add value to their firm; and (2) forecast the funding requirements of their company, and devise strategies for acquiring those funds. b. The three main forms of business organization are (1) sole proprietorships, (2) partnerships, and (3) corporations. In addition, several hybrid forms are gaining popularity. These hybrid forms are the limited partnership, the limited liability partnership, the professional corporation, and the s corporation. The proprietorship has three important advantages: (1) it is easily and inexpensively formed, (2) it is subject to few government regulations, and (3) the business pays no corporate income taxes. The proprietorship also has three important limitations: (1) it is difficult for a proprietorship to obtain large sums of capital; (2) the proprietor has unlimited personal liability for the business’s debts, and (3) the life of a business organized as a proprietorship is limited to the life...
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...Homework Assignment (week 1) Problems 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, and 1.7 The Four Types of Firms (p. 19), 2-8 The Balance Sheet, 2-11 The Income Statement and 2-24 The Statement of Cash Flows Problem 1.1 The most important difference between a corporation and all other organizational forms are corporation is considered by law to be a unique legal entity, separate and apart from its owners, they are responsible for their own liability and business debts, and therefore shareholders’ liability is normally always limited to the amount of money they paid for their shares. A corporation can be taxed; it can be sued; it can enter into contractual agreements. A corporation also pays its own taxes at the corporate income tax rate and files its own corporate tax forms each year. Moreover, Corporations cannot deduct dividends from business income. Problem 1.2 Limited liability mean their liability is limited to their investment and limited liability companies means a limited partnership without a general partner. Problem 1.3 Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners Problem 1.4 Advantages: * Limited liability and perpetual life * Stockholders, directors, officers are typically not liable for the company’s debts and obligations * In the US, corporations are generally taxed at lower rate Disadvantages: * High cost ...
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...------------------------------------------------- Top of Form Grading Summary | Grade Details - All Questions | 1. | Question : | (TCO D) A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price? | | | Student Answer: | | $17.39 | | | | $17.84 | | | | $18.29 | | | | $18.75 | | | | $19.22 | | Instructor Explanation: | Chapter 7D1 $0.75rs 10.5%g 6.4%P0 = D1/(rs − g) $18.29 | | | | Points Received: | 10 of 10 | | Comments: | | | | 2. | Question : | (TCO D) If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s expected dividend yield for the coming year? | | | Student Answer: | | 4.42% | | | | 4.66% | | | | 4.89% | | | | 5.13% | | | | 5.39% | | Instructor Explanation: | Chapter 7D0 $2.25g 3.5%P0 $50.00D1 = D0(1 + g) = $2.329Dividend yield = D1/P0 = 4.66% | | | | Points Received: | 10 of 10 | | Comments: | | | | 3. | Question : | (TCO D) Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share...
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...FIN515 Homework 3 CHAPTER 5 Problem (p. 164) 5-29 Term Interest Rate Structure a. Calculate the present value of an investment that pays $1000 in two years and $2000 in five years for certain. PV = (C1/1+r2) ^2+(C1/1+r5) ^5 PV = 1,000/(1 + 0.0241)^2 + (2,000/(1 + 0.0332)^5= $2,652.15 b. Calculate the present value of receiving $500 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average of the rate in year 3 and year 5.) r4 = (2.74 + 3.32)/2= 3.03 PV = 500/(1 + 0.0199)^1 + 500/(1 + 0.0241)^2 + 500/(1 + 0.0274)^3 +500/(1 + 0.0303)^4+500/(1 + 0.0332)^5 = $2,296.43 *c. Calculate the present value of receiving $2300 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.) Term yrs | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | Rate (EAR, %) | 1.99 | 2.41 | 2.74 | 3.03 | 3.32 | 3.54 | 3.76 | 3.88 | 4 | 4.13 | 1+rate | 1.0199 | 1.0241 | 1.0274 | 1.0303 | 1.0332 | 1.0354 | 1.0376 | 1.0388 | 1.04 | 1.0413 | 2300/C^A | 2255.1 | 2193 | 2120.9 | 2041.1 | 1953.5 | 1866.7 | 1776.3 | 1695.8 | 1616 | 1534.5 | | | | | | | | | | | | Term yrs | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | Rate (EAR, %) | 4.21 | 4.29 | 4.37 | 4.45 | 4.53 | 4.61 | 4.64 | 4.77 | 4.85 | 4.93 | 1+rate | 1...
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...Chapter 18 Capital Budgeting and Valuation with Leverage 18-4. Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? We can compute the levered value of the plant using the WACC method. Goodyear’s WACC is Therefore, A divestiture would be profitable if Goodyear received more than $47.6 million after tax. 18-5. Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%. a. What is Alcatel-Lucent’s WACC? b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows? c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b? a. b. Using the WACC method, the levered value of the project at date 0 is Given a cost of 100 to initiate, the project’s NPV is 185.86 – 100 =...
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...Problem 5-1 Current market price Given: Interest paid annually $1,000 par value 12 years to maturity Coupon rate of 8% Yield to maturity of 9% Using a financial calculator phone app PMT=80 FV=1000 I=9% N=12 Current market price=$928.39 Problem 5-2 Yield to Maturity Given: Interest paid annually $1,000 par value 12 years to maturity Coupon rate of 10% Current price=$850 Using a financial calculator phone app PV=-850 PMT=100 FV=1000 N=12 Yield to Maturity=12.48% Problem 5-6 Market Risk Premium Given: Risk Free Rate=3% Inflation=3% for two years Current Yield=6.3% Current Yield=rRF+IP+MRP 6.3%=3%+3%+MRP MRP=.3% Problem 5-7 Current Price of the Bond Given: Interest paid semiannually $1,000 par value 8 years to maturity Coupon rate of 10% Yield to maturity of 8.5% Using a financial calculator phone app PMT=100 FV=1000 I=8.5% N=8 Current market price=$1085.80 Problem 5-13 Yield to Maturity Given: 5 years to maturity Par value of $1000 Coupon Rate=8% Current Yield=8.21% Using Excel =RATE(5,80,-974.42144,1000) Yield to Maturity= 8.65% Question 6-6 If a company’s beta were to double, would its expected return double? No, the expected return will increase but since the beta is multiplied by the market risk premium it will not double as the beta does. Problem 6-1 Portfolio Beta Given: $35,000 in stock1 Beta1=.8 $40,000 in stock2 Beta2=1.4 Portfolio beta= (.46667)(.8)+(.53333)(1.4)=1.12 Problem 6-2 ...
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...Project One Financial Management FIN-515 Keller Graduate School of Management Prepared for: Professor Cynthia Taylor Prepared by: Abu N Rahman In current online business marketing competition there are two companies competing each eBay and Amazon. That’s why I choose those companies for financial analysis. Considering availability of information analyzing year 2013 Profitability Ratios Gross Margin eBay Amazon. $3081, 000/$4530, 000 $6781, 000/$25587, 000 = 0.68 or 68% 0.2650 or 26.50% Because it shows company retains after incurring the direct costs associated with producing the goods and services sold by a company. Considering that eBay’s gross margin shows they are more efficient than the Amazon. Amazon have larger the cost than the eBay. They sale more than eBay but because of cost their gross profit is less than eBay. If we consider gross margin for an investment it shows eBay is safer than the Amazon for an investment. Operating Margin eBay Amazon. $1022, 000/$4530, 000 $510, 000/$25587, 000 = .2256 or 22.56% 0.0199 or 1.9% After operating margin analysis we can say that eBay has a large proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. in this case company is going to left some portion of revenue after pay for debt, interest...
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...(13-10) Corporate Valuation The financial statements of Lioi Steel Fabricators are shown below—both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted average cost of capital is 11% Income Statements for the Year Ending December 31 (Millions of Dollars Except for Per Share Data) Actual 2010 Projected 2011 500.00 $ 530.00 360.00 381.60 37.50 39.80 397.50 $ 421.40 102.50 $ 108.60 13.90 16.00 88.60 $ 92.60 $35.44 53.16 6.00 47.16 $ $ $37.04 55.56 7.40 48.16 29.70 18.46 10 2.97 Balance Sheet, December 21, 2010 Actual 2010 Projected 2011 $ 5.60 51.90 56.20 112.40 226.10 397.50 623.60 Net sales Costs (except depreciation) Depreciation Total operating costs Earnings before interest and taxes Less interest Earnings before taxes Taxes (40%) Net income before preferred dividends Preferred dividends Net income available for common dividends Common dividends Addition to retained earnings Number of shares Dividends per share $ $ $ $ $ $ $ $ $ Assets Cash Marketable securities Accounts receivable Inventories Total current assets Net plant and equipment Total assets Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Preferred stock Common stock (par plus PIC) Retained earnings Common equity Total liabilities and equity $ $ $ 5.30 49.90 53.00 106.00 214.20 375.00 589.20 $ $ $ 9.60 69.90 27.50 107.00 140.80 35.00 160.00 146.40...
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...Problem 2-29 Yes, a firm with positive net income can run out of cash. It could run out of cash if it spends too much on financing activities. For an example a company could pay too much of a dividend, pay off too much long term debt, or buying back too many shares of stock. Problem 2-30 a) Current Ratio = Current Assets/Current Liabilities $51.94B / 33.06B = 1.5711 b) Quick Ratio = (Cash and Cash Equivalent + Marketable Securities + Accounts Receivables) / Current Liabilities ($27.65B + 14.30B) / 33.06B = 1.2689 c) Cash Ratio = (Cash and Cash Equivalent + Invested Funds) / Current Liabilities $27.65B / 33.06B = .8364 d) Apple has more liquid assets than Dell relative to current liabilities Problem 2-31 a) Accounts Receivable Days = ((Accounts Receivable / (Sales/365)) 2013 2012 2011 2010 2009 Accounts Receivable 86.1 76.9 69.8 69.8 88.6 Sales 604.1 510.7 424.6 363.8 404.3 Sales / 365 1.65507 1.39918 1.16329 .9967 1.1077 Accounts Receivable Days 52.02 54.96 60.00 70.03 79.99 The accounts receivable period has decreased every year since 2009. This essentially means that it is taking Mydeco less time/days to collect its account receivables. This is a positive thing for the company. b) Inventory Days = ((Inventory / (Sales/365)) 2013 2012 2011 2010 2009 Inventory 35.3 31.7 28.4 30.9 33.7 Sales 604.1 510.7 424.6 363.8 404.3 Sales / 365 1.65507 1.39918 1.16329 .9967 1.1077 Inventory Days 21.33 22.66 24.41 31.00 30.42 More the most part the Inventory...
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...ALL FI515 Week 5 Exam Answers ------------------------------------------------- Top of Form QUESTION 1: Which of the following statements is CORRECT? 1. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 2. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation. 3. One of the advantages of the corporate form of organization is that it avoids double taxation. 4. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.” 5. Corporations of all types are subject to the corporate income tax. ------------------------------------------------- Top of Form QUESTION 2: Which of the following statements is CORRECT? 1. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. 2. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. 3. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. 4. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. 5. The statement of cash flows shows how much the firm’s cash—the total of currency...
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...(3-1) Days sales outstanding Green Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year? Days of Sales Outstanding DSO= Receivables Average sales per day 20 days = Receivables Average sales per day Receivables= 20 days *$20,000 Receivables= $400,000 (3-2) Debt Ratio Vigo vacations has an equity multiplier of 2.5 .The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio EM= Equity Multiplier EM= TOTAL ASSETS TOTAL EQUITY EM= 2.5 = 2.5 1 Assets = Equity + Liabilities Liabilities= Assets - equity Liabilities= 2.5 - 1 = 1.5 Debt ratio= Total liabilities = 1.5 = 0.6 = 60% Total assets 2.5 (3-3) Market /Book Ratio Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities , $3 billion in long –term debt , and $6 billion in common equity. It has 800 million shares of common stock outstanding. What is winston’s market/ book ratio? Market to book ratio= Market value per share Book value per share Book value per share= Common Equity = $6 billion = $7.50 # shares $800 million Market to-book ratio= Market price per share = $75...
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...CHAPTER 1 HOMEWORK 1. What is the most important difference between a corporation and all other organizational forms? A corporation is a legal entity separate from its owners. 4. What are the main advantages and disadvantages of organizing a firm as a corporation? Advantages: Limited liability, liquidity, infinite life Disadvantages: Double taxation, separation of ownership and control 8. You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make. As the manager of an iPhone applications developer, you will make three types of financial decisions. i. You will make investment decisions such as determining which type of iPhone application projects will offer your company a positive NPV and that your company, therefore, should develop. ii. You will make the decision on how to fund your iPhone application investments and what mix of debt and equity your company will have. iii. You will be responsible for the cash management of your company, ensuring that your company has the necessary funds to make investments, pay interest on loans, and pay your employees. 10. Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act...
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...FIN515 Homework Week # 3 Brian Jack D01609334 Managerial Finance briancjack@hotmail.com 03-23-2014 Professor: Paul Tovbin Chapter 5 29. Suppose the term structure of risk-free interest rates is as shown below: Top of Form |Term |1 year | |Treasury |3.1 | |AAA corporate |3.2 | |BBB corporate |4.2 | |B corporate |4.9 | • a. What is the price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating? • b. What is the credit spread on AAA-rated corporate bonds? • c. What is the credit spread on B-rated corporate bonds? • d. How does the credit spread change with the bond rating? Why? 30. HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate...
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...FIN515 Week 5 Project Equipment’s Basic Cost 70,000 To Modify it to Firm 15,000 The Spectrometer (MARC 3 year Class Would be sold after 3yrs 30,000 Equipment’s requires increase in net working capital 4,000 The Spectrometer no effect on Revenue But expected to save 25,000 per year before-tax operating cost Federal plus state tax rate 40% A. What is the net cost of the spectrometer- Price – 70,000+ 15,000 + 4,000 Net Cost – (89,000) B. What are the net operating cash flow in Year 1,2, and 3 Depreciation Expense = Cost multiplied by MACRs Allowance MACRs 33% yr 1 – 45% yr 2 – 15% yr 3 Year 1 Year 2 Year 3 85,000 x.33 85,000 x .45 85,000 x .15 Depreciation Expense 28,050 38,250 12,750 (Dep. Exp x Tax rate) Depreciation after Tax 11,220 15,300 5,100 After- Tax Saving – 25,000 x (1-.40)= 15,000 per year After Tax 15,000 15,000 15,000 Net Operating Cash Flow 26,220 30,300 20,100 C. What are the additional (non-operating ) cash flow in year 3 Net Salvage Value =Salvage Value - Tax Rate + Increase in working Capital Book Value = Dep. cost x Acc. Dep. Rate Book Value = 85,000 x 7% Book Value = 5,950 Salvage Value = 30,000 Book Value = 5950 Total 24,050 Tax Rate 40% Tax on SV 9,620 Salvage Value - 30,000 Tax on SV 9620 SV after – Tax 20,380 Increase in WC 4,000 ...
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...Managerial Finance ; FIN515 1. What is the most important difference between a corporation and all other organizational forms? A corporation is a legal entity separate from its owners. 2. What does the phrase limited liability mean in a corporate context? Owners’ liability is limited to the amount they invested in the firm. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm. 3. Which organizational forms give their owners limited liability? Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners. 4. What are the main advantages and disadvantages of organizing a firm as a corporation? The advantages would include limited liability, liquidity, and infinite life. The disadvantages are double taxation, separation of ownership and control. 5. Explain the difference between an S corporation and a C corporation. C corporations must pay corporate income taxes; S corporations do not pay corporate taxes, but must pass through the income to shareholders to whom it is taxable. S corporations are also limited to 75 shareholders and cannot have corporate or foreign stockholders. 6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings...
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