SkyTech Ltd. is expected to pay a per-share dividend next year of $30. The market’s consensus is that the firm’s dividend growth rate of 2% per year will be maintained in the foreseeable future. SkyTech’s cost of equity is 10% per year.

(a) What is the price of a share of SkyTech?                                

(b) Suppose SkyTech’s internal view is that it has an expected average yearly dividend growth     of 2% because its return on equity is 8% and management retains 25% of earnings. What is       the earnings per share of SkyTech next year? What is the present value of growth opportunities per share of SkyTech?                                                        

(c)    Suppose SkyTech is about to announce that it will increase its retention ratio to 50%,       effective immediately. If the market is still unaware of SkyTech’s decision, what will be the new value of the stock after the change in policy? How would you invest to profit    from this fact?                                                              

(d)    If the dividend policy of SkyTech Ltd. has not shown a clear relationship to its earnings growth, what other absolute valuation model can you use to value the company? What cash flows should be used in the valuation?                                  

Bob is considering purchasing a two-year endowment policy with a $1,000 face amount at the beginning of his 50. The probability of Bob dying between 50 and 51 is 0.00550, and that between 51 and 52 is 0.00611. The annual interest rate is 6 percent. (1) Calculate the net level premium for this two-year endowment policy. (2) Show that this premium is just sufficient to fund benefits over the two years at the assumed interested and mortality rates. (3) Ignoring expenses, what would the policy’s cash value equal after one year? (Round to two decimal places when calculating your answer.Bob is considering purchasing a two-year endowment policy with a $1,000 face amount at the beginning of his 50. The probability of Bob dying between 50 and 51 is 0.00550, and that between 51 and 52 is 0.00611. The annual interest rate is 6 percent. (1) Calculate the net level premium for this two-year endowment policy. (2) Show that this premium is just sufficient to fund benefits over the two years at the assumed interested and mortality rates. (3) Ignoring expenses, what would the policy’s cash value equal after one year? (Round to two decimal places when calculating your answer.

Analyze CSR initiatives at Boxwood Company

Boxwood Company is a wholesale plant nursery that is considering implementing two CSR initiatives. Information about these initiatives is summarized as follows:

a. Determine which performance perspectives each CSR initiative would best fit under on the balanced scorecard.

  CSR initiatives best fit under the internal processes performance perspective.

b. Determine the initial investment cost of each initiative.

Replacing old fans initiative: $

Replacing ATVs initiative: $

c. Determine the yearly cost savings of each initiative.

Replacing old fans initiative: $

Replacing ATVs initiative: $

d. Determine how many years it will take for each initiative to pay off its initial investment cost. Round your answers to two decimal places.

Replacing old fans initiative:

Replacing ATVs initiative:

e. Assuming that the new fans have an estimated useful life of 25 years and that the ATVs have an estimated useful life of 8 years, determine which initiatives should be adopted.

a. The project of installing new fans can be adopted.

b. The project of installing new ATV’s can be adopted.

c. Both the projects of installing new fans and ATV’s can be adopted.

d. The project of new fans can be adopted and ATV’s can be rejected.

What limits the usefulness to managers of fixed budget performance reports? How can these limits be overcome? Provide a hypothetical example of budgeting which incorporates flexibility.

Maple Leaf Production manufactures truck tires. The following information is available for the last operating period.

• Maple Leaf produced and sold 95,000 tires for $38 each. Budgeted production was 100,000 tires.
• Standard variable costs per tire follow.

• Fixed production overhead costs:

Monthly budget $2,350,000

• Fixed overhead is applied at the rate of $23.50 per tire.
• Actual production costs:

Required:
a. Prepare a cost variance analysis for each variable cost for Maple Leaf Productions.
b. Prepare a fixed overhead cost variance analysis.
c. (Appendix) Prepare the journal entries to record the activity for the last period using standard costing. Assume that all variances are closed to cost of goods sold at the end of the operating period.

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows:

*Common costs allocated on the basis of machine-hours.

†Common costs allocated on the basis of sales dollars.

Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company’s total general factory overhead or total Purchasing Department expenses.

Required:

What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

The cash flows for three independent projects are found below.

Year 0 (Initial investment) Project A $(45,000) Project B $(120,000) Project C $(460,000)

Year 1 $12,000    $ 30,000 $ 220,000

Year 2 $14,000 $ 30,000 $ 220,000

Year 3 $ 19,000 $ 30,000 $   220,000

Year 4 $ 27,000 $ 30,000 -

Year 5   

a. Calculate the IRR for each of the projects. b. If the discount rate for all the three projects is 16 percent, which projects or projects would you want to undertake? c. What is the net present value of each projects where the appropriate discount rate is 16 percent? a. The IRR of project A is.

Excel Online Structured Activity: Recapitalization

Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (r_RF) is 6%, and the market risk premium (r_M - r_RF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12%. The company has a 40% tax rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations.

What is Forever's current WACC? Round your answer to two decimal places.

____________%

What is the current beta on Forever's common stock? Round your answer to two decimal places.

_____________

What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, b_U?) Round your answer to two decimal places.

____________

Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the company's tax rate.

What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to two decimal places.

___________%

What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places.

________%

Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure?

A. Yes

B. No

You want to buy your dream house. You currently have $15,000 saved and you need to have a 10% down payment plus an additional 5% of the loan amount for closing costs. The price of the house is $1,005,879. You can earn 7.5% per year in a savings account per year. How long will it be before you have enough money for the down payment and closing costs? __________________

Given your current credit, you secure a 15-year fixed rate mortgage at 3.12%. Calculate your monthly mortgage payment; you must pay the home loan on the 1st of each month. Payment: ___________________

Now, consider the possibility of being able to make one additional mortgage payment per year for each of the 15 years. How much will you save in interest payments? ________________

Which of the following statements is true?

1. We can use NPV to evaluate two mutually exclusive repeated projects

2. To make an investment decision based on IRR, we do not need to know the appropriate discount rate

3. We can use profitability index to evaluate mutually exclusive project

4. For a given project, NPV and Discounted Payback Period will reach the same decision if the targeted time is infinity

5. When comparing two mutually exclusive projects using IRR, we should always pick the one with a higher IRR

1. As a stockholder in Randolph Corporation, you receive its annual report. In the financial statements, Randolph has reported that the after-tax (net) income is $300 million. With 150 million shares of common stock outstanding, Randolph announced to distribute $100 million of dividends to its shareholders. The stock is now sold for $20 per share.   

a. Assume that Randolph Corporation does not have any outstanding debt. The current share price reflects the fair value of the Corporation.

i. Find the market value of Randolph Corporation before the ex-dividend date,

ii. Find the market value of Randolph Corporation after the ex-dividend date,

iii. Find the price per share of Randolph Corporation after the ex-dividend date,

iv. Calculate the value of investor’s wealth who holds 4,000 shares of Randolph Corporation before the ex-dividend date,

v. Calculate the dividend income of an investor who holds 4,000 shares of Randolph Corporation until the ex-dividend date,

vi. Calculate the value of shareholding on the ex-dividend date of an investor who holds 4,000 shares of Randolph Corporation.

b. Based on your answers in part C to answer the following question.
Does it matter for the investor to sell his shares before the ex-dividend date or to hold his shares until the ex-dividend date which enables him to receive dividend? Assume the dividend is paid on the ex-dividend date.

2. You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.5 in dividends next year.

a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock?

b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?

c. What do your answers to part (a) and part (b) indicate about the impact of dividend growth rates on expected rate of returns on stocks?

vvv3. You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.5 in dividends next year.

a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock?

b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?

c. What do your answers to part (a) and part (b) indicate about the impact of dividend growth rates on expected rate of returns on stocks?

3. How do corporate stocks differ from bonds? Explain.

4. Icy Candy announces a 1 for 8 bonus issues. Icing Candy shares are trading at $9.00 before the bonus issue.

a. Calculate the theoretical price of Icing Candy’s shares immediately after the bonus issue.

b. Casper has 1,000 shares in Icy Candy before Icing Candy announced the 1 for 8 bonus issue.

i. How many bonus shares will Casper entitle to?

ii. Find the value of Casper’s stockholding in Icy Candy before and after the bonus issue.

5. Eason plans to open a do-it-yourself dog bathing center in Petland. The bathing equipment will cost $50,000.

Eason expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment.

a. Find the project’s payback period.

b. What is the project’s discounted payback period if the required rate of return is 10%?

c. What is the project’s net present value (NPV) if the required rate of return is 10%?

d. What is the project’s Profitability Index (PI) if the required rate of return is 20%? Should the project be accepted according to the rule of PI?

6. Your firm is considering the launch of a new product, the KPOP11. The upfront development cost is $1,000,000., and you expect to earn a cash flow of $300,000. per year for the next five years.

a. Draw the Net Present Value (NPV) profile for the new project KPOP11 for discount rates ranging from 0%, 5%. 10%, 15% to 20%.

b. Determine the range of discount rates showing that the project is acceptable. (N.B. NPV values at vertical axis whilst the discount rates at horizontal axis)    

7. Consider the following two bonds:

a. If both bonds had a required return of 8%, what would the bonds’ prices be (Bond A and Bond B respectively)?

b. With reference to your answers in (a), are these two bonds (Bond A and Bond B respectively) selling at a discount, premium, or par?

c. If the required return on the two bonds (Bond A and Bond B respectively) rose to 10%, what would the bonds’ prices be?

d. What do your answers in part (a) and part (c) indicate about the relation between the required rates of return and prices (present values) of bonds?   

Assume the following:  This is a large conglomerate company with over 30 divisions and over 24,000 employees, but the company might be in financial trouble. Company divisions are so different that EVERY type of benefit / retirement plan is available to all employees.

Scenario 1

Married individual with young children at entry level position

Scenario 2

Mid-level manager with grown children seeking a long career and a comfortable retirement

Scenario 3

Top executive nearing retirement and hired to solve financial difficulties.

ADVISE each of your three clients on the­­­ following:

Compensation

Equity Options

Deferred Compensation (both qualified and nonqualified plans are available)

Health and Disability

Life Insurance

Fringe Benefits

Suppose you purchase a 20-year treasury bond with a 6% annual coupon ten years ago at par. Today the bond's yield to maturity has risen to 8% (EAR).

- If you hold this bond to maturity, the internal rate of return you will earn on your investment will be closest to:

A) 5.0%.

B) 5.6%.

C) 6.0%.

D) 8.0%.

E)  9.0%

- If you sell this bond now, the internal rate of return you will earn on your investment will be closest to:

A) 5.0%.

B) 4.9%.

C) 6.0%.

D) 8.0%.

E)  7.9%

- Consider a bond that pays annually an 8% coupon with 20 years to maturity. The amount that the price of the bond will change if its yield to maturity increases from 5% to 7% is closest to:

A) -$270.

B) -$225.

C) -$310.

D) -$250.

E) -$800

Why real estate investors believe that ethical behavior is essential to the profitability and sustainability of their investments?

What are the main sources of income for a Real Estate Investor and/or Broker?