General Electric got a SR 100, 000, 000 loan repaid over a 5-year period at 0.5% per month interest.
What is the difference in the amount of interest in the second month’s payment if interest is charged on the principle of the loan rather on the unrecovered balance?

a) Discuss the role of the financial markets in providing the platform for investors to interact

and help in providing the financing and investment requirements of market participants.

a) Discuss the process of going public through an IPO. Your answer should also include the Part played by the underwriter in the issuance of the IPO.

b) With respect to fixed income securities, discuss the concept of:

I. Treasury Bills

II. Municipal Bonds

1. Cash Conversion Cycle & Ratios

Target

Sales = 74,433,000,000

Cost of goods sold = 53,299,000,000

Inventory = 9,497,000,000

Accounts receivable = 468,000,000

Accounts payable = 1,127,000,000

Inventory conversion period = 65.04

Average collection period = 2.29

Payables deferral period = 7.72

CCC = 59.61

Nike

Sales = 36,397,000,000

Cost of goods sold = 20,441,000,000

Inventory = 5,261,000,000

Accounts receivable = 3,498,000,000

Accounts payable = 2,279,000,000

Inventory conversion period = 93.94

Average collection period = 35.08

Payables deferral period = 40.69

CCC = 88.33

McDonalds

Sales = 21,025,000,000

Cost of goods sold = 2,200,000,000

Inventory = 51,100,000

Accounts receivable = 2,441,500,000

Accounts payable = 1,207,900,000

Inventory conversion period = 8.48

Average collection period = 42.39

Payables deferral period = 2.00

CCC = 48.87

Best Buy

Sales = 42,151,000,000

Cost of goods sold = 32,275,000,000

Inventory = 5,209,000,000

Accounts receivable = 1,049,000,000

Accounts payable = 4,873,000,000

Inventory conversion period = 58.91

Average collection period = 9.08

Payables deferral period = 55.11

CCC = 12.88

Amazon

Sales = 232,887,000,000

Cost of goods sold = 139,156,000,000

Inventory = 17,174,000,000

Accounts receivable = 16,677,000,000

Accounts payable = 38,192,000,000

Inventory conversion period = 45.05

Average collection period = 26.14

Payables deferral period = 100.18

CCC = -28.99

*Compare and analyze thoroughly the CCC for the five companies

1. Analyze the CCC for the five companies. How does the CCC compare across the different companies?

2. Analyze the relationship between CCC and the company’s profitability for all five companies

3. Analyze the relationship between CCC and the size of the company (measured by total assets) for all five companies

A company is projected to have a free cash flow of $486 million next year, growing at a 4.1% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.9%. The company's cost of capital is 9.4%. The company owes $143 million to lenders and has $6 million in cash. If it has 293 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.

Thorpe and Company is currently an​ all-equity firm. It has three million shares selling for ​$32 per share. Its beta is 0.8​, and the current​ risk-free rate is 2.1​%. The expected return on the market for the coming year is 9.1​%. Thorpe will sell corporate bonds for ​$32,000,000 and retire common stock with the proceeds. The bonds are​ twenty-year semiannual bonds with a 9.4​%coupon rate and ​$1,000 par value. The bonds are currently selling for ​$893.61 per bond. When the bonds are​ sold, the beta of the company will increase to 1.3 What was the WACC of Thorpe and Company before the bond​ sale? What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is 15%​? Hint​: The weight of equity before selling the bond is​ 100%.

Here are the cash flows for two mutually exclusive projects:

Project                 C0                           C1                           C2                           C3

A                             -20,000                 +8,000                   +8,000                   +8,000

B                             -20,000                 0                              0                              +25,000

At what interest rate would you prefer project A to B? (Hint: try drawing a NPV profile.)

                a)            If the discount rate is below 3%.

                b)            If the discount rate is above 3%.

                c)            If the discount rate is above 4%.

                d)            A is never preferred to B at any discount rate.

Which project has the highest IRR?

a.Project A

b. Project B

c. They have equal IRRs.

The WACC is 10% for all projects.

                        Project A

                                Project B

Project C

1. Which project has the superior payback period?

a)            Project C

b)           Project A

c)            Project B

2. If you use a cutoff period of 3 years with the discounted payback period rule, which project(s) would you accept?

a)           Project A

b)            Project B

c)            Project C

d)            All Projects

3. Which projects have positive NPVs?

1. Project A
2. Project B
3. Project C
4. Projects B and C

A project has the following cash flows :

C0                           C1                           C2

+6,750                   +4,500                   -18,000

Calculate the NPV of the project for a discount rate of i) 0% ii)33%   iii) 50% and iv) 100%. Which discount rate provides the largest NPV?

                a)            0%

                b)            33%

                c)            50%

                d)            100%

Titan Mining Corporation has 8.9 million shares of common stock outstanding and 330,000 5.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.15; the bonds have 15 years to maturity and sell for 118 percent of par. The market risk premium is 7.7 percent, T-bills are yielding 4 percent, and the company’s tax rate is 24 percent.

a.

What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .3216.)

Debt?

Equity?

b.If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

MamaMia’s Pizza purchases its pizza delivery boxes from a printing supplier. MamaMia’s delivers on average 225 pizzas each month (assume deterministic demand). Boxes cost 43 cents each, and each order costs $12.50 to process. Because of limited storage space, the manager wants to charge inventory holding at 25 percent of the cost. The lead time is 7 days, and the restaurant is open 360 days per year, assuming 30 days per month.

1. Draw a graph that sows the relationships among inventory carrying (holding) cost, order cost, and total annual cost.

The company's financial year is the calender year. Certain costs (incl. wages, rents and taxes) of 202500 € total are paid out in the middle of each month.

The company's first financial year is, exceptionally, only six months of length (1.7.-31.12.). At the beginning of the first financial year, the company has taken out a loan of 7200000 € total that has not been amortized. However, an interest of 5 % p.a. has been paid at the end of the financial year. The company has made an initial investment of 10800000 €. Half of the investment has been paid during the previous financial year and the rest must be paid at the beginning of the second financial year. Nothing has been sold yet during the the first financial year.

The revenues of the second financial year are estimated according to shipped (billed) quantities of 30000 units at a unit price of 300 € per unit. The variable costs consist of purchasing the materials and are expected to be 171 € per unit. At the end of the second financial year, 3600000 € of the debt must be amortized and an interest must be paid.   

The company then specifies the plan for the second financial year. 28 % of the annual volumes are delivered during the first half of the year and 72 % during the second. Monthly volumes are constant during both phases and the customers are given one month for payments. The company purchases the materials for the second financial year in three equal instalments. The first batch has arrived at the end of December, but the bill is not due until at the end of January. The next batches arrive at the beginning of May and September. In order for the business to run smoothly during the next year as well, the company purchases an additional batch of materials for 7500 units towards the end of December (20.12). Each batch is payable in 14 days.

It is recommended to make a table of months having the monthly information of incoming and outgoing payments allocated to the three cash flows, changes in cash and equivalents and total cash and equivalents.

Calculate the cash flow from operating activities and the cash flow from investment activities of the first financial year.

Dhingra & Associates Consulting and our firm is working on behalf of Falguni and Sameer’s Financial Empire. The Empire is involved in a major capital expansion by developing a significant Entertainment Centre.

An in- depth market survey and a concept plan have been completed by Dhingra and Associates at a considerable cost of $375,000.

Falguni has owned the land for years and the book value (balance sheet) is just $500,000, and its current market value is $4 million (4,000,000). If the Entertainment Centre project is evaluated over a 10-year period and when the Centre is shut down at the end of that period, the land would be worth $4.8 million based on a land appreciation rate of about 2% per year on average. The project requires a large castle structure, costing $18 million, to be constructed this year (year 0). The castle is a Class 1 asset with a CCA rate of 4%. At the end of the 10-year period, we estimate that the castle can be sold for about half of its initial cost.

We estimate that an investment of $7 million is required for equipment needed to operate the new Centre. This capital cost for all equipment will be depreciated using straight-line depreciation over the 10-year period (starting from year 1)1. Of course, the equipment required for the Centre will be treated quite roughly during this period, so we estimate that they will have no value at the end of the project’s life. All annual depreciation amounts related to both the castle and the equipment will result in an annual tax-shield for the company, but we’re not sure how to account for this in our project analysis. Falguni and Sameer have instructed us that they require a 10% rate of return on this type of project based on similar risk projects. They have sufficient capital available and the marginal tax rate for their company is 35%.

NOTE: 1 Straight-line depreciation means that the annual depreciation amount allowed under CCA tax rule is simply the total initial cost divided by number of years in the project’s life.

The project requires $1.2 million in incremental net working capital (NWC) immediately (at year 0). The required amount will double at the end of year 1, and then we expect that it will need to be maintained at the level of $3 million starting from the end of year 2 (when the Centre is working at full capacity) until the end of the project. Please note that at the end of the 10th year, the accumulated NWC will no longer be required.

We estimate that the Entertainment Centre will have $1 million in extra annual fixed costs for the company. Based on our marketing research, we estimate the incremental revenue in year 1 to be about $12 million, with incremental variable costs of $6 million. For each of years 2 to 7, the Centre will run at full capacity, with annual incremental revenues of $15 million and annual incremental variable costs of $7 million for the company. For the last three years (years 8-to-10), we expect a gradual slowdown in the Centre’s activities that will result in about $1 million of lost revenues per year. This will be accompanied by a $0.5 million reduction in variable costs. There will be no change in the fixed costs of operating the Centre over the 10-year period (from year 1-to-10).

Please use (display + name) the excel function/ formula used for cells (as required).

Ques 1: Given the above information, what is the NPV of this Entertainment Centre project?

Ans: Computing the NPV of the Entertainment Centre project assuming a RRR of 10%

Ques 2 :Using the base case, what is the percentage change in the project’s NPV if the required return increased by 2% (r =12% instead of 10%) to account for additional risk factors?

Ques 3 : What is the NPV in a scenario where the annual incremental costs (both fixed and variable) and annual incremental revenues are all worse by 5% compared to the base scenario?

a) Discuss the process of going public through an IPO. Your answer should also include the Part played by the underwriter in the issuance of the IPO.