In 1980 and investor bought 12 initial public offering of oil and gas companies, stock he held each of those for approximately one month and then sold them. The investment rule he followed was to submit a purchase order for every firm commitment initial public offering of oil and gas exploration companies. There were 22 of these offerings, and he submitted a purchase order for a approximately $1000 in stock for each of the companies. With 10 of the 22 offerings he was unable to invest as no shares were allocated to him. With 5 of the 12 offerings that were purchased fewer is in that requested number of shares were allocated and he received fewer shares then he wanted.

The year 1980 was very good for oil and gas exploration company owners: On average for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date. The investor looked at his performance record and found that the $8400 invested in the 12 companies had grown to $10,000, representing a return of only about 20% (commissions were negligible). Did he have bad luck, Or should he have expected to do worse than the average initial public offering investor? Explain (your discussion should center on the difference between Under and oversubscribed offerings and the implication to the investors return)

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L.

1. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond L be if the going interest rate is 13%? Round your answer to the nearest cent.
   $
   
   What will the value of the Bond S be if the going interest rate is 13%? Round your answer to the nearest cent.
   $
   
2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   
   1. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   2. Long-term bonds have lower interest rate risk than do short-term bonds.
   3. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
   4. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
   5. Long-term bonds have greater interest rate risk than do short-term bonds.

Problem 10-11 Calculating Project Cash Flow from Assets [LO1]

Consider the following bond: Face value = 1000; coupon rate = 8%; maturity = 5 years; ytm = 7%

A) What is the value of the bond today and in 2 years?

b) what are the current yield and capital gains yield for this bond this year and in two years?

c) Assuming interest rates remain the same over this bond's lifetime, what is going to happen to the value of this bond as time goes by?

1. Consider these three bonds:

1) USTN 10% due 3/31/2025 with a yield to maturity of 3.5%

2) USTN 3% due 3/31/2025 with a yield to maturity of 3.6%

3) USTN 10% due 12/31/18 with a yield to maturity of 3.1%

Which bond has the highest risk and which bond has the lowest risk. Tell me in your own words, what bond risk means to you. If you were investing in bonds and you believe interest rates will rise across the entire yield curve, which of these three bonds would you buy and why.

At the beginning of 1976 a relative migrated to Australia with $10,000 ‘spare cash’. The money could have been used to buy a block of land or invested in an ‘at-call’ savings account that paid interest at 8% p.a. compounded half-yearly. At the end of 2018, the land was valued by a local real estate agent who was keen to list the property on behalf of his agency, at a price of approximately $400,000.

Required:

1. a) Which of the alternative investments had the higher value at the end of 2018? Justify your response with appropriate calculations.

(Students should write no more than 50 words for this part of the question).

b) i) Assuming the half-yearly compounding of interest, what was the rate of growth in the land value over the total period expressed as a nominal annual interest rate?

ii) What was the rate of growth in the land value over the total period expressed as an effective interest rate?

iii) What was the rate of growth in the ‘at-call’ savings account over the total period expressed as an effective interest rate?

1. c) What investment in the savings account would have been necessary at the beginning of 1976, to have the same value as the land was worth at the end of 2018? Briefly explain your response.

(Students should write no more than 50 words for this part of the question).

d) Recognising both your finance skills and ‘common sense’, one of your friends has asked whether your calculations above allow you to determine which of the investments would have been ‘better’ to make at the beginning of 1976, given the outcomes discussed above at the end of 2018. Provide a well-reasoned, complete response to this question taking into consideration various financial and non-financial issues.

(Students should write no more than 100 words for this part of the question).

1. d) i) You have now been provided further information that the investment in the land required the owner to make continuous annual payments of council rates over the total period held. These amounts are determined in accordance with Table 1 below. Assuming the land was sold at the end of 2018 (but ignoring the expected sale value), what is the adjusted present value at the beginning of 1976 of all the cash outflows relating to the acquisition and continued ownership of the land?

Note: For the purposes of this question assume the following:

1. Rates are payable on the anniversary of each year of land ownership.

2. The annual amount of the rates are determined in accordance with the following formula;

Initial Purchase Cost ($) x Factor (times) x Relevant Percentage (%)

3. Rates are still payable for the 2018 year (for the full year).

Table 1

ii) Taking into consideration the calculations from part e) i) of this question, what is the rate of growth in the land value over the total period expressed as an effective interest rate?

(Students should write no more than 50 words for this part of the question).

Question3.

Suppose you are working a financial manager at one of the investment corporations, if there were two investment opportunities require the same size of the investments (250,000 Saudi Riyals), and the level of risk is close, the cash flows for each project is shown in the following table:

year

1. Calculate the net present value for each project?
2. Which project would you select? and why? (assume that the interest rate is 10%).

North Side, Inc. has no debt outstanding and a total market value of $168,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be $21,960 . The company is considering a $50,000 debt issue with an interest rate of 7.4 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding and the tax rate is 21 percent. What is the EPS for each capital structure under each scenario? If we ignore taxes, what is the break-even EBIT?

Assume today is March 16, 2016. Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science. She is currently employed as a Tier 2 field service representative for a telephony corporation located in Seattle, Washington, and earns $38,000 a year that she anticipates will grow at 3% per year. Natasha hopes to retire at age 65 and has just begun to think about the future.

Natasha has $75,000 that she recently inherited from her aunt. She invested this money in 30-year Treasury Bonds. She is considering whether she should further her education and would use her inheritance to pay for it.*

She has investigated a couple of options and is asking for your help as a financial planning intern to determine the financial consequences associated with each option. Natasha has already been accepted to both of these programs, and could start either one soon.

One alternative that Natasha is considering is attaining a certification in network design. This certification would automatically promote her to a Tier 3 field service representative in her company. The base salary for a Tier 3 representative is $10,000 more than what she currently earns and she anticipates that this salary differential will grow at a rate of 3% a year as long as she keeps working. The certification program requires the completion of 20 Web-based courses and a score of 80% or better on an exam at the end of the course work. She has learned that the average amount of time necessary to finish the program is one year. The total cost of the program is $5000, due when she enrolls in the program. Because she will do all the work for the certification on her own time, Natasha does not expect to lose any income during the certification.

Another option is going back to school for an MBA degree. With an MBA degree, Natasha expects to be promoted to a managerial position in her current firm. The managerial position pays $20,000 a year more than her current position. She expects that this salary differential will also grow at a rate of 3% per year for as long as she keeps working. The evening program, which will take three years to complete, costs $25,000 per year, due at the beginning of each of her three years in school. Because she will attend classes in the evening, Natasha doesn’t expect to lose any income while she is earning her MBA if she chooses to undertake the MBA.

1. Determine the interest rate she is currently earning on her inheritance by going to the U.S. Treasury Department Web site (treasury.gov) and selecting “Data” on the main menu. Then select “Daily Treasury Yiled Curve Rates” under the Interest Rate heading and enter the appropriate year, 2016, and then search down the list for March 16 to obtain the closing yield or interest rate that she is earning. Use this interest rate as the discount rate for the remainder of this problem. --> the identified rate for March 16th on a 30 year bond is 2.73
2. Create a timeline in Excel for her current situation, as well as the certification program and MBA degree options, using the following assumptions:
   • Salaries for the year are paid only once, at the end of the year.
   • The salary increase becomes effective immediately upon graduating from the MBA program or being certified. That is, because the increases become effective immediately but salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification.
3. Calculate the present value of the salary differential for completing the certification program. Subtract the cost of the program to get the NPV of undertaking the certification program.
4. Calculate the present value of the salary differential for completing the MBA degree. Calculate the present value of the cost of the MBA program. Based on your calculations, determine the NPV of undertaking the MBA.
5. Based on your answers to Questions 3 and 4, what advice would you give to Natasha? What if the two programs are mutually exclusive? That is, if Natasha undertakes one of the programs there is no further benefit to undertaking the other program. Would your advice be different?

* If Natasha lacked the cash to pay for her tuition upfront, she could borrow the money. More intriguingly, she could sell a fraction of her future earnings, an idea that has received attention from researchers and entrepreneurs; see M. Palacios, Investing in Human Capital: A Capital Markets Approach to Student Funding, Cambridge University Press, 2004.

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,600 per month, and the rent is $2,600 per month. In addition, she must make a tax payment of $11,000 in December. The current cash on hand (on December 1) is $700, but Koehl has agreed to maintain an average bank balance of $5,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below.

Purchases during November amounted to $110,000.

Sales Purchases

December $140,000 $40,000

January 48,000 40,000

February 58,000 40,000

Prepare a cash budget for December, January, and February.

I. Collections and Purchases:

December January February

Sales $ $ $

Purchases $ $ $

Payments for purchases $ $ $

Salaries $ $ $

Rent $ $ $

Taxes $ --- ---

Total payments $ $ $

Cash at start of forecast $ --- ---

Net cash flow $ $ $

Cumulative NCF $ $ $

Target cash balance $ $ $

Surplus cash or loans needed $ $ $

Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)

A proposed cost-saving device has an installed cost of $670,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $49,000, the marginal tax rate is 30 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $74,000. What level of pretax cost savings do we require for this project to be profitable? MACRS schedule (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Your task is to determine the WACC for a healthcare organization. Your deliverable is a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide a relevant discussion of your findings. Chapter 7 covers the basic concepts of WACC. Refer to the WACC formula at the bottom of page 341: WACC = Kd(1-t)(D / V) + Ke(E/V) Company HCA Healthcare (Stock Ticker Symbol: HCA) Assumptions: HCA has a cost of debt of 6%, a corporate tax rate of 40%, and a debt weight of 60%. HCA has a cost of equity of 11.4% and an equity weight of 40%.

Submit the following: Write a 350- to 700-word report that contains the following elements:

• Your calculated WACC. Describe how you used the assumptions to calculate the WACC.

• What does HCA’s WACC indicate? How could decision makers use this information?

• How would an increase in equity or debt impact the WACC?

• US corporate tax rates were reduced to 21% starting in 2018. Recalculate your WACC based on the new tax rates. Describe the impact of changes in corporate tax rates on HCA’s WACC. • Is a higher WACC good or bad? Support your answer.

Include the math used for your calculations.

1. Assume that December 2019 Mexican Peso futures contract has a price of $.90975 per 10MXN. You believe the spot price in December will be $.9700 per10MXN. The size of 1 MXN futures contract is MXN500,000. What position do you need to enter into to benefit from your anticipation? If you use three futures contracts, what is your profit/loss if you end up correct in your belief?

1. A speculator is considering the purchase of five three-month Euro call options (size €100,000 each) with a striking price of $.869/€. The premium is 1.35 cents per €. The spot price is $.84/€ and the 90-day forward rate is $.85/€. The speculator believes the euro will appreciate to $.91/€ over the next three months. As the speculator’s assistant, you have been asked to prepare the following:
2. A.-Determine the speculator’s profit if the euro appreciates to $.91/€.
4. Determine the speculator’s profit if the euro appreciates only to the forward rate
6. Determine the future spot rate at which the speculator will only break even.

Swanton Industries is expected to pay a dividend of $5 per year for 10 years and then increase the dividend to $10 per share for every year thereafter. The required rate of return on this stock is 20 percent. What is the estimated stock price for Swanton?