1. It’s Taylor’s Birthday Corp. needed to borrow $200,000. The company issued a 20-year, 11% coupon annual payment bonds when market rates were 10.5% on January 1, 2015. One year later interest rates had increased to 8%. What is the issue price of the bonds? How much is it worth in 1 year?

Donaldsen International is an all-equity firm with a current share price of $12.50 and 10,000 shares outstanding. Management is considering issuing $50,000 of debt at an interest rate of 6.5 percent and using the proceeds to repurchase shares. It is felt that the company will have earnings before interest and taxes (EBIT) of $30,000. The company tax rate is 30%. What will the earnings per share (EPS) be if the debt is issued?

You are comparing two financial policies. The first is all equity. The second involves the use of $2 million of debt. The break-even point between these two policies occurs when the earnings before interest and taxes (EBIT) is $450,000. Given this, it is accurate to say that leverage _____ beneficial to the firm when EBIT is $325,000 and _____ beneficial when EBIT is $625,000.

A company has 400,000 shares outstanding at a market price of $6 each. The company also has 20,000 bonds outstanding each with a face value of $100, and a market price of $113.

What is the firm's equity ratio?

Case 4 – Budgeting and Variance

Mike has been selling lemonade at his lemonade stand under the name ‘Mike’s Lemonade’ for the past few summers and has had tremendous success. As a matter of fact, kids are so “hooked” on his lemonade that he is now offering credit to those customers who have spent their allowance but need more of his product. His weekly budget is:

BUDGET NOTES:

• ‘Salaries & wages’ are comprised of Mike’s salary
• Cash customers pay $0.50/cup and credit customers pay a 10% surcharge
• Lemons, sugar, and cups expenses are for 100 cups of lemonade
• Equipment (pitcher, spoons, measuring cups) are rented from Mike’s mother

1. Mike’s Lemonade – Monthly Budget

Mike plans to keep his lemonade stand open for the 3 summer months (total of 12 weeks) each year. For better planning, expand his weekly budget into a monthly (4 weeks) budget.

2. Mike’s Lemonade – Budget Variance

Things go well for the first two months of operations. However, after the third month Mike finds that he is losing money badly, having to offset his losses from his personal savings account (previous months’ profits). He speaks with his father, a CPA at an accounting firm, who recommends that Mike run a budget variance report. Mike asks you to complete the following table (note – the budget numbers should come from your monthly budget in #1):

Clearly there is a problem, so Mike begins to investigate. He talks to his customers and finds that many were away on vacation some or part of his third month of operations. He also talks to his distributors (the grocery store manager) and finds that the price of lemons and sugar are likely to increase this year due to drought and freezing. Mike estimates that the cost of his supplies will increase by 3% next year.

Mike talks to his father again, who recommends that Mike project monthly budgets for next year including predictions for drops in volume and increases in costs. He also suggests that Mike may want to consider raising the price of his lemonade, but must take into account that price affects volume.

3. Mike’s Lemonade – Projected Monthly Budget

Develop a monthly budget for each of the 3 summer months (June, July, and August) for next year. Make and note any assumptions under ‘Budget Notes’, including from the information that Mike learned from his investigation.

4. What could Mike do to improve his net profit?

Hamstring Inc. is considering a project with the following cash flows:

C₀ C₁ C₂      C₃ C₄

_{$(25,000) $10,000 $12,000 $5,000 $8,000}

_{The company is reluctant to consider projects with paybacks of more than three years. If projects pass the payback screen, they are considered further by means of the NPV and IRR methods. The firm's cost of capital is 9%.}

_{a. What is the project 's payback period? Should the project be considered further?}

_{b. What is the project's NPV ? Does NPV indicate acceptance on a stand-alone basis?}

_{c. Calculate the project's IRR by using an iterative approach. Start with the cost of capital and the NPV calculation from part (b). Does IRR indicate acceptance on a stand-alone basis?}

_{d. What is the project's PI? Does PI indicate acceptance on a stand-alone basis?}

You will put $1200 down on a car and want a 4 year loan. You could buy a new car for $15,000 (interest rate 6%) or the same model car that is 2 years old for $11,500 (interest rate 6.5%). The new car has a monthly payment of $305.31 and the used car has a monthly payment of $244.26. Explain what you would pick and why.

Ch. 2 p. 64-65

EYK2-3) Ethics Case Great Cake is a large bakery known for its quality “boxed cake” products. Its motto is “We Use Only the Best Ingredients.” Ralph Sands, the purchasing supervisor, is responsible for ordering the ingredients for all the bakery products. He is being considered for a promotion based on his proven ability to purchase ingredients at the best price available.

The cost of all the ingredients has risen substantially over the past few months. Sands decides to purchase 2.5% of the ingredients at a lower quality than Great Cakes normally uses because the cost is significantly less. Without relying on the company’s test kitchens, he believes this substitution will not be noticed by the customers and the lower cost will counterbalance the increased costs of the other ingredients.

Sands explains this decision to his friend, Lynn Pall, the company’s accountant, one day at lunch. He also tells her that he does not intend to inform management of the inclusion of the lower-quality ingredients in the bakery’s products.

Required

What ethical considerations arise from Ralph Sands’ decisions? What problems face Lynn Pall because of his actions?

What is the discounted payback period on Versace's proposed investment in a new line of fashion clothes? The expected cash flows appear below. Note that year 0 and year 1 cash flows are negative. (Answer in years; round to 2 decimals)

Year 0 cash flow = -95,000
Year 1 cash flow = -18,000
Year 2 cash flow = 50,000
Year 3 cash flow = 49,000
Year 4 cash flow = 54,000
Year 5 cash flow = 45,000
Year 6 cash flow = 46,000


Required rate of return = 14.00%

Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway's cost of capital is 12%.

Project A    PROJECT B

_{0 ($25,000) ($80,000)}

_{1 $44,000 $65,000}

_{2 $34,000 $30,000}

_{3 $14,000 $ 0}

_{4 $14,000 $5,000}

_{a. Calculate each project's NPV and IRR.}

_{b. Which project should be undertaken ? Why?}

a.

Hi there, please solve these questions. These type of questions might be in my final exam this weekend.

Thank you

2. Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 8%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) −0.5×Aσ 2, where E(r) is the expected return, A is the risk aversion coefficient and σ 2 is the variance of returns.

a) What is the expected value and standard deviation of the rate of return on your client’s portfolio?

b) Your client’s degree of risk aversion is A = 3.5.

(i) What proportion, y, of the total investment should be invested in your risky fund?

(ii) What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?

c) Prove that the optimal proportion of the risky asset in the complete portfolio is given by the equation y ∗ = E(rp)−rf Aσ2 p , where rf is the risk-free rate, E(rp) is the expected return of the risky portfolio, σ 2 p is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable’s effect on y ∗ and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse.

Case Study 2: Lakme Cosmetics [7.5 Marks]

The following financial data relate to Lakme, a cosmetic and toiletries company in the Tata Group of Companies for the period ending on 31 March 20X6 and 20X7.

Lakme Financial Data for the year ending on 31 March

(Rs. In lakh)

Discussion Questions

1. Comment on Lakme’s performance. Show computation to support your answer.
2. How effectively has Lakme used its assets in generating sales?
3. Do you think there is appropriate balance between equity and borrowed funds? Show relevant ratios.
4. Critically evaluate Lakme’s profitability?
5. Does Lakme have sufficient liquidity?

You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $35,235 at the end of this​ year, $ 70,470 at the end of next year, and $105,705 at the end of the year after that​ (three years from​ today). The interest rate is 7.6 % per year.

a. What is the present value of your​ windfall?

b. What is the future value of your windfall in three years​ (on the date of the last​ payment)?

Round to the nearest​ dollar.)

This is Question (exercise) 5 from Chapter 23 in the book Financial Modeling by Simon Benninga 4th edition.

An Underwriter issues a new 7-year C-rated bond at par. The anticipated recovery rate in default of the bond is expected to be 55%. What should be the coupon rate on the bond so that its expected return is 9%? Assume the transition matrix of exercise 2.(I tried to copy it bellow, hope it helps)

1 0 0 0 0

0.06 0.90 0.03 0.01 0

0.02 0.05 0.88 0.05 0

0 0 0 0 1

0 0 0 0 1

The expected rate of return for Stock A is?

The​ investment's standard deviation for stock A?

COMMON STOCK A       COMMON STOCK B  
PROBABILITY   RETURN   PROBABILITY   RETURN
0.20   11%   0.10   -4%
0.60   16%   0.40   7%
0.20   19%   0.40   14%
       0.10   22%