1. Decision making is increasingly more complex today because of uncertainty. Additionally, most capita! projects will involve numerous variables and possible outcomes. For example, estimating cash flows associated with a project involves working capital requirements, project risk, tax considerations, expected rates of inflation, and disposal values. We have to understand existing markets to forecast project revenues, assess competitive impacts on the project, and determine the fife cycle of the project. If our capital project involves production, we have to understand operating costs, additional overheads, capacity utilization, and startup costs. Consequently, we cannot manage capital projects by simply looking at the numbers, i.e. discounted cash flows. Why?

Question 8

Consider a company that issues a dual-currency bond with a face value of €45 million, which pays an interest rate of 3.5 percent a year in dollars. Indicate how the company can manage the risk on this bond issue and calculate the net cash flows associated with the transactions. A bond with a face value of €45 million that pays 5 percent annual interest in euros is available for purchase. The fixed rates on a currency swap are 4 percent in dollars and 4.75 percent in euros, and the exchange rate is €1.15/$.

1) Statement of the Assignment:

Please prepare a comprehensive list of financial ratios . Write a brief explanation below each financial ratio, e.g. what does the financial ratio measures or what the significance of it is.

For example:

Current Ratio = Current Assist / Current Liabilities

Current ratio measures whether our current assets, if liquidated, are sufficient to pay all of our current liabilities. A CR of 1.5, for example, shows that if we were to liquidate all of our current assets, we will be able to cover 1.5x our current liabilities, whereas a CR of 0.5 shows that liquidating our current assets only covers half of our current liabilities.

THE FOLLOWING RATIONS ARE THE RATIONS I NEED. CAN I PLEASE GET AN ANSWER EACH ONE OF THEM. (EACH BULLET POINT)

• Total debt Ratio=Total assets – total equity / total assets

• Debit equity ratio = total debt / total equity

• Equity multiplier = total assets / total equity

• Long term debt ratio = long term debt / long term + total equity

• Times interest earned ratio = EBIT / Interest

• Cash coverage ratio= EBIT + Depreciation / interest

  Asset management, Or turnover, measures

• Inventory turnover = Cost of goods sold / inventory

• Receivables Turnover = sales / accounts receivable

• NWC turnover= sales / NWC

• Fixed asset turnover = sales/ net fixed assets

• Total asset turnover = sales/ total assets

Profitability measures

• Profit margin = Net income/ sales

• Return on Assets= Net income / total assets

• Return on equity = net income / total equity

Market Value Measures

• EPS = net income/ Shares outstanding

• PE= price per share / earning per share

• Market to book ratio= market value per share / book value per share

• Enterprise value= total market value of the stock + book value of liabilities – cash

• EBITA Ration= enterprise value/ EBITDA

2)

Select one of the financial ratios listed.   Write the formula for calculating it, and then explain how it is useful in analyzing the financial health of the firm.

How would you use the ratio, how would you assess whether it is at an appropriate level or if it should be improved, and if so, how would you improve it?

1. A company is analyzing two mutually exclusive projects, A and B, whose cash flows are shown below:

Years        0 r = 10%    1                   2                   3

|                    |                    |                    |

The company's cost of capital is 10 percent, and it can get an unlimited amount of capital at that cost. What is the IRR of the better project, i.e., the project which the company should choose if it wants to maximize its stock price?

Project----------------                   IRR-------------------                 

A group of graduate students has decided to form a small Internet Service Company in Brevard County. The company will service Brevard County Florida home users and need $400 million to start the company. Two financing plans have been proposed by the investment banking firms. Plan A is an all common- equity alternative. Under this agreement, 4 million common shares will be sold to net the firm $100 per share. Plan B involves the use of financial leverage (debt and equity). A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to

$200 million. The corporate tax rate is 40 percent. If the detailed financial analysis

projects that there is a 30% chance that EBIT will be $15.0 million, 40% chance that it will be $18.0 million, and 30% chance that it will be $20 million annually, which plan will maximize the wealth of the stockholders? (note: the problem is based on the understanding of financial statement and financial leverage)

Plan ?

TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEK’s Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the following quotes:

1. What are the costs of its payment hedging alternatives if it uses the forward and options market?

Consider the following information on two securities Expected rate of return on Security Ri = 0.10 Expected rate of return on Security Rj = 0.20 Variance of ROR of security Ri = 0.16 Variance of ROR of security Rj = 0.25 Covariance between Ri and Rj = -0.04 (minus 0.04)

Obtain the

1. the investment fractions to obtain the Global Minimum Variance Portfolio
2. Expected rate of return on Global Minimum Variance Portfolio
3. Variance of Global Minimum Variance Portfolio
4. Is your portfolio diversified? Whatever your answer you must explain the reason for your answer.
5. If you need to draw a graph how the graph of the efficient frontier will look for the correlation structure given above. (

   Obtain the

6. the investment fractions to obtain the Global Minimum Variance Portfolio
7. Expected rate of return on Global Minimum Variance Portfolio
8. Variance of Global Minimum Variance Portfolio
9. Is your portfolio diversified? Whatever your answer you must explain the reason for your answer.
10. If you need to draw a graph how the graph of the efficient frontier will look for the correlation structure given above. (Draw a graph to discuss your answer). Do not forget to write down the legends on X and Y axis)
11. What is the threshold coefficient of correlation above which diversification will not be possible?
12. a graph to discuss your answer). Do not forget to write down the legends on X and Y axis)
13. What is the threshold coefficient of correlation above which diversification will not be possible?

2 Factors that cause the current value to be less than future value are opportunity cost and risk/uncertainty?

Explain why with a real-life example

You will receive annual payments of $15,000 for the next 25 years. You would like to have your money today instead of waiting of waiting 25 years to receive it all. What is the equivalent value of this future stream of payments if the appropriate discount rate is 8%?

A. 148,421.91

B. 160,121.64

C. 183,926.48

D. 201,448.72

You have a 5-year investment holding horizon, would like to earn an 5% annual compound return each year, and have a choice between two different bonds. Whatever amount of money you have to invest will be invested in Bond 1 or Bond 2 (with the number of bonds to be purchased to be determined later).

Find the Duration and Modified Duration for each bond (be sure to show your work and answer the questions below for credit)

• Bond 1 has a 5% annual coupon rate (i.e., a $50 coupon at the end of each year), and an  $1000 maturity value, n = 5 years, YTM = 5% (pays a $50 annual coupon at the end of each year and $1,000 maturity payment at maturity at the end of year 5).  

• Bond 2 is a zero coupon bond with a $1000 maturity value, and n = 5 years; YTM= 5%. (The zero coupon bond has no coupon payments; only a $1,000 maturity payment paid at maturity at the end of year 5).

a. Price Bond 1 ______________           Price Bond 2 _____________

b. Duration Bond 1 ______________    Duration Bond 2 ____________

c. Modified Duration Bond 1 ______ _   Modified Duration Bond 2 ____________

d. Which of the two bonds should you choose for your 5-year investment horizon to duration match to ensure your desired 10% annual compound return if you hold either bond to maturity (i.e. for 5 years)? Explain why. (assume the same default risk for each bond).  

__________________________________________

e.  If interest rates go up by 1%, what will be the % Change in the market value for each Bond’s Price? (Hint Change in Price % = - Modified Duration x Change in Rate (expressed as a fraction, i.e. .01).

% Change in Price for Bond 1 ________% Change in Price for Bond 2 ____________

f.  Which of the 2 bonds has more price risk, and which has more reinvestment risk? Explain why.

If the APR is 8% and compounding is weekly, what is (a) the periodic rate and (b) the EAR?

Can you explain step by step, how to understand the question?

Prepare an amortization spreadsheet in Excel.  The sheet should be labeled, and I should be able to change purchase price, interest rate, or the other relevant factors and the spreadsheet should automatically update. As we discussed in class, spend some time labeling the spreadsheet and using proper cell references.  This is the first but not the last spreadsheet of this type, it is highly likely that elements of this spreadsheet will be helpful in subsequent assignments, so time spent here may mean less time in the future.

For an initial calculation, assume you are purchasing a $400,000 home with 5% down at an interest rate of 4%, financed over 30 years using a traditional mortgage.

Suppose you borrow $8,000 and agree to repay the loan in 4 equal installments over a 4-year period. The interest rate on the loan is 13% per year. What is the amount of the reduction in principal in year 2?

A. $1,040 B. $1,864 C. $2,690 D. $826 E. $2000

Suppose you win $100 million in lottery. The money is paid in equal annual installments of $4 million over 25 years. If the appropriate discount rate is 10%, how much is the sweepstakes actually worth today?

A. $100,000,000 B. $4,000,000 C. $36,308,160 D. $42,699,100 E. $45,537,760

To buy a new house, you must borrow $270,000. To do this, you take out a $270,000, 30-year, 9% mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principal and 9% interest on the declining balance. How large will your annual payments be? A. $24,334 B. $26,281 C. $25,000 D. $82,809 E. $107,651

Please show steps on how to work it out