Problem 9-13

Two firms have sales of $1.5 million each. Other financial information is as follows:

What are the operating profit margins and the net profit margins for these two firms? Round your answers to two decimal places.

Operating profit margins:

Firm A: %

Firm B: %

Net profit margins:

Firm A: %

Firm B: %

What are their returns on assets and on equity? Round your answers to two decimal places.

Return on assets:

Firm A: %

Firm B: %

Return on equity:

Firm A: %

Firm B: %

Discounted Cash Flow Models discussed:

1. The Adjusted Present Value Model
2. The Free Cash Flow to Equity Model

What are the advantages and shortcomings of each?

Which one do you think is generally better to use? Why?

In case of an asymmetric demand shock, which "tool" cannot be used ANYMORE by countries that have joined a monetary union?

16. Consider the following information about the CMX gold futures contract:

    (a) Contract size: 100 troy ounce
    Initial margin: $1,013 per contract
    Maintenance margin: $750 per contract
    Minimum tick size: 10 cents/troy ounce ($10/contract)

    There are four traders, A, B, C, and D in the market when next yearís June contract commences trading. (Kolb Ch3)

(a) Complete the following table showing the open interest for the contract.

(b) Calculate the gains and losses for Trader A. Assume that at the time of each change in position, Trader A must bring the margin back to the initial margin account. Compute the amount in Trader Aís margin account at the end of each trading day. Will Trader A get a margin call? If so, when and how much additional margin must be posted?

4. Consider two countries: Japan and France. Suppose you saw the following information in the newspaper: Interest rate on one-year Japanese deposits = 8%; Interest rate on one-year French deposits = 6%; Current spot rate: 100 yens per euro. Further suppose that based on your research on the two countries, you expect the spot rate is going to be 105 yens per euro a year from now. Round numbers to 3 decimal points. Pick home and foreign country and setup your equation appropriately

1. Does uncovered interest parity (in exact form) hold?
2. If not, at what current spot rate would the uncovered interest parity hold (be satisfied)?
3. How might the current spot rate be driven to this level you found in (b)? Explain. (Explain the adjustment mechanism that occurs through trade of currencies that makes arbitrage disappear).

A company currently pays a dividend of $2.25 per share (D₀ = $2.25). It is estimated that the company's dividend will grow at a rate of 15% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.8, the risk-free rate is 5%, and the market risk premium is 5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Ms. Kathleen Boyd, director of logistics for the Scenic Calendar Company, wishes to evaluate

two methods of time series forecasting. She has collected quarterly calendar sales data from the

years 2003 and 2004.

2003 . 2004

Qtr. Actual Sales Qtr. Actual Sales

1 1200 1 1300

2 800 2 800

3 200 3 250

4 1000 4 1200

a.Use the moving averages technique to find forecasted sales for the third quarter of 2009 based on actual sales from the previous three quarters. (0,5p)

b. Use simple exponential smoothing to forecast each quarter’s sales in 2009, given that Mr. Clayton qualitatively forecasted 800 calendars for quarter 4, 2008. Mr. Clayton has assigned an alpha factor of 0,1 for time series sensitivity. (0,5p)

c. Repeat the simple exponential smoothing problem above (part 5b) with Mr Clayton employing an alpha factor of 0,8. (0,5p)

d. How well does the moving averages and simple exponential smoothing techniques seem to work in Mr. Clayton’s situation? In what ways do the techniques appear to fail? Explain. (0,5p)

IDENTIFY FORMULAS AND SHOW WORK.

Miller Corporation has a premium bond making semiannual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has a 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. The bond pays a 6 percent coupon, and has a YTM of 8 percent, and also has a 13 years maturity.

Assume a face value of $1,000 for both bonds. (a) If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? One day before maturity?

(b) Suppose the YTM increases 1 percent for each of the bonds (7 percent and 9 percent respectively). Calculate the Holding Period Yield of the one-year investment for each of the bonds (from today to one year from today).

Note: Holding Period Yield is the total effective annual return for the investor that buys the bond today and sells the bond in one year given the change in interest rates. The return can be decomposed in he income component (current yield) and the capital gain component (capital gain yield).

Company A deposit $10,000 now in the bank. Company A will keep deposits $1500 at the end of each payment period. The interest rate and the payment period information are given in the following table. How much will the company have after 5 years in the bank account? Assume each year contains 52 weeks/365 days, each quarter contains 13 weeks/90 days, each month contains 4 weeks/30 days.

You are a homebuilder with excess houses in inventory and the local economy heading towards a recession. In order to stimulate home sales, you offer the following promotion: 1.5% annual interest for the first 3 years of your new mortgage!

You have contracted with a local bank to offer 30-year, fully amortizing mortgages for your buyers at a rate of 3.95% per year with a .8 Loan-to-Value (LTV) ratio.

You have agreed to pay the bank the Present Value of the difference in monthly payments between their rate of 3.95%/year and your “teaser” rate of 1.5%/year.

Your promotion is working, and soon you have a home under contract to sell for $300,000. Using a Discount Rate of 5%/year, what is the amount which you willpay the bank at closing to compensate them for the 3-year teaser interest rate?

Use Excel. Use $$$ please

3. The cost of debt

What do lenders require, and what kind of debt costs the company?

The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt to be raised to finance the new project.

Consider the case of Peaceful Book Binding Company (PBBC):

Peaceful Book Binding Company is considering issuing a new 30-year debt issue that would pay an annual coupon payment of $100. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to its par value.

PBBC’s CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember, the flotation costs will be _________the proceeds the firm will receive after issuing its new bonds. The firm’s marginal federal-plus-state tax rate is 35%.

To see the effect of flotation costs on PBBC’s after-tax cost of debt (generic), calculate the after-tax cost of the firm’s debt issue with and without its flotation costs, and select the correct after-tax costs (in percentage form):

This is the cost of _______ debt, and it is different from the average cost of capital raised in the past.

2. Solving for the WACC

9.97

The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is only an appropriate discount rate for a project of average risk—in other words, a project that has the same beta as the company. If a project has less risk than the overall company risk, it should be evaluated with a lower discount rate; if a project is riskier than the overall company risk, it should be evaluated using a discount rate higher than the company WACC.

Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address.

Consider the case of Turnbull Co.

Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%.

If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%.

If its current tax rate is 40%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Do not round your intermediate calculations.)

0.65%

0.55%

0.88%

0.81%

Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 9.6%, $78,000 of preferred stock at a cost of 10.7%, and $880,000 of equity at a cost of 13.5%. The firm faces a tax rate of 40%. What will be the WACC for this project? ______ (Note: Do not round intermediate calculations.)

Consider the case of Kuhn Co.

Kuhn Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share. You can assume that Jordan does not incur any flotation costs when issuing debt and preferred stock.

Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax rate of 40%. Determine what Kuhn Company’s WACC will be for this project _______.     

Given certain international transactions, determine if they cause a supply/demand of the U.S. dollar as well as a depreciation/appreciation of the U.S. dollar? "at least 1 paragraph required"

This is all that was given is just wants really an opinion on it

As a manager of an MNE( Multinational Enterprise) what are the implications of a STRENGTHENING DOMESTIC CURRENCY on a companies?

A. Profits

B. Revenues

C. Exports/Imports