Questions 1 to 3:

Janice Leo is the head of bond valuation at UMB Investments Management LLC. She has been very frustrated by the number of investment analysts who seem to have a little understanding of financial statement analysis and corporate finance concepts. She has written a set of conceptual questions and simple problems to screen for the better candidates in the applicant pool. A few of the questions related to cash flow statements, present value, future value and problems are given below:
In response to a few question regarding cash flow statements Mike Grillo, one of the analysts at UMB Investments made the following statements.

Statement -1: Cash flows are generally considered more sustainable if they are generated by a firm investing and financing activities.
Statement -2: If a firm is profitable and reports positive cash flow, this is sustainable over the long term.
Statement -3: The act of factoring accounts receivable will generally result in a decrease in operating cash flows in the current year, and a decrease in operating cash flows in subsequent years.
Statement – 4: The fundamental drivers that underlie operating cash flow are ROE, growth, sustainability, profitability and efficiency.

Is Leo correct with respect to statements 1 and 2?

With respect to statement 3, Leo is incorrect.

Leo’s statement 4 is correct with respect to

QUESTION 4

1. Leo was wondering whether candidates are familiar with accounting estimates and assumptions that a firm’s management could use to manipulate the firm’s profitability.  MicroMoon (MM) is one of the firms that UMB is considering in investing. In its December 31, 2011 annual report MM reported the following year-end data:

   Depreciation expense	$30 million
   Net income	$30 million
   Dividends	$5 million
   Total assets	$535 million
   Shareholder’s equity	$150 million
   Effective tax rate	35 percent

   Last year, MM purchased equipment for $140 million. For the first year, straight-line depreciation was used assuming a depreciable life of 7 years with no salvage value. However, at year-end MM’s management determined that assumptions of a useful life of 5 years with a salvage value of 10 percent of the original value were more appropriate.

   How would the return on assets (ROA) and return on equity (ROE) for last year change due to the change in depreciation assumptions? ROA decreases to:

   	A.	5.7% from 5.6% and ROE decreases to 19.7% from 20.0
   	B.	5.0% from 5.6% and ROE decreases to 18.4% from 20.0
   	C.	5.7% from 21.43% and ROE increases to 21.0% from 20.0

A 5-yr project has an initial requirement of $145,226 for new equipment and $9,294 for net working capital. The fixed assets will be depreciated to a zero book value over 5 years and have an estimated salvage value of $27,669. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $51,222. The cost of capital is 9% and the tax rate is 27%. What is the net present value of the project?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Congratulations! You have just won the State Lottery. The lottery prize was advertised as an annualized $105 million paid out in 30 equal annual payments beginning immediately. The annual payment is determined by dividing the advertised prize by the number of payments. Instead you could take a one lump cash prize of the present value of all the annuity payments using a 4.5% discount rate. You now have up to 60 days to determine whether to take the cash prize or the annuity. Which option is better and why. Be sure to cite sources and provide any calculations that can help in determining the best outcome.

Discuss and analyze each ratios and compare Ned to its competitors

Discuss and analyze each ratio on how Ned compares to the other organizations .

A project has an initial cost of $300,000, expected net cash inflows of $67,500 per year for 7 years, and a cost of capital of 11%. What is the project's NPV? What is the IRR and the PI? What is the payback period?

"Digital banks" discuss their advantages and disadvantages for the whole banking industry

Linda Jones is deciding between two investment projects.

Choice 1 Linda can invest into a young biotech firm. She expects that she will need to pay this firm $35,000 at the end of each year for the next two years. After that, she expects to receive back from the firm $90,000 at the end of each year for 18 years.

Choice 2 Linda can invest $200,000 today into an AI firm. She expects to be paid $42,000 at the end of the year, and expects cash flows from the AI firm to increase by 5% every year, paid at the end of each year in perpetuity

a. “Draw” timelines (tables), showing cash flows of each investment.

b. Suppose Linda’s discount rate is 12%. Which project should she choose?

c. At which discount rate would Linda be indifferent between her two choices?

Sheridan Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 8.140 percent. Assume that coupon payments will be made semiannually. Management is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. Sheridan needs to raise $1 million. SEMIANNUALLY

a. What will be the price of an 8 percent coupon bond?

b. How many 8 percent coupon bonds would have to be issued?

c. What will be the price of a zero coupon bond?

d. How many zero coupon bonds will have to be issued?

Walter Burton was a self-employed window washer earning approximately $700 per week. One day, while cleaning windows on the eighth floor of the Commercial Bank Building, he tripped and fell from the scaffolding to the pavement below. He sustained severe multiple injuries but miraculously survived the accident. He was immediately rushed to the local hospital for surgery. He remained there for 60 days of treatment, after which he was allowed to go home for further recuperation. During his hospital stay, he incurred the following expenses: surgeon, $2,500; physician, $1,000; hospital bill for room and board, $250 per day; nursing services, $1,200; anesthetics, $600; wheelchair rental, $100; ambulance, $150; and drugs, $350. Walter has a major medical policy that has a $3,000 deductible clause, an 80 percent co-insurance clause, internal limits of $180 per day on hospital room and board, and $1,500 as a maximum surgical fee. The policy provides no disability income benefits.

Explain the policy provisions as they relate to deductibles, co-insurance, and internal limits.

How much should Walter recover from the insurance company? How much must he pay out of his own pocket?

Would any other policies have offered Walter additional protection? What about his inability to work while recovering from his injury?

Based on the information presented, how would you assess Walter’s health care insurance coverage? Explain.

Please respond to the following:

How is the NPV rule related to the goal of maximizing shareholder wealth, and under what conditions would you expect the NPV and IRR rules to return the same accept / reject decision? Identify one problem with using IRR as part of this decision-making process. What value might the financial decision maker gain by adding the profitability index to the decision-making process?

# Interest rates are expressed as annualized rates for the term specified. Report your interest rate answers as fractional numbers like 0.11 for 11% per year.

Problem B. The price of a stock is currently 69. The stock price by the end of the next three-month period is expected to be up by 10 percent or down by 10 percent. The risk-free interest rate is 7.8 percent per annum with continuous compounding. What is the current value of a three-month American call option with strike price of 64 using a single-step binomial tree? How will you trade involving one call option to make arbitrage profits if the call option’s current market price is 39.5.

25. What is the value of p? What are the two values (cash flows) of the call option at maturity from top to bottom of the tree?

26. Cash flows at the top of the tree.

27. Cash flows at the bottom of the tree.

28. What is the current fair value of the call option?

29. What is the value of delta at time 0?

30. Write 1 if your answer is to take a long position in the call option and 0 if it is to take a short position in the call option in an arbitrage trading strategy at time zero.

31. Write the net cash position (if borrowed write with a negative sign) at time zero. Write the two net cash positions from top to bottom at the end of one step (maturity) in your trading strategy:

32.

33.

34. Write the net cash made as of maturity from the arbitrage trading strategy.

CAN YOU PLEASE SHOW WORK.

A Foreign currency trader at the bank’s FX desk calls to inform you that Bank of America is quoting $1.12/€1, and Citibank is offering $1.28/£1. The trader also noticed that Credit Agricole is making market in pound sterling and Euro at €1.18/£1.

a. What is the implied €/£ cross-rate for the two European currencies? Show this trader how you would use $1 million to conduct a triangular arbitrage to profit from the deviation (if any) of the implied cross rate of the €/£, from the rate quoted by Credit Agricole.

b. Suppose you observed that the 3-month forward rate quote from Bank of America is $1.21/€1, calculate the forward premium (discount) implied by the quote.

c. What do investors expect to happen to the value dollar in the next three months?

4b) The Rich Pharma Corporation has just invented a cheap form of energy. Investors with a 16% required rate of return expect this company to grow at an accelerated rate of 45% per year for the next 3 years and then continue at a constant growth rate of 15% per year. What would investors be willing to pay for the common stock if the most recent annual dividend was $4.00 per share?

You find the following corporate bond quotes. To calculate the number of years until maturity, assume that it is currently January 15, 2016. The bonds have a par value of $2,000. Company (Ticker) Coupon Maturity Last Price Last Yield EST $ Vol (000’s) Xenon, Inc. (XIC) 6.600 Jan 15, 2032 94.303 ?? 57,374 Kenny Corp. (KCC) 7.240 Jan 15, 2031 ?? 5.38 48,953 Williams Co. (WICO) ?? Jan 15, 2038 94.855 7.08 43,814

What price would you expect to pay for the Kenny Corp. bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price $

What is the bond’s current yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield %