Problem Set 1 You are the owner of a large data-services firm and are deciding on the purchase of a new hardware cooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. The installation of this cooling system will cost $3,000,000.
1. At face value, does this system seem profitable? By how much?
2. Assume that your company uses a discount rate of 6%.
a. What is the Net Present Value (NPV) of this project?
b. How does the NPV of this project change as you assume a higher or lower discount rate? Why?
c. What is the IRR/ROI of this project?
d. How much should the yearly cost-savings be in order to break even? i. (hint) use goal-seek/what-if analysis
3. Suppose that you decide to finance the purchase of this system through a loan from the bank. The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.
a. Using a 70/30 debt-to-equity ratio, what is the NPV of this project? i. (hint) calculate the yearly payment using excel function “PMT”
b. How does the NPV of this project change if a larger portion is financed through equity (e.g. debt-to-equity ratio of 60/40)? Why?
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Finance is exciting! In this course, we learned how money can
grow through the use of compounding and interest rates and your
growth strategies may now be different. What are your new financial
goals? Would you like to become more liquid, to save more for your
retirement, or to start a new business? Whatever your goals,
finance is right at the core. Think about what you learned in this
course regarding investing to complete this assignment.
Write a two to three (2-3) page paper in which you:
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the stock price is currently $80. The stock price annual up-move factor is 1.15. The risk free rate is 3.9%. Compute the value of a 2 year European call option with an exercise price of $62 using a two-step binomial model
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Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy’s employer withheld $11,000 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $23,000 in itemized deductions.
Determine Jeremy’s tax refund or taxes due.
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The Price is Right! Utilizing 1 of these public companies—Target, Coke, Pepsi, Wal-Mart, or J. P. Morgan—determine the right price for that company’s stock in the following 5 easy steps: Visit this Web site. Type in your selected company’s name in the Quote Search box, and select your company's stock symbol. Jot down the current stock price. Select the Analysis tab, and find the Analyst Recommendation box. Jot down the stock’s Earnings Per Share (EPS) Estimate. Select the Price Ratios tab, and jot down the current Price to Earnings Ratio (P/E) for the industry (not the company). Using the PE valuation model to determine the right price for this stock, multiply the industry average P/E ratio by the stock’s EPS to estimate the intrinsic price of the stock. Answer the following questions: Is this stock overvalued or undervalued when compared to the current stock price? What are the analysts’ recommendations for this stock (buy, sell, or hold)? Do you agree with them? Would you consider purchasing this stock? Why?
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Q4. When a Mexican distillery offers rebates to its current customers, what growth strategy is the company using? (0.5 points) (20-70 words)
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Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $ 12 comma 500 with terms of 2.4/10 Net 40, so the supplier will give them a 2.4 % discount if they pay by today (when the discount period expires). Alternatively, they can pay the full $ 12,500 in one month when the invoice is due. H2M is considering three options:
Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $ 12,500 in one month.
Alternative B: Borrow the money needed to pay its supplier today from Bank A, which has offered a one-month loan at an APR of 12.4 %. The bank will require a (no-interest) compensating balance of 4.6 % of the face value of the loan and will charge a $ 90 loan origination fee. Because H2M has no cash, it will need to borrow the funds to cover these additional amounts as well.
Alternative C: Borrow the money needed to pay its supplier today from Bank B, which has offered a one-month loan at an APR of 14.9 %. The loan has a 1.3 % loan origination fee, which again H2M will need to borrow to cover.
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To provide a consistent frame of reference for the company’s financial statements and ratios, assume that the following balance sheet and income statement reflect the company’s pre-transaction condition and performance.
Phoenix Golf Club Co.’s Pre transaction Statement of Financial Condition
| Cash | $15,000 | Accounts payable | $20,000 |
| Marketable securities | 10,000 | Wages payable | 20,000 |
| Accounts receivable | 470,000 | Taxes payable | 10,000 |
| Inventory | 500,000 | Notes payable | 50,000 |
| Prepaid expenses | 5,000 | Total current liabilities | 100,000 |
| Total current assets | 1,000,000 | Long-term debt | 500,000 |
| Total liabilities | 600,000 | ||
| Gross plant and equipment | 1,500,000 | Common stock | 150,000 |
| Accumulated depreciation | 500,000 | Capital paid in excess of par | 350,000 |
| Net plant and equipment | 1,000,000 | Retained earnings | 900,000 |
| Total equity | 1,400,000 | ||
| Total assets | $2,000,000 | Total debt and equity | $2,000,000 |
|
Phoenix Golf Club Co.’s Pre transaction Statement of Financial Performance |
|
|---|---|
| Sales | $5,000,000 |
| Less: Cost of goods sold¹ | 2,000,000 |
| Gross profit | 3,000,000 |
| Less: Operating expenses | 600,000 |
| Operating profit (EBIT) | 2,400,000 |
| Less: Interest expense² | 33,000 |
| Earnings before taxes (EBT) | 2,367,000 |
| Less: Tax expense³ | 828,450 |
| Net income | $1,538,550 |
¹Cost of goods sold equals 40% of sales.
²Interest expense equals 6% of the combined notes payable and long-term debt balances.
³The average federal and state tax rate is 35%.
Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction. Assume there are 365 days in a year.)
Business Transaction 1
Phoenix Golf Club Co. (PGC) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share.
|
Financial Account |
Check if the Account Is Affected by the Specified Transaction |
|
|---|---|---|
| Cash | ||
| Operating income | ||
| Long-term debt | ||
| Common stock | ||
| Capital paid-in excess of par |
|
Financial Ratio |
Ratio’s Behavior |
|---|---|
| Inventory turnover | |
| Debt ratio | |
| Times interest earned | |
| Operating profit margin | |
| Basic earnings power | |
| Current ratio |
Business Transaction 2
Phoenix Golf Club Co. (PGC) switches from holding an available inventory to a just-in-time inventory system, thereby reducing its inventory by 80.00%.
|
Financial Account |
Check if the Account Is Affected by the Specified Transaction |
|
|---|---|---|
| Inventory | ||
| Accounts payable | ||
| Prepaid expenses | ||
| Total assets | ||
| Common stock |
|
Financial Ratio |
Ratio’s Behavior |
|---|---|
| Average collection period | |
| Inventory turnover | |
| Fixed assets turnover | |
| Quick ratio | |
| Return on assets | |
| Debt ratio |
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Venture capital financing is a type of funding which assembles cash from investors and lends it to startup businesses that have high potential for success. Venture capital investments usually encompass very high risk; however, the reward has the potential to exceed the risk. The process for acquiring venture capital financing sometimes is complicated, but generally there are five stages in the process of procuring venture capital financing.
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n this unit we learned to conduct a retirement needs analysis taking into account various assumptions such as inflation rate, retirement period, life expectancy, income sources, and other variables, and determine financial needs during the accumulation and retirement period. Lets extend the discussion by examining the practical implications of these concepts. TIAA-CREF has an excellent site that provides a consider- able amount of information on retirement planning and retirement options. Visit the site at tiaa-cref.org click on the What We Offer tab, and examine the information in the Retirement section.
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Why do firms have trouble managing their cash flow? What events cause a cash flow crisis?
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Budgeting
Describe your company's annual budget process.
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Indicate and Discuss how will be affected the prices (and the yields) of the next Bonds (no calculations required) i. US Treasury Bonds with Moderate GDP Growth ii. German Government Bonds with Higher than expected GDP Growth iii. Investment Grade Corporate Bonds with Terrorist attack in London, NY. iv. Spanish, Italian and Portuguese Bonds with EU Debt Crisis v. High Yield Corporate Bonds with US Debt out of control due to Trump cutting Taxes.
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Business and Corporations Law
5. Larry Large started a business in early 2001 involving direct marketing of a range of garden products. He operated through a proprietary company, Large Larry Pty Ltd. The business was quite successful, aided apparently by a media campaign featuring Larry himself. In 2017 he decided to dramatically expand the business and to change the operation from direct marketing to distribution of products through various retail outlets. In that year he converted the proprietary company into a public company (Large Larry Ltd). He now wants to raise $15 million in additional funds to assist with the expansion and also to retire some debt. One option that is being considered is to offer shares in Large Larry Ltd to a number of large institutional investors. An alternative option is to float the business, that is offer the shares to the public and apply for listing on the Australian Stock Exchange (ASX). Larry is very upbeat about the company’s prospects. He believes that with favourable economic conditions the company will double in size within a year. He approaches you and asks you to advise him on the following matters:
a) What are the implications under Chapter 6D of the Corporations Act of the two fundraising options being considered?
b) If a decision is made to carry out a float, what type of disclosure document will be required and what type of information must it contain?
c) If the offer document includes forecasts consistent with Larry’s view concerning the prospects of the company, what consequences could follow if the forecasts are not met?
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There are four zero-coupon Treasury bonds as follows: Maturity (years) Price ($) 0.5 979.43 1.0 955.54 1.5 928.60 2.0 897.17 Assume that the face values are $1000 for all the bonds. (a) Determine the quasi-modified duration for the given 1.0-year zero-coupon bond. (Keep 2 decimal places, e.g. xx.12) (b) The price for a 2-year Treasury note with semi-annual coupon payments is $ 987.42. Find the annual coupon rate for the note, and hence determine its quasi-modified duration. Coupon rate: % (Keep it in percentage format with 2 decimal places, e.g. xx.12%) Qusi-modified duration: (Keep 2 decimal places, e.g. xx.12)
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