The Boss Corporation has operating income (EBIT) of $750,000. The company's depreciation expense is $200,000. Boss Corp. is 100% equity financed, and it faces a 40% tax rate. They invested $100,000 in Net Fixed Assets, and $25,000 in additional working capital. what are the company's net income, its net cash flow, operating cash flow and cash flow from assets?

net income = $450,000; operating cash flow = $650,000; cash flow from assets = $525,000

1. How much was cash flow to shareholders?

2. How large was the dividend paid to shareholders?

If you invest $22,267 today at an interest rate of 9.98 percent, compounded daily, how much money will you have in your savings account in 21 years?

How would a CFO decide if company should raise finance from Bond, OR Equity, OR Preferred Stock? Evaluate it by giving detailed features, merits and demerits of the each of them.

A company issues a $1,000 perpetual bond. The current rate is 6%. Next period, the rate

will change to either 4% or 10%, with equal probability. The bond is callable at the end

of the first year only, for a price of $1,117.90. What is the coupon amount, if the bond

sells at par?

The answer is $83.51. Please show how this was reached.

Modern (MPT) and Post-Modern (PMPT) Portfolio Theory  

Harry Markowitz (1952/1957/1959) developed Modern P ortfolio Theory (MPT). Graph the Expected Return on the Portfolio (E(r)p) vs. th e Portfolio Standard Deviation (Show). Show the Rf rate, Capital Allocation Line (CAL), Ef ficient Frontier (EF) Umbrella, Tangency of the CAL/EF along with Utility Curves (U C), show how risk- averse/institutional investors have to lower their utility to get to the Market Basket (M) tangency point. Show how you can move up and down t he Efficient Frontier by buying/selling bonds to reallocate your portfolio b etween stocks and bonds, raising and lowing return and risk, how you can jump off the Ef ficient Frontier and up and down the CAL through the use of leverage or lending. And, sh ow how you can bow out the EF by allocating your portfolio to Alternative Investment s (AI). Give examples of AIs, and what would be the target/model portfolio for the next 30 years for risk-adjusted/institutional investors? Show how they can be better off using th e Inverse Coefficient of Variation (CV) Equation? What two objectives are you as the p ortfolio manager trying to achieve? Show how Cash Value Life Insurance (CVLI) as a uniq ue alternative asset class can allow your clients portfolio return jump off the ef ficient frontier and onto a higher Utility Curve (UC).

1. Normal Efficient Frontier (Positive Risk-Free Rate):

2. Normal Efficient Frontier (Negative Risk-Free Rate):

RES 3200: ARMs and REFI

1. A bank makes a 30 year Fully Amortizing FRM for $2,500,000 at an annual interest rate of 4.875% compounded monthly, with monthly payments. What is the difference between the balance and the market value of the loan after 36 monthly payments if the interest rate rises to 5%?

(Give the absolute value of the difference, so the answer should be a positive number.)

2. A bank makes a 30 year Fully Amortizing FRM for $2,500,000 at an annual interest rate of 5% compounded monthly, with monthly payments. Suppose inflation is 2% per year, compounded monthly. What is the real value of the 120^th payment?

3. Assume the initial rate on a 1/1 ARM is 11.50%. The loan has a margin of +265 basis points above Libor. In one year after the loan is originated, the Libor is 9.5%. What is the fully indexed rate on the loan in one year?

4. Suppose a bank pays depositors 0.40% on their checking deposits. The same bank makes mortgages at 3.50%. What is the bank’s Net Interest Margin (NIM)?

5. A bank originates a 30 year fully amortizing FRM at an annual interest rate of 5.5%. 9 years later the bank’s cost of funds is 12.50%. What is the bank’s NIM on this loan? (Your answer can be positive or negative, use the correct sign!)

6. Tim wants to buy an apartment that costs $2,225,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 4.875%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. Tim anticipates the index to be 3.50% at the time of the 1^st reset. What is Tim’s monthly mortgage payment going to be during the 1^st 3 years?

7. Tim wants to buy an apartment that costs $2,225,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 4.875%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. Tim anticipates the index to be 3.50% at the time of the 1^st reset. If the index resets to 3.50% as Tim forecasts, what will his new mortgage payment be in year 4?

8. Tim wants to buy an apartment that costs $2,225,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 3.75%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. The index was 1% at the time of origination. Tim also had to pay 6.5 points for this loan. Compute the true APR (annualized IRR) for this loan.

9. Tim wants to buy an apartment that costs $2,225,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 3.75%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. The index was 1% at the time of origination. Tim also had to pay 1 point for this loan.

Suppose the index rate will remain 1% for the life of the loan. Compute the annualized IRR for this loan assuming Tim will prepay in 5 years.

10. Bob got a 30 year Fully Amortizing FRM for $2,500,000 at 4%, except with non-constant payments. For the first 2 years Bob will pay $1,250 per month. The loan will become a fully amortizing mortgage after 2 years. What will be the balance on this mortgage after 2 years?

(hint: see the option ARM slide in the ARM lecture)

11. Tom got a 30 year fully amortizing FRM for $1,500,000 at 8%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of refinancing for Tom assuming he stays until maturity?

12. Tom got a 30 year fully amortizing FRM for $1,500,000 at 8%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of refinancing for Tom assuming he prepays the new loan 5 years after refinancing?

(Clarification: Tom will prepay the new loan 3+5=8 years after the house is purchased)

What type of risk does beta measure? Is this risk associated with the risk premium of an asset?

the following budgeted figures have been taken from the cost records of MZ ltd:

normal capacity is equal to 12 500 units. As a result of poor economic conditions the budget for July 2019 has been set at 80%of normal capacity

the company uses the direct costing method for internal reporting purposes the following variance report for July 2019 has been presented to management

(A) prepare an alternative variance report for the department that would be more meaningful to management

(B) critically discuss the format and content of the variance report for July 2019 a represented to the department

What types of cycles predict an industry’s sensitivity to the economy?

1. Best Window & Door Corporation is considering the acquisition of Glassmakers Inc. Glassmakers has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmakers' pre-merger beta is 1.36. Best's beta is 1.02, and both it and Glassmakers face a 40% tax rate. Best's capital structure is 40% debt and 60% equity. The free cash flows from Glassmakers are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.

1. What is Glassmakers' pre-merger WACC?
2. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings?
3. What is the value of Glassmakers' equity to Best?

Exercise 1-6 (Algo) Traditional and Contribution Format Income Statements [LO1-6]

Cherokee Inc. is a merchandiser that provided the following information:

Required:

1. Prepare a traditional income statement.

2. Prepare a contribution format income statement.

1)

In general, what determines the market price of any financial asset? What determines its intrinsic value? How are the two related in the absence of mispricing?

2) Assuming a constant real return, why are investors worse off when the inflation rate is high

3)

Why do we measure the risk of an asset by the standard deviation of its returns?

4)

Why do we consider only portfolios on the efficient frontier when trying to find the optimal risky portfolio?

5)

What is the separation property and why does it apply?

What are the estate tax consequences in the following independent cases involving commercial annuities? H and W are married. H purchased a joint and survivorship annuity for $500,000. When H died the present value of W's annuity was $300,000. Same as (a) except W died first and the value of H's remaining annuity was $250,000. Same as (a) except that the annuity was paid for by W's employer. Same as (b) but the policy was purchased with community property. H and W each purchased a single life annuity for $250,000. H died first, several years before W. How would the answers above change if the annuities involved were private annuities?

The following are the cash flows of two projects:

If the opportunity cost of capital is 11%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.

What is Project Delta's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

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