1. Why does not an increase in company pre-tax profits convert into an increase in giving as a percentage of corporate pre-tax profits?

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecast sales figures:

Of the firm’s sales, 50 percent are for cash and the remaining 50 percent are on credit. Of credit sales, 50 percent are paid in the month after sale and 50 percent are paid in the second month after the sale. Materials cost 35 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 45 percent of sales and is paid for in the month of sales. Selling and administrative expense is 10 percent of sales and is paid in the month of sales. Overhead expense is $22,000 in cash per month.

Depreciation expense is $10,800 per month. Taxes of $8,800 will be paid in January, and dividends of $6,000 will be paid in March. Cash at the beginning of January is $96,000, and the minimum desired cash balance is $91,000.

a. Prepare a schedule of monthly cash receipts for January, February, and March.
  

b. Prepare a schedule of monthly cash payments for January, February, and March.
  

c. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

PLEASE HELP!

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%.

What is the difference between FDIC and SIPC?

Use the following information regarding your retirement planning:

• You plan to work (and save) for 35 years, then retire (and spend money from your retirement account) for 25 years. After these 60 years, you expect that your retirement saving account will have $50,000 left to give to your family.
• You plan to save $4,000 in year 1, and you will increase this amount by 3% a year
• You want your retirement spending to increase by 2% per year
• You expect to earn a rate of return of 8% during your working years and 4.50% during retirement

To solve this problem, find the amount that you spend your first year of retirement.

An investment is expected to produce the following annual year-end cash flows: year 1: $5,000 year 4: $5,000 year 2: $1,000 year 5: $6,000 year 3: $0 year 6: $863.65 The investment will cost $13,000 today. I got that IRR is 10%

Prove your answer for IRR by showing how much of each year’s cash flow is recovery of the $13,000 investment and how much of the cash flow is return on investment. (Hint: See Exhibit 3–13 and Concept Box 3.2.)

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

What is the firm’s 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has sufficient/insufficient current assets to meet its current obligations as they come due.

What is the firm’s 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnan’s 2014 quick ratio is 1.0 then an analyst might conclude that Rosnan’s fixed assets are managed -Select-efficiently/inefficiently

What is the firm’s 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnan’s creditors have a -Select-smaller/bigger cushion than indicated by the industry average.

What is the firm’s 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-True/FalseCorrect

What is the firm’s 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2014 ROE? Round your answer to two decimal places.
%

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?