1.

7-3: Bond Valuation
Problem Walk-Through

Bond valuation

Bond X is noncallable and has 20 years to maturity, a 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; and if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5, years the yield to maturity on a 15-year bond with similar risk will be 12%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Round your answer to the nearest cent.

$    

2.

7-4: Bond Yields

Yield to maturity and yield to call

Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 10% annual coupon payment, and their current price is $1,170. The bonds may be called in 5 years at 109% of face value (Call price = $1,090).

1. What is the yield to maturity? Round your answer to two decimal places.
   %
   
2. What is the yield to call if they are called in 5 years? Round your answer to two decimal places.
   %
   
3. Which yield might investors expect to earn on these bonds? Why?
   
   1. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
   5. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
   
   -Select-IIIIIIIVV
   
4. The bond's indenture indicates that the call provision gives the firm the right to call the bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of face value; but in each of the next 4 years, the call percentage will decline by 1%. Thus, in Year 6, they may be called at 108% of face value; in Year 7, they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
   
   In Year -Select-

1. Kerria Inc. would like to buy $130,000 of new candy-making equipment. However, the company has a major loan maturing in three years and needs this money back at that time to avoid bankruptcy. The candy-making equipment is expected to increase the cash flows by $35,000 in the first year, $40,000 in the second year, and $50,000 a year for the following two years. Should Kerria Inc. buys the equipment at this time? Why or why not?

   		yes; because the money will be recovered in two years
   		yes; because the money will be recovered in less than three years
   		yes; because the money will be recovered in one year
   		no; because the money will be recovered in more than three years

2. You are considering an investment for which you require a 10 percent rate of return. The investment will cost $55,000 and produce cash inflows of $10,000 a year for 9 years. Should you accept this project based on its internal rate of return? Why or why not?

   		no; because the IRR is 9.17 percent
   		yes; because the IRR is 9.17 percent
   		yes; because the IRR is 11.17 percent
   		no; because the IRR is 11.17 percent

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $90,000, and it would cost another $13,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $27,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $79,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent.
   $  
2. 
   
3. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent.
   Year 1: $  
   Year 2: $  
   Year 3: $  
4. 
   
5. If the WACC is 13%, should the spectrometer be purchased?
   -Select-Yes/No

Colsen Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

Sales revenues	$5 million
Operating costs (excluding depreciation)	3.5 million
Depreciation	1 million
Interest expense	1 million

The company has a 40% tax rate, and its WACC is 13%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. If this project would cannibalize other projects by $0.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
   The firm's OCF would now be $  
4. 
   
5. Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar.
   The firm's operating cash flow would -Select-increase/decrease by $  

QUESTION 10 Car payments are determined using simple interest. If you don’t remember this formula, go back and look it up! To finance your vehicle purchase you have two choices. Write two equations, one for each bank, that models the banks' loan options using x for the price of the vehicle and y to represent the total cost (price, interest and origination fees) paid on each loan. Be sure to label which equation goes with which bank. Bank A: Finance the full price of the vehicle at 5% with an origination fee of $300 paid over 5 years. Bank B: Finance the full price of the vehicle at 3.5% paid over 6 years (no additional fees). car costs:$31,690.

QUESTION 12 Use the equations you came up with for bank financing options to calculate the following: Total cost of your vehicle using bank A Monthly payment of your vehicle using bank A Total cost of your vehicle using bank B Monthly payment of your vehicle using bank B Show all of your work using the equation editor and label each solution.

QUESTION 13 Taking into account your allowed car payment range and the payments you determined for Bank A and Bank B, can you afford to purchase your vehicle? Express your answer in paragraph form. If you cannot afford the vehicle, explain why based on your budget values you determined. If you will purchase the vehicle, which bank will you finance your vehicle through and why?

capital budgeting criteria:

You are given the following cash flow of a project with a discount rate of 7%. Calculate the Net Present Value, Internal Rate of Return, Profitability Index, and Payback Period.

Year	Cash.Flow
0	-17000
1	4500
2	8700
3	11900

Net present value = ??

Internal Rate of Return = ??

Profitability Index = ??

Payback period = ??

Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $800 and has an existing customer base of 660. Paul plans to raise the annual fee by 6 percent every year and expects the club membership to grow at a constant rate of 4 percent for the next five years. The overall expenses of running the health club are $131,000 a year and are expected to grow at the inflation rate of 2 percent annually. After five years, Paul plans to buy a luxury boat for $560,000, close the health club, and travel the world in his boat for the rest of his life. Assume Paul has a remaining life of 25 years and earns 9 percent on his savings.

How much will Paul have in his savings on the day he starts his world tour assuming he has already paid for his boat? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Account value at retirement $

What is the annual amount that Paul can spend while on his world tour if he will have no money left in the bank when he dies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Annual withdrawal

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?

Hint:

g = growth rate of sales = ??

S0 = current sales = ??

S1 = new sales = S0 * (1+g) = ??

A0 = current asset = ??

NI0 = current profit = ??

NI0 / S0 = current profit margin = ??

RR0 = Retention ratio = 1 - Dividend / Net profit = ??

Change of Assets = A0 * g= ??

Change of Liability = ??

Addition to Retained Earnings = S1 * (NI0 / S0) * RR0 = ??

AFN = Change of Assets - Change of Liabilities - Addition to Retained Earnings = ??

explain the importance of distinguishing between variable and fixed costs?

A stock had the following trades during a particular period. What was the money flow for the stock? (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Week	Day	Price				Volume
1	Monday	$	91.42
	Tuesday		91.38			2,700
	Wednesday		91.39			3,100
	Thursday		91.42			3,000
	Friday		91.41			3,150
2	Monday		91.44			1,100
	Tuesday		91.45			1,600
	Wednesday		91.49			600
	Thursday		91.48			1,500
	Friday		91.50			3,300

Price	Up/Down	Price Times Volume	Positive Money Flow	Negative Money Flow	Net Money Flow
$91.42
91.38	–selected answer correct	$246,726selected answer correct	$0selected answer correct	$(108)selected answer incorrect
91.39	+selected answer correct	283,309selected answer correct	31selected answer incorrect	0selected answer correct
91.42	+selected answer correct	274,260selected answer correct	90selected answer incorrect	0selected answer correct
91.41	–selected answer correct	287,942selected answer correct	0selected answer correct	(32)selected answer incorrect
91.44	+selected answer correct	100,584selected answer correct	33selected answer incorrect	0selected answer correct
91.45	+selected answer correct	146,320selected answer correct	16selected answer incorrect	0selected answer correct
91.49	+selected answer correct	54,894selected answer correct	24selected answer incorrect	0selected answer correct
91.48	–selected answer correct	137,220selected answer correct	0selected answer correct	(15)selected answer incorrect
91.50	+selected answer correct	301,950selected answer correct	66selected answer incorrect	0selected answer correct

v

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $890 per set and have a variable cost of $427 per set. The company has spent $190,000 for a marketing study that determined the company will sell 79,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,550 sets per year of its high-priced clubs. The high-priced clubs sell at $1,320 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,700 sets per year. The cheap clubs sell for $336 and have variable costs of $138 per set. The fixed costs each year will be $14,250,000. The company has also spent $1,400,000 on research and development for the new clubs. The plant and equipment required will cost $42,600,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,575,000 that will be returned at the end of the project. The tax rate is 24 percent, and the cost of capital is 14 percent.

Calculate the payback period, the NPV, and the IRR.

I need new and unique answers, please. (Use your own words, don't copy and paste), Please Use your keyboard (Don't use handwriting) Thank you..

***Just choose the correct answer without explain

25- The measure of net income returned from every dollar invested in total assets is the:(…………..).

A. profit margin.

B. return on assets.

C. return on equity.

D. asset turnover.

E. earnings before interest and taxes.

26- The financial ratio that measures the accounting profit per dollar of book equity is referred to as the:(…………..).

A. profit margin.

B. return on assets.

C. return on equity.

D. asset turnover.

E. earnings before interest and taxes.

27- The amount that investors are willing to pay for each dollar of annual earnings is reflected in the:(…………..).

A. profit margin.

B. return on assets.

C. return on equity.

D. asset turnover.

E. earnings before interest and taxes.

28- The market-to-book ratio is measured as the:(…………..).

A. market price per share divided by the par value per share.

B. net income per share divided by the market price per share.

C. market price per share divided by the net income per share.

D. market price per share divided by the dividends per share.

E. market value per share divided by the book value per share.

29- Which one of the following statements is correct concerning ratio analysis?

A. A single ratio is often computed differently by different individuals.

B. Ratios do not address the problem of size differences among firms.

C. Only a very limited number of ratios can be used for analytical purposes.

D. Each ratio has a specific formula that is used consistently by all analysts.

E. Ratios cannot be used for comparison purposes over periods of time.

30- Which one of the following is a liquidity ratio?

A. quick ratio

B. cash coverage ratio

C. total debt ratio

D. EV multiple

E. times interest earned ratio.

31- An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

A. accounts payable

B. cash

C. inventory

D. accounts receivable

E. fixed assets

32- A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?

A. current

B. cash

C. debt-equity

D. quick

E. total debt

33- A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:(................).

A. $1 in total equity.

B. $.53 in total assets.

C. $1 in current assets.

D. $.53 in total equity.

E. $1 in fixed assets.

34- The long-term debt ratio is probably of most interest to a firm's:(................).

A. credit customers.

B. employees.

C. suppliers.

D. mortgage holder.

E. stockholders.

35- From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?.

A. times interest earned ratio

B. cash coverage ratio

C. cash ratio

D. quick ratio

E. interval measure.

36- The higher the inventory turnover, the:(................).

A. less time inventory items remain on the shelf.

B. higher the inventory as a percentage of total assets.

C. longer it takes a firm to sell its inventory.

D. greater the amount of inventory held by a firm.

E. lesser the amount of inventory held by a firm.

37- If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:(................).

A. has no debt of any kind.

B. is using its assets as efficiently as possible.

C. has no net working capital.

D. also has a current ratio of 15.

E. has an equity multiplier of 2.

38- If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the:(................).

A. Profit margin.

B. Return on assets.

C. Return on equity.

D. Equity multiplier.

E. Earnings per share.

39- Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the:(................).

A. return on equity will increase.

B. return on assets will decrease.

C. profit margin will decline.

D. equity multiplier will decrease.

E. price-earnings ratio will increase.

40- Which one of the following sets of ratios would generally be of the most interest to stockholders?

A. return on assets and profit margin

B. quick ratio and times interest earned

C. price-earnings ratio and debt-equity ratio

D. return on equity and price-earnings ratio

E. cash coverage ratio and equity multiplier

41- ROE is: (…………..).

A) Return on Equity.

B) Return on investment.

C) All the above.

42-The return on equity can be calculated as: (…………..).

A. ROA × Equity multiplier.

B. Profit margin × ROA.

C. Profit margin × ROA × Total asset turnover.

D. ROA ×(Net income / Total assets).

E. ROA × Debt-equity ratio.

43-Which one of the following depicts a correct relationship?

A. Dividend payout ratio = 1 – Retention ratio

B. Total asset turnover = 1 + Capital intensity ratio

C.ROA = ROE × (1 + Debt-equity ratio)

D. ROE = 1 – ROA

E. Equity multiplier = 1 – Debt-equity ratio

44- DuPont known as: (…………..).

A) Du Pont Equation.

B) Du Pont Model.

C) All of the above.

45- The DuPont identity can be computed as: (…………..).

A. Net income × Profit margin × (1 + Debt-equity ratio).

B. Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio).

C. Net income × Total asset turnover × Equity multiplier.

D. Profit margin × Total asset turnover × Debt-equity ratio.

E. Return on equity × Profit margin × Total asset turnover.

46- If a firm decreases its operating costs, all else constant, then the: (…………..).

A. profit margin will decrease.

B. return on assets will decrease.

C. total asset turnover rate will increase.

D. cash coverage ratio will decrease.

E. price-earnings ratio will decrease.

47- It is easier to evaluate a firm using its financial statements when the firm: (…………..).

A. is a conglomerate.

B. is global in nature.

C. uses the same accounting procedures as other firms in its industry.

D. has a different fiscal year than other firms in its industry.

E. tends to have one-time events such as asset sales and property acquisitions.

48- The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to: (…………..).

A. the firm’s ratios from prior time periods and to the ratios of firms with similar operations.

B. the average ratios of all firms within the same country over a period of time.

C. those of other firms located in the same geographic area that are similarly sized.

D. the average ratios of the firm’s international peer group.

E. those of the largest conglomerate that has operations in the same industry as the firm.

49- The equity multiplier measures: (…………..).

A. financial leverage.

B. returns to stockholders.

C. operating efficiency.

D. management efficiency.

E. asset use efficiency.

50- The Expressions to breaks Return on Equity are : (…………..).

A) Profitability.

B) Financial Leverage.

C) All of the above.

a) What are the key differences between equity and debt financing? Discus the merits and demerits of each type of procuring finance at the firm level.

b) What are Hedge Funds? What investment strategies do the hedge fund managers use?

Tim Smith is shopping for a used car. He has found one priced at $4500. The salesman has told Tim that if he can come up with a down payment of $500 the dealer will finance the balance of the price at an annual rate of 14% over 2 years (24 months).  

a.  Assuming that Tim accepts the dealer's offer, what will his monthly (end-of-month) payment amount be?
b.  Use a financial calculator or spreadsheet to help you figure out what Tim's monthly payment would be if the dealer were willing to finance the balance of the car price at an annual rate of 9%?

b) Write brief notes about the key features, relevance and there role in the capital markets for the following: I. Private Equity Funds II. Venture Capital Funds III. Exchange Traded Funds