A two-year coupon bond with a 5% coupon rate is valued at $916.79 and another two-year coupon bond with a 10% coupon rate is valued at $1,007.13. Given this information, what will be the value of a two-year bond with an 8% coupon rate? The par values of all three bonds are $1,000.

1. Restructuring activities: Have the companies restructured operations in the last three years?

a)      Determine the amount of the expense on the income statement?

b)      Are other close competitors also restructuring during this time period?

c)      Find the restructuring liability on the balance sheet, does the liability seem reasonable over time?

d)      Are there significant reversals of prior accruals? This might indicate shifting.

1. Revenue recognition: On the income statement we must assess it on a quantitative and qualitive basis.

a)      Use horizontal analysis to identify any time trends.

b)      Compare the horizontal analysis of the two companies, what are the differences if any?

c)      Consider the current economic environment and the companies’ competitive landscape. Given that they operate in the same industry, do they have similar revenues?

1) a year ago you purchased a $1000 face value bond for $989. A year later you sold the bond for $981 after receiving a coupon payment for $53. What was your rate of capital gain?

2) A banker must earn at least a 4.8% return after expected inflation on short term loans. The inflation rate for the past 6 months has averaged 5.1%. The expected inflation rate for the next twelve months is 7.8%. Nominal interest rates for short term loans were 8.2% last month. What is the minimum nominal interest rate that he should charge for a one year loan?

3) A $5000 face value bond maturing in 4 years has a coupon rate of 4.1 percent. What is the coupon payment?

4) A $1080 face value bond is selling in the market place for $926. It matures in 3 years. If keep to maturity, what is the bond's yield to maturity?

1. Interpret the tables trend for revenue, expense & dividend year by year comparing both company?

Lockheed Corporation reported EBITDA of $4,000 million in the year just ended (year 0), prior to interest expenses of $1,000 million and depreciation charges of $600 million. Capital expenditures in the year just ended amounted to $1,000 million, and working capital was 8% of revenues (which was $20,000 million). The tax rate for the firm was 40%.

The firm had debt outstanding of $18.00 billion (in book value terms), trading at a market value of $20.0 billion and yield a pre-tax interest rate of 8%.

There were 100 million shares outstanding, trading at $250 per share, and the most recent beta was 1.20. The Treasury bond rate was 3%, and the market risk premium was 6.5%.

The firm expected revenues, earnings (EBITDA) and depreciation to grow at 10% a year from the current year (year 0) to year 3, after which the growth rate was expected to drop to 3% a year forever.

Capital expenditures will also grow at 10% a year from year 0 to year 3, but capital spending will be 120% of depreciation in the steady state period. The company also planned to lower its debt/equity ratio to 60% for the steady state which will result in the pretax interest rate dropping to 6%. As a result of the lowering of the firm’s debt/equity ratio, the beta of the firm is also expected to decline.

1. Estimate the free cash flow to the firm.

2. Compute the beta of the firm after Year 3.

WACC Before Year 3 =

Cost of Equity After Year 3 =

WACC After Year 3 =

You plan to retire in year 20
Your retirement will last 25 years starting in year 21
You want to have $50,000 each year of your retirement.
How much would you have to invest each year, starting in one year, for 15 years , to exactly pay for your retirement ,if your investments earn 6.00% APR (compounded annually)?

The following transactions pertain to Year 1, the first-year operations of Rooney Company. All inventory was started and completed during Year 1. Assume that all transactions are cash transactions.

1. Acquired $4,600 cash by issuing common stock.

2. Paid $680 for materials used to produce inventory.

3. Paid $1,800 to production workers.

4. Paid $848 rental fee for production equipment.

5. Paid $100 to administrative employees.

6. Paid $117 rental fee for administrative office equipment.

7. Produced 320 units of inventory of which 220 units were sold at a price of $13 each.

Required

Prepare an income statement and a balance sheet in accordance with GAAP.

An investment offers €10,000 per year for 15 years, with the first payment occurring one year from now. If the required return is 10 per cent,

a) What is the value of the investment?

b) What would the value be if the payments occurred for 50 years?

c) For ever?

Lockheed Corporation reported EBITDA of $4,000 million in the year just ended (year 0), prior to interest expenses of $1,000 million and depreciation charges of $600 million. Capital expenditures in the year just ended amounted to $1,000 million, and working capital was 8% of revenues (which was $20,000 million). The tax rate for the firm was 40%.

The firm had debt outstanding of $18.00 billion (in book value terms), trading at a market value of $20.0 billion and yield a pre-tax interest rate of 8%.

There were 100 million shares outstanding, trading at $250 per share, and the most recent beta was 1.20. The Treasury bond rate was 3%, and the market risk premium was 6.5%.

The firm expected revenues, earnings (EBITDA) and depreciation to grow at 10% a year from the current year (year 0) to year 3, after which the growth rate was expected to drop to 3% a year forever.

Capital expenditures will also grow at 10% a year from year 0 to year 3, but capital spending will be 120% of depreciation in the steady state period. The company also planned to lower its debt/equity ratio to 60% for the steady state which will result in the pretax interest rate dropping to 6%. As a result of the lowering of the firm’s debt/equity ratio, the beta of the firm is also expected to decline.

1. Estimate the free cash flow to the firm. (40pts)

2. Compute the beta of the firm after Year 3. (4pts)

3. Determine the Cost of Equity and WACC for the Period from Year 0 to Year 3, and the Cost of Equity and WACC after Year 3. (16pts)

Cost of Equity Before Year 3 =

WACC Before Year 3 =

Cost of Equity After Year 3 =

WACC After Year 3 =

4. Estimate the Terminal Value of the Firm in Year 3. (3pts)

5. List the free cash flows to the firm (FCFF). FCFF in Year 3 should include the terminal value. (3pts)

6. Estimate the Enterprise Value of Lockheed (value of the firm).    (4pts)

Lockheed has $800 million in cash, and it also owns 10% of the stock of ABC Corporation. ABC Corporation has 100 million shares outstanding, and its shares are trading at $50/share. Estimate the Intrinsic Value of Equity and estimate the current share price of Lockheed.