“Finance
215
Assume at most two decimal fractions in your bottom line answers and assume, unless
otherwise stated, that income (cash inflow) and payments (cash outflow) are at
period end
Do all
a problems subparts, e.g., for problem 3, 3.1 and 3.16
1. Deternine if and why the firm should (not) replace the
existing equipment with the new more efficient, pollution-free equipment.
Firm:
30% tax rate
8% WCC
Existing equipment:
Purchased two years ago for 250,000
Can be sold at year-end two for 100,000
Had a 7 year life
MACRS {.143, .245, .175, .125, .089, .089,
.089, .045} for 7 year life assets
New equipment:
Can be purchased for 300,000
Has a 5 year life
MACRS {.200, .320, .192, .115, .115, .058}
for 5 year life assets
Projected operating income before
depreciation
Year-end
1
2
3
4
5
6
Existing
36,000
26,000
19,000
18,000
16,000
-2,000
New
100,000
96,000
80,000
72,000
62,000
43,000
Year six for old includes polution
remediation costs incurred with deinstallation
2.
Complete the table for each condo home loan option.
15 year loan term
$150,000 selling price
Points are a finance charge, assessed on
the loan amount, and paid upfront, e.g., 1 point is 1%
Fixed interest rate and, excepting deferral
periods and ballon, equally monthly payments
Quoted rate is the nominal rate, not
necessarily the APR
Loan amount = selling price (1 down
payment %) = selling price down payment
Option
Down payment %
Points
Quoted rate
Other
A
5
5
7.0%
None
B
10
0
7.5%
$10,000 balloon payment at year-end 15
C
30
0
7.9%
No payments for first 6 months
For Option C, no payments occur for the
first half year and the loan is amortized over the ensuing 14.5 years. For Option B, the last payment includes the
monthly amount plus the balloon amount.
Option
Monthly payment
Total interest and points
APR
A
B
C
3.
Given the ensuing financial statements, answer
the following.
3.1
Quick/acid ratio
3.2
Debt ratio
3.3
Average collection period
3.4
Fixed charge coverage
3.5
Dupont analysis (result)
3.6
DOL
3.7
DFL
3.8
DCL
3.9
Break even point
3.10
EPS
3.11
ROE
3.12
Common share IPO price
3.13
Common share book value
3.14
Cash flow
3.15
DDA
3.16
Amount to be used in the Investing portion of the Statement of Cash Flow
Other as of year-end 12/31/11:
*/ Includes annual operating lease expense of 200000
and DDA expense of 50000
Unit sales price = $250
Unit variable cost = $150
Market price of common = $13.75
Dividend per common share = $.35
Sales/calendar days per year = 365
P&L Statement for year ended 12/31/11:
Sales
7000000
Fixed costs*/
2100000
Variable costs
4200000
EBIT
700000
Interest
250000
EBT
450000
Taxes
157500
EAT
29250
Balance sheet for year end 12/31/11:
Assets
Liabilities
and Equity
Cash
50000
Accounts payable
2200000
Marketable securities
80000
Accrued expenses
150000
Accounts receivable
3000000
Notes payable
499999
Inventory
1000000
Bonds
2500000
FP&E gross
6000000
Common ($10 par)
1700000
DDA accumulated
2000000
Paid in capital
180000
FP&E net
4000000
Retained earnings
1000000
Total
8130000
Total
8130000
4. Given the need for $25M (M for million) additional capital to fund new
long-term investments, answer the followingl.
4.1
WCC for the current capitalization
4.2
Recommended securities to be issued to provide new capital
4.3
WCC for new capital structure, including the additional $25M capital
Firms current status:
$50M, 10% bonds, due 2020
$100M, 6% bonds, due 2015
$150M, 4% bonds, due 2014
4M preferred shares, callable and
cumulative, $3 dividend, $25 par value
$250M common equity, including retained
earnings, excess over par value, and par value
Common stock dividend of $1.25
EPS and dividends historically growing at
4% per year
Current market conditions:
Comparable bonds coupon rate of 9.25%
New preferred stock floatation costs of
$1.50 per share
Existing preferred stock trading at $45.00
per share
New common stock floatation costs of $2.00
per share
Existing common stock trading at $35.00 per
share
5.
Generate the complete Statement of Cash Flow for year ended 12/31/11.
P&L Statement for Year 2011 Statement of
Retained Earnings for Year 2011
Sales
3,300,000
Balance 12/31/2010
800,000
COGS
1,950,000
Earnings for common 2011
240,000
Gross profits
1,350,000
Cash dividends 2011
140,000
SGA
650,000
Balance 12/31/2011
900,000
DDA
230,000
Operating income (EBIT)
470,000
Interest expense
80,000
EBT
390,000
Taxes
140,000
EAT
250,000
Preferred stock dividends
10,000
Earnings for common
240,00
Shares outstanding
150,000
EPS
1.60
Balance Sheet for Years 2010 and 2011
2010
2011
Assets
Current assets
Cash
100,000
120,000
Accounts receivable
500,000
510,000
Inventory
610,000
640,000
Prepaid expenses
60,000
30,000
Total current
1,270,000
1,300,000
Investment securities
90,000
80,000
Plant and equipment
2,000,000
2,600,000
Accumulated DDA
1,000,000
1,230,000
Net plant and equipment
1,000,000
1,370,000
Total
2,360,000
2,750,000
Liabilities and Equity
Current liabilities
Accounts payable
300,000
550,000
Notes payable
500,000
500,000
Accrued expenses
70,000
50,000
Total current
870,000
1,100,000
Long-term
Bonds
100,000
160,000
Total liabilities
970,000
1,260,000
Equity
Preferred stock at par
90,000
90,000
Common stock at par
150,000
150,000
Capital paid in excess
350,000
350,000
Retained earnings
800,000
900,000
Total equity
1,390,000
1,490,000
Total liabilities and equity
2,360,000
2,750,000
6.
Answer the following.
6.1
Tax considerations and brokerage costs aside, complete the table for
parties A, B, and C assuming bond interest is semi-annual
Party A
invests $2782.26 to purchase original issue, zero coopon bonds, $1000 par
value with a 20 year term when the market rate is 6.5%, retains them for
7.5 years, and sells them to Party B when the market rate is 6%
Party B
retains the bonds for 5 years and sells them to Party C when the market
rate is 7%
Party C
retains the bonds until maturity and redeems them when the market rate is
3.75%.
Party A
Party B
Party C
Purchase price per $1000 bond
Total purchase amount (all bonds)
APR to bondholder
Sale/redemption price per $1000 bond
6.2
Recommend one of the ensuing two mutually exclusive investments and
explain the basis for your recommendation.
Year
0
1
2
3
4
5
Investment A
-10000
5000
4000
3000
2000
1000
Investment B
-8500
500
1000
2000
4000
8000
7.
Answer the following.
7.1
Complete the table for each payment option pursuant to retiring a $9000
debt and explain which of the options you as the borrower would elect assuming
annual interest compounded monthly.
Option A
Option B
Option C
Total payment (principal and interest)
Total interest (finance) charge
APR
Option
A:
6.25% simple interest charge computed on
the original balance due
12 monthly equal payments, including both
principal and interest
Option
B:
Single year-end payment, both principal and
interest, of $9950
Option
C:
$550 upfront (month beginning) financing
charge payment
12 monthly payments of $750 each
7.2
Ignoring taxes and investment costs, determine the annual investment
amount required during each working year to fund the annual retirement annuity
assuming annual transactions and annual interest (discount).
Retirement years covered by the annuity: 25
Annual amount needed at the beginning of
each retirement year: $25,000
Working years for investing: 21
Annual investment to be made at the
beginning of each working year
Annual interest rate applicable to the
working years investments: 6.25%
Annual discount rate applicable to the
retirement years annunity: 7.40%
8.
Briefly answer the following.
8.1
The concepts and mathematics underlying the present and future time
value of money
8.2
For each of two similar firms, one with high growth and one with zero
growth, the recommended security — bonds, preferred, or common — to be
issued to raise additional capital
8.3
The difference between and the differing treatment, accounting and
otherwise, accorded capital versus operating leases
8.4
The definition of the following preferred stocks: Cumulative,
non-cumulative, convertible, and participating
8.5
The advantages (disadvantages) of level production versus production
geared to demand in an industry with highly seasonal demand
8.6
The relative risk between two similar firms, both with the same DCL but
one with a high DOL and one with a high DFL
8.7
Viable approach, if any, to avoid immediate market share price dilution
upon the issuance of new common shares
8.8
The resolution and choice if different discount rates yield different
decisions regarding the best investment between two mutually exclusive
investments
8.9
The explanation for a common stock having grossly different IPO, market,
book, and par values
8.10
The advantages and disadvantages to each of the issuer and the purchaser
of zero coupon bonds
9.
Determine the investment-annuity plan the best benefits the
investor-retiree.
30 year
work (investment) period
20 year
retirement (annunity) period
30.0%
income tax rate during the working years
8.5%
income tax rate during the retirement years
6.5%
annual return on the balanced stock fund; compounded annually
4.8%
annual return on the high-yield, tax free municipal bond fund; compounded
annually
5.0%
discount rate applies to the annuities
A given
plan applies to both the investment and annuity phases
The
annual payroll investment deduction is the same for all plans
The
investment phase stops and the annuity phase immediately begins
Income
taxes, if applicable, are deducted concurrent with the related transaction
Transactions
are annual at the beginning of the year
No
investment costs, fees, etc. are charged
Plan
1: Traditional SEP IRA
entailing a balanced stock fund
Investment contribution is pre-tax and
taxes are paid pro rata on the percentage of the annuity payments that
represent the increase over and above the investment contribution
Plan
2: Roth SEP IRA entailing
a balanced stock fund
Investment contribution is after-tax and
annuity payments are tax free
Plan
3: Traditional SEP IRA
entailing a tax-free high yield municipal bond fund
Investment contribution is pre-tax and
taxes are paid pro rata on the percentage of the annuity payments that
represent the investment contribution
10.
Given the following information, answer the ensuing.
Existing bonds:
$10,000,000 principal amount
9.50% annual interest
Interest paid semi-annually
Callable (can be redeemed)
$102.50 redemption (call) price per $100
principal amount
$150,000 unamortized floatation costs
15 years remaining
New bonds:
$10,000,000 principal amount
15 year term
Interest paid semi-annually
2.40% floatation ($2.40 issuance cost per
$100 principal amount) cost
$175,000 other transaction costs, e.g.,
outside legal and financial counsel; expensed when incurred
Assumptions:
35.0% tax rate
7.50% after-tax discount rate
Redemption of existing bonds and issuance
of new bonds coincide at outset of 15 year period
10.1
The highest market rate at which the corporate treasurer would redeem
the existing bonds and issue new, lower coupon bonds to replace them
10.2
The price of the existing bond at the preceding market rate
Finance
215
Assume
at most two decimal fractions in your bottom line answers and assume, unless
otherwise stated, that income (cash inflow) and payments (cash outflow) are at
period end
Do all
a problems subparts, e.g., for problem 3, 3.1 and 3.161. Deternine if and why the firm should (not) replace the
existing equipment with the new more efficient, pollution-free equipment.Firm:30% tax rate8% WCCExisting equipment:Purchased two years ago for 250,000Can be sold at year-end two for 100,000Had a 7 year lifeMACRS {.143, .245, .175, .125, .089, .089,
.089, .045} for 7 year life assetsNew equipment:Can be purchased for 300,000 Has a 5 year lifeMACRS {.200, .320, .192, .115, .115, .058}
for 5 year life assetsProjected operating income before
depreciationYear-end123456Existing36,00026,00019,00018,00016,000-2,000New100,00096,00080,00072,00062,00043,000Year six for old includes polution
remediation costs incurred with deinstallation2.
Complete the table for each condo home loan option.15 year loan term$150,000 selling price Points are a finance charge, assessed on
the loan amount, and paid upfront, e.g., 1 point is 1%Fixed interest rate and, excepting deferral
periods and ballon, equally monthly paymentsQuoted rate is the nominal rate, not
necessarily the APRLoan amount = selling price (1 down
payment %) = selling price down paymentOptionDown payment %PointsQuoted rateOtherA557.0%NoneB1007.5%$10,000 balloon payment at year-end 15C3007.9%No payments for first 6 monthsFor Option C, no payments occur for the
first half year and the loan is amortized over the ensuing 14.5 years. For Option B, the last payment includes the
monthly amount plus the balloon amount.OptionMonthly paymentTotal interest and pointsAPRABC3.
Given the ensuing financial statements, answer
the following.3.1
Quick/acid ratio3.2
Debt ratio3.3
Average collection period3.4
Fixed charge coverage3.5
Dupont analysis (result)3.6
DOL3.7
DFL3.8
DCL3.9
Break even point3.10
EPS3.11
ROE3.12
Common share IPO price3.13
Common share book value3.14
Cash flow3.15
DDA3.16
Amount to be used in the Investing portion of the Statement of Cash FlowOther as of year-end 12/31/11:*/ Includes annual operating lease expense of 200000
and DDA expense of 50000Unit sales price = $250Unit variable cost = $150Market price of common = $13.75Dividend per common share = $.35Sales/calendar days per year = 365P&L Statement for year ended 12/31/11:Sales7000000Fixed costs*/2100000Variable costs4200000EBIT700000Interest250000EBT450000Taxes157500EAT29250Balance sheet for year end 12/31/11:AssetsLiabilities
and EquityCash50000Accounts payable2200000Marketable securities80000Accrued expenses150000Accounts receivable3000000Notes payable499999Inventory1000000Bonds2500000FP&E gross6000000Common ($10 par)1700000DDA accumulated2000000Paid in capital180000FP&E net4000000Retained earnings1000000Total8130000Total81300004. Given the need for $25M (M for million) additional capital to fund new
long-term investments, answer the followingl. 4.1
WCC for the current capitalization4.2
Recommended securities to be issued to provide new capital4.3
WCC for new capital structure, including the additional $25M capital Firms current status:$50M, 10% bonds, due 2020$100M, 6% bonds, due 2015$150M, 4% bonds, due 20144M preferred shares, callable and
cumulative, $3 dividend, $25 par value$250M common equity, including retained
earnings, excess over par value, and par valueCommon stock dividend of $1.25EPS and dividends historically growing at
4% per yearCurrent market conditions:Comparable bonds coupon rate of 9.25%New preferred stock floatation costs of
$1.50 per shareExisting preferred stock trading at $45.00
per shareNew common stock floatation costs of $2.00
per shareExisting common stock trading at $35.00 per
share5.
Generate the complete Statement of Cash Flow for year ended 12/31/11.P&L Statement for Year 2011 Statement of
Retained Earnings for Year 2011
Sales3,300,000Balance 12/31/2010800,000COGS1,950,000Earnings for common 2011240,000Gross profits1,350,000Cash dividends 2011140,000SGA 650,000Balance 12/31/2011900,000DDA230,000Operating income (EBIT)470,000Interest expense80,000EBT390,000Taxes140,000EAT250,000Preferred stock dividends10,000Earnings for common240,00Shares outstanding150,000EPS1.60Balance Sheet for Years 2010 and 201120102011AssetsCurrent assetsCash100,000120,000Accounts receivable500,000510,000Inventory610,000640,000Prepaid expenses60,00030,000Total current1,270,0001,300,000Investment securities 90,00080,000Plant and equipment2,000,0002,600,000Accumulated DDA1,000,0001,230,000Net plant and equipment1,000,0001,370,000Total2,360,0002,750,000Liabilities and EquityCurrent liabilitiesAccounts payable300,000550,000Notes payable500,000500,000Accrued expenses70,00050,000Total current870,0001,100,000Long-termBonds 100,000160,000Total liabilities970,0001,260,000EquityPreferred stock at par90,00090,000Common stock at par150,000150,000Capital paid in excess350,000350,000Retained earnings800,000900,000Total equity1,390,0001,490,000Total liabilities and equity2,360,0002,750,0006.
Answer the following. 6.1
Tax considerations and brokerage costs aside, complete the table for
parties A, B, and C assuming bond interest is semi-annualParty AParty BParty CPurchase price per $1000 bondTotal purchase amount (all bonds)APR to bondholderSale/redemption price per $1000 bond6.2
Recommend one of the ensuing two mutually exclusive investments and
explain the basis for your recommendation.Year012345Investment A-1000050004000300020001000Investment B-850050010002000400080007.
Answer the following. 7.1
Complete the table for each payment option pursuant to retiring a $9000
debt and explain which of the options you as the borrower would elect assuming
annual interest compounded monthly.Option AOption BOption CTotal payment (principal and interest)Total interest (finance) chargeAPROption
A:6.25% simple interest charge computed on
the original balance due12 monthly equal payments, including both
principal and interestOption
B:Single year-end payment, both principal and
interest, of $9950Option
C:$550 upfront (month beginning) financing
charge payment12 monthly payments of $750 each7.2
Ignoring taxes and investment costs, determine the annual investment
amount required during each working year to fund the annual retirement annuity
assuming annual transactions and annual interest (discount). Retirement years covered by the annuity: 25Annual amount needed at the beginning of
each retirement year: $25,000Working years for investing: 21Annual investment to be made at the
beginning of each working yearAnnual interest rate applicable to the
working years investments: 6.25%Annual discount rate applicable to the
retirement years annunity: 7.40%8.
Briefly answer the following.8.1
The concepts and mathematics underlying the present and future time
value of money8.2
For each of two similar firms, one with high growth and one with zero
growth, the recommended security — bonds, preferred, or common — to be
issued to raise additional capital 8.3
The difference between and the differing treatment, accounting and
otherwise, accorded capital versus operating leases8.4
The definition of the following preferred stocks: Cumulative,
non-cumulative, convertible, and participating8.5
The advantages (disadvantages) of level production versus production
geared to demand in an industry with highly seasonal demand8.6
The relative risk between two similar firms, both with the same DCL but
one with a high DOL and one with a high DFL8.7
Viable approach, if any, to avoid immediate market share price dilution
upon the issuance of new common shares8.8
The resolution and choice if different discount rates yield different
decisions regarding the best investment between two mutually exclusive
investments8.9
The explanation for a common stock having grossly different IPO, market,
book, and par values8.10
The advantages and disadvantages to each of the issuer and the purchaser
of zero coupon bonds9.
Determine the investment-annuity plan the best benefits the
investor-retiree.Plan
1: Traditional SEP IRA
entailing a balanced stock fundInvestment contribution is pre-tax and
taxes are paid pro rata on the percentage of the annuity payments that
represent the increase over and above the investment contribution Plan
2: Roth SEP IRA entailing
a balanced stock fundInvestment contribution is after-tax and
annuity payments are tax freePlan
3: Traditional SEP IRA
entailing a tax-free high yield municipal bond fundInvestment contribution is pre-tax and
taxes are paid pro rata on the percentage of the annuity payments that
represent the investment contribution10.
Given the following information, answer the ensuing.Existing bonds:$10,000,000 principal amount9.50% annual interestInterest paid semi-annuallyCallable (can be redeemed) $102.50 redemption (call) price per $100
principal amount$150,000 unamortized floatation costs15 years remainingNew bonds:$10,000,000 principal amount15 year termInterest paid semi-annually2.40% floatation ($2.40 issuance cost per
$100 principal amount) cost$175,000 other transaction costs, e.g.,
outside legal and financial counsel; expensed when incurredAssumptions:35.0% tax rate7.50% after-tax discount rateRedemption of existing bonds and issuance
of new bonds coincide at outset of 15 year period10.1
The highest market rate at which the corporate treasurer would redeem
the existing bonds and issue new, lower coupon bonds to replace them10.2
The price of the existing bond at the preceding market rate”
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