Posted: September 16th, 2017
Corporate Finance Name ______________________________
Corporate Finance Name ______________________________
Answer each of the following in the space provided. Be sure to show your work.
1. You have your savings invested in an FDIC insured account (Account A) that pays a nominal rate of 3.00% with interest compounded monthly. You are considering moving your savings to another FDIC insured account (Account B) that offers a nominal rate of 3.10%, but with interest compounded daily. Determine which account you should use for your investment.
2. Two years ago, Steven Industries issued 20-year, $1,000 Par Value bonds with 6% coupon rate with interest paid semiannually. At origination, the bonds had a five year call provision with a $100 premium. Boxer’s cost of debt for these bonds has fallen to 4%. What is the price of one of their bonds?
3. Harris, Inc. has $5 billion in assets and its tax rate is 40%. Its basic earning power ratio is 10%, and its return on assets is 5%. What is Harris’s times-interest-earned ratio?
4. Consider two mutually exclusive projects, C & H, with the following cash flows. The IRR for project C is 14.05%, the IRR for project H is 15.97%, and both projects would have the same NPV if the required rate of return was 22.62%. Determine the range of interest rates in which you would choose project C, the range of interest rates in which you would choose project H, and the range of interest rates for which you would reject both project.
| Time | 0 | 1 | 2 | 3 |
| CFC | ($175) | $85 | $75 | $70 |
| CFH | ($200) | $70 | $80 | $125 |
5. Masters Mining is considering the purchase of some new equipment that will expand their business. The revenues and expenditures associated with that expansion are listed below (negative numbers in parentheses). Find the Net Present Value of this expansion project and indicate whether you advise Miller to adopt the project.
| Time | 0 | 1 | 2 | 3 |
| Equipment | ($1,200,000) | |||
| Installation | ($50,000) | |||
| DNWC | ($80,000) | |||
| Sales | $1,370,000 | $1,450,000 | $1,554,000 | |
| – non-depreciable Costs | ($900,000) | ($912,000) | ($944,000) | |
| – Depreciation & Amortization | ($412,500) | ($562,500) | ($187,500) | |
| -Tax | ($20,126) | $8,576 | ($147,876) | |
| Salvage | $290,000 | |||
| – Capital Gains Tax | ($70,876) | |||
| ReturnDNWC | $80,000 | |||
| Cash Flow | ||||
| WACC | 12.00% | |||
| NPV |
Adopt or Reject? ___________________________________
| Formula Sheet | ||
| V0 = Vt x 1/(1+r)t | VB =S (INT/m) x 1/(1+rd/m)t + M/(1+rd/m)nm | |
| = Vt x PVIFr,t | Gordon Model: P0 = D1/(rs-g) | |
| Generalized DCF | SML: rs = rRF +bs x (rM – rRF) | |
| V0 =S Vt x 1/(1+r)t | EAR = (1 + rnom/m)m – 1 | |
| Annuity | FCF = EBIT x (1-T) + Depreciation | |
| V0 = AS1/(1+r)t | – Capital Expenditures | |
| = A x PVIFAr,t | -D Net Working Capital | |
| EPS = (EBIT-I)*(1-T)/Shares Outstanding | IRR: S CFt/(1+IRR)t = 0 | |
| mean return,m =S pi ri | Portfolio beta,bport =S wibi | |
| return variances2 =S pi (ri-m)2 | Inventory Turnover | |
| Current Ratio | Sales | |
| Current Assets | Average Inventory | |
| Current Liabilities | Inventory Conversion | |
| DSO | Average Inventory | |
| Receivables | Daily Sales | |
| Annual Sales/365 | Fixed Asset Turnover | |
| Payables Deferral Period | Sales | |
| Accounts Payable | Net fixed assets | |
| Daily COGS | Debt to Assets | |
| Total Asset Turnover | Total Debt | |
| Sales | Total Assets | |
| Total Assets | EBITDA Coverage | |
| TIE | EBITDA + Lease payments | |
| Earnings before interest and taxes | Interest + Principal payments + Lease Payments | |
| Interest Charges | BEP | |
| Profit Margin on Sales | Earnings before interest and taxes | |
| Net income avaliable to common stockholders | Total Assets | |
| Sales | ROE | |
| ROA | Net income avaliable to common stockholders | |
| Net income avaliable to common stockholders | Common Equity | |
| Total assets | P/E | |
| WACC = wd * rd*(1-T) + wps*rps+wc*(rs or re) | Price per share | |
| Pps= Div/rps | Earnings per share |
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