1 You are given with the following information statements of a public firm BB in the fast food industry concurrently (Notice that all negative numbers are parenthesized) The firm has issued 12 million shares of common stock with current market price as $45 per share, the expected dividend is $4 90 per share with 3 5 growth rate, 300,000 shares of preferred stocks with promised preferred dividend and preferred stock price as $2 20 per share and $22 5 per share, respectively The firm also has a $6 million loan with annual interest rate as 5 6 for 5 years with market price as $750 with face value as $1000 The corporate income tax rate is 20 Answer the following questions a) If using the market prices for assessment on rates of return, what is the rate of return of the common stock of BB What is the rate of return for their preferred stocks b) What is the estimate for the bond's cost of capital c) Suppose you are also given with the following financial statements of BB for the past three years What are the historical returns on equity for this company for the past three years Is the firm BB doing well from the perspectives of shareholders Why or why not d) Is this firm well diversified with their arrangement of capital That is, are they well diversified with different sources of capital e) Based on the given information, provide your ratios analyses, and interpret your results for the firm's performance f) Suppose the industry average for the cost of capital is 4 6 , is the firm financing with suitable capital structure Balance Sheet (in millions) 2014 2015 2016 Assets Cash 30 10 473 Marketable securities 100 100 0 Accounts Receivable 920 150 800 Inventory 710 178 450 Plant, Building, and Equipment's (net) 872 1802 1209 Investments in affiliates 0 30 329 Total Assets 2632 2270 3261 Liabilities Short term debts 107 9 30 Advances from customers 111 34 134 Accounts payable 85 192 771 Interest payable 75 98 62 Tax payable 127 147 128 Other Accrued Expenses 20 15 35 Bonds payable 925 486 750 Stockholders' Equity Common stock 1021 1055 1175 Additional paid in capital 74 156 47 Retained earning 87 78 129 Total liabilities and equities 2632 2270 3261 Income Statement(in millions) 2014 2015 2016 Net Sales 3296 3418 3983 Cost of Goods Sold 2115 1979 2510 Selling and General Expenses 700 812 759 Depreciation Expense 160 298 284 Interest Expense 90 109 121 Income Tax Expense 195 137 254 Net Income 36 83 55 2 Suppose you're given the following information for some assets a 12 year 2 coupon bond of semi annual coupon payment with face value as $1,000, a common stock of $3 20 expected dividend with 2 0 growth rate currently Both bond and common stock are issued by Company M M Answer the following questions Suppose the yield to maturity (that is, the discount rate) for the bond is 10 , what is the present value of this coupon bond Is it a discount bond Why What if the discount rate is 6 Suppose the bond is in fact, callable That is, the firm may repurchase it with the call price as $925 and the bond is callable at the end of year 4, what is the yield to call for this bond if the current bond price is $835 (That is, the discount rate for the bond if you choose to be called Use IRR function in EXCEL for this question) Suppose the stock price is $32 32 per share right now, and assuming the capital market is efficient, what is the required rate of return for the stock What are the assumptions you have for this present value model Suppose the dividend growth rate for the g If the stock price right now is $30 85 per share, what is possible growth rate of dividends g if using the rate of return obtained from c) Suppose the bond is convertible That is, at the end of the 3rd year after issuance , the holder of the bond has the right to convert the bond with 1 to 4 ratio toward company M M's common stock Would you possibly convert the bond at the end of 4 th year if based on the above information in a) and c) Why the so called fair value of financial asset is represented by the present value of future cash flows of financial asset 3 You're given a mortgage from your credit union to buy a house that costs $620,000 Suppose you pay $124,000 for down payment and the current average market interest rate is 3 2 for the 15 year mortgage Answer the following questions What is the monthly payment if there is no pre payment penalty Suppose the credit union says that if you'd like to retire the loan earlier, say at the end of the 7th year, you need to pay (say) $361,000 for the rest of the loan, would you take it given that you have no difficulty to generate the cash flow Why or why not Suppose that the credit union also offers you another possible payment program that is they will give you a low 1 2 interest rate for the first 6 years and with a lump sum payment at the end of the 6 th year as $532,000 (The lump sum payment is a one time payment that you must pay it off or, you need to re finance by then ) What is your monthly payment for the first 5 years Suppose you follow the original mortgage in (a) without any refinancing or prepayment, and after 5 years of payments, you discover the current market interest rate for mortgage drops to 1 8 APR Instead of paying off the mortgage, you are about to re finance your mortgage for 15 year mortgage instead What is your monthly payment for your mortgage now Is re financing good for you Do you think re financing is worthy What is the total payment after re financing 4 Answer True' or False to the following questions and with Explanation (No credits will be given if no explanation is shown) a) The mutual funds are good for investments since they are all efficient portfolios b) The reason for time value of money is that there is risk in financial asset c) The bond's yield to maturity is the required rate of return for creditors of the holding horizons Therefore, if Federal Reserve increases the money supply by reducing the required reserve in all banks, the bond yield will also increase d) The discount rate for future expected cash flows is defined as the cost of capital Hence, it must cover all financing risk where the institution may arrange to finance the necessary capital for the investment projects 5 You are given the following information of two projects planned by your company The initial costs are given as $3 million for project A, and $3 5 million for project B, respectively Table 1 (in thousands) Project Year 1 Year 2 Year 3 Year 4 Year 5 A 450 1250 350 2200 2500 B 360 952 400 875 2250 Answer the following questions a) Suppose the actual cost of capital is 12 What are the Net Present Values for these two projects b) Suppose the financial manager discovered that if we postponed the project B to two years later, the cost of capital could be 10 due to possible low future interest rates However, the deferment may cost the firm additional $0 5 million to restart the facilities and the initial cost must be spent now, instead of two years later Will you recommend waiting for additional 2 years to start c) Let the corporate income tax rate be 30 , the cost of debts be 6 , the cost of equity be 25 and there is no preferred stock issued by the firm What is the debt to equity ratio for your company

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1.You are given with the following information statements of a public firm BB in the fast-food industry concurrently. (Notice that all negative numbers are parenthesized).

1.You are given with the following information statements of a public firm BB in the fast-food industry concurrently. (Notice that all negative numbers are parenthesized). The firm has issued 12 million shares of common stock with current market price as $45/per share, the expected dividend is $4.90/per share with 3.5% growth rate, 300,000 shares of preferred stocks with promised preferred dividend and preferred stock price as $2.20/per share and $22.5/per share, respectively. The firm also has a $6 million loan with annual interest rate as 5.6% for 5 years with market price as $750 with face value as $1000. The corporate income tax rate is 20%. Answer the following questions:

a) If using the market prices for assessment on rates of return, what is the rate of return of the common stock of BB? What is the rate of return for their preferred stocks?

b) What is the estimate for the bond's cost of capital?

c) Suppose you are also given with the following financial statements of BB for the past three years. What are the historical returns on equity for this company for the past three years? Is the firm BB doing well from the perspectives of shareholders? Why or why not?

d) Is this firm well-diversified with their arrangement of capital? That is, are they well diversified with different sources of capital?

e) Based on the given information, provide your ratios analyses, and interpret your results for the firm's performance.

f) Suppose the industry average for the cost of capital is 4.6%, is the firm financing with suitable capital structure?

Balance Sheet (in millions)

2014 2015 2016

Assets

Cash 30 10 473

Marketable securities 100 100 0

Accounts Receivable 920 150 800

Inventory 710 178 450

Plant, Building, and Equipment's (net) 872 1802 1209

Investments in affiliates 0 30 329

Total Assets 2632 2270 3261

Liabilities

Short-term debts 107 9 30

Advances from customers 111 34 134

Accounts payable 85 192 771

Interest payable 75 98 62

Tax payable 127 147 128

Other Accrued Expenses 20 15 35

Bonds payable 925 486 750

Stockholders' Equity

Common stock 1021 1055 1175

Additional paid-in capital 74 156 47

Retained earning 87 78 129

Total liabilities and equities 2632 2270 3261

Income Statement(in millions)

2014 2015 2016

Net Sales 3296 3418 3983

Cost of Goods Sold 2115 1979 2510

Selling and General Expenses 700 812 759

Depreciation Expense 160 298 284

Interest Expense 90 109 121

Income Tax Expense 195 137 254

Net Income 36 83 55

2. Suppose you're given the following information for some assets; a 12-year 2%-coupon bond of semi-annual coupon payment with face value as $1,000, a common stock of $3.20 expected dividend with 2.0% growth rate currently. Both bond and common stock are issued by Company M&M. Answer the following questions.

Suppose the yield to maturity (that is, the discount rate) for the bond is 10%, what is the present value of this coupon bond? Is it a discount bond? Why? What if the discount rate is 6%?
Suppose the bond is in fact, callable. That is, the firm may repurchase it with the call price as $925 and the bond is callable at the end of year 4, what is the yield to call for this bond if the current bond price is $835? (That is, the discount rate for the bond if you choose to be called. Use IRR function in EXCEL for this question).
Suppose the stock price is $32.32 per share right now, and assuming the capital market is efficient, what is the required rate of return for the stock? What are the assumptions you have for this present value model?
Suppose the dividend growth rate for the g%. If the stock price right now is $30.85 per share, what is possible growth rate of dividends g if using the rate of return obtained from c)?
Suppose the bond is convertible. That is, at the end of the 3rd year after issuance, the holder of the bond has the right to convert the bond with 1 to 4 ratio toward company M&M's common stock. Would you possibly convert the bond at the end of 4^th year if based on the above information in a) and c)?
Why the so-called "fair value" of financial asset is represented by the present value of future cash flows of financial asset?

3. You're given a mortgage from your credit union to buy a house that costs $620,000. Suppose you pay $124,000 for down payment and the current average market interest rate is 3.2% for the 15-year mortgage. Answer the following questions:

What is the monthly payment if there is no pre-payment penalty?
Suppose the credit union says that if you'd like to retire the loan earlier, say at the end of the 7th year, you need to pay (say) $361,000 for the rest of the loan, would you take it given that you have no difficulty to generate the cash flow? Why or why not?
Suppose that the credit union also offers you another possible payment program that is they will give you a low 1.2% interest rate for the first 6 years and with a lump-sum payment at the end of the 6^th year as $532,000. (The lump-sum payment is a one-time payment that you must pay it off or, you need to re-finance by then.) What is your monthly payment for the first 5 years?
Suppose you follow the original mortgage in (a) without any refinancing or prepayment, and after 5 years of payments, you discover the current market interest rate for mortgage drops to 1.8% APR. Instead of paying off the mortgage, you are about to re-finance your mortgage for 15-year mortgage instead. What is your monthly payment for your mortgage now? Is re-financing good for you?
Do you think re-financing is worthy? What is the total payment after re-financing?

4. Answer "True' or "False" to the following questions and with "Explanation". (No credits will be given if no explanation is shown)

a) The mutual funds are good for investments since they are all efficient portfolios.

b) The reason for time value of money is that there is risk in financial asset.

c) The bond's yield to maturity is the required rate of return for creditors of the holding horizons. Therefore, if Federal Reserve increases the money supply by reducing the required reserve in all banks, the bond yield will also increase.

d) The discount rate for future expected cash flows is defined as the cost of capital. Hence, it must cover all financing risk where the institution may arrange to finance the necessary capital for the investment projects.

5. You are given the following information of two projects planned by your company. The initial costs are given as: $3 million for project A, and $3.5 million for project B, respectively.

Table 1: (in thousands)

Project	Year 1	Year 2	Year 3	Year 4	Year 5
A	-450	1250	-350	2200	2500
B	360	952	400	875	2250

Answer the following questions.

a) Suppose the actual cost of capital is 12%. What are the Net Present Values for these two projects?

b) Suppose the financial manager discovered that if we postponed the project B to two years later, the cost of capital could be 10% due to possible low future interest rates. However, the deferment may cost the firm additional $0.5 million to restart the facilities and the initial cost must be spent now, instead of two years later. Will you recommend waiting for additional 2 years to start?

c) Let the corporate income tax rate be 30%, the cost of debts be 6%, the cost of equity be 25% and there is no preferred stock issued by the firm. What is the debt-to-equity ratio for your company?