3. Consider the following timeline:

0 1 2 3

-150 $40 $80 $100

If the current market rate of interest is 9%, what is the value of the cash flows in year 0, year 2 and year 3 as of year 2? Show your work.

Professor F. Demers ECON 3050, Fall 2017 NAME: STUDENT #: ASSIGNMENT I Due Thursday October 5 AT 2:30 pm in class Please STAPLE TOGETHER ALL OF THE PAGES of your answers. 1- The balance sheet and income statement of MET Corporation are given on page 2 below. (All values are in millions of dollars.) Refer to these financial statements for the following questions. Assume that MET is listed on the NASDAQ and has 12.5 million shares outstanding in 2016 with a price of $ 28 per share, up from $ 26.5 in 2015. The earnings growth is expected to be 15%. (28pts) a) Complete the following table on the basis of the financial statements provided for MET. Write down the formula for each ratio, fill in the numerical value and briefly answer the analysis question. (22pts) b) Prepare the Statement of Cash Flows (for 2016 only) for MET Corporation knowing that $ 21.7 million were paid out in dividends in 2016. (Read carefully section 2.4, pp.35-39.) Balance Sheet and Income Statement Ratios Analysis questions 2016 2015 Market-to-book ratio What can you infer from this ratio with respect to how successful the firm is? Explain briefly. Quick ratio What can you infer from this ratio? (Compare the ratios for 2016 and 2015.) Accounts-receivable days What is the change in this ratio between 2016 and 2015? What does this change imply? Accounts payable days What is the change in this ratio between 2016 and 2015? What does this change imply? Debt-to-Equity ratio (book versus market) Explain the difference between the book and market ratios. Which of the two is more useful? Why? What does this ratio tell us about the way MET is financed? Price-to-earnings ratio What can you infer from this ratio with respect to the market value of MET stock? Explain briefly. ROE How would an increase in leverage affect the company's ROE? 1 MET Corporation Balance Sheet 2016 2015 Assets Current Assets Cash Accounts receivable Inventories Total current assets Long-Term Assets Net property, plant, and equipment Total long-term assets Total Assets 50 22 17 89 47.5 17.2 15.3 80 121 99.3 121 99.3 210 179.3 2016 312 -210 102 -34 2015 296.4 -202.5 93.9 -33.5 -10 -5 53 53 -9 -4.5 46.9 -20 33 -8 25 -15 31.9 -7.7 24.2 2016 2015 Liabilities Current Liabilities Accounts payable Notes payable/short-term debt 42 7 39.1 5.5 Total current liabilities 49 44.6 128 128 105 105 Total Liabilities Shareholders' Equity Common Stock Retained Earnings Total shareholders' equity 177 149.6 18 15 33 18 11.7 29.7 Total Liabilities and Shareholders' Equity 210 179.3 Long-Term Liabilities Long-term debt Total long-term liabilities Income Statement Total sales Cost of sales Gross Profit Selling, general, and administrative expenses Research and development Depreciation and amortization Operating Income Other income Earnings before interest and taxes (EBIT) Interest income (expense) Pretax income Taxes Net Income 46.9 2 Draw the timeline for each of the following problems before you solve them. Indicate clearly the steps in your calculations and the formula used. Show your work. Indicating only a numerical value as an answer will not receive credit. Round off figures to the FIFTH decimal place. Not following this guideline can lead to substantial rounding-off errors. (6pts) 2. You have holdings of 325 troy ounces of platinum, currently valued at $ 920 per ounce. You estimate that the price of platinum will rise to $950 per ounce in the next year. If the interest rate is 9%, should you sell the platinum today and deposit the amount in the bank, or wait until next year to sell the platinum? Show your work. (6pts) 3. Consider the following timeline: If the current market rate of interest is 9%, what is the value of the cash flows in year 0, year 2 and year 3 as of year 2? Show your work. (6pts) 4. A mine has just started its operations and will have produced $20,000 worth of ore by the end of the year. As the ore closest to the surface is removed, it will become more difficult to extract the ore. Therefore, the value of the ore will decline at a rate of 7% per year forever in future years. If the appropriate interest rate is 5%, what is the value of this mining operation today? (6pts) 5. You need to take out a loan for your business from an investor. In exchange for a lump sum today, you offer to pay the investor $1500 in one year's time, $2500 in two years' time, $3500 in three years' time and $4500 in 4 years' time. If the interest rate is 7%, what is the minimum value of the lump sum you must receive from the investor if the net present value (NPV) is to be equal to zero? Show your work. (13pts) 6. Suppose that you are 30 years old today, and that you are planning to retire at age 65. Your salary this year is $50,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 10% of this year's salary. Likewise, you expect to deposit 10% of your salary each year until you reach age 65. Assume that the interest rate is 7%. (10pts) (a)What is the present value (at age 30) of your retirement savings? (3pts) (b)How much will you have in your savings account on your 65th birthday? (13pts) 7. A newly married couple would like to purchase a house worth $400,000. They can afford to make a down payment of $70,000 and need to take out a mortgage. The bank offers them a 25-year mortgage with annual payments. The interest rate is 6%. (6pts) a) What would be their annual payment? (7pts) b) They can only afford to make payments of $22,700 per year. The bank agrees to this on the condition that they pay the remaining amount in a lump sum fashion at the end of 25 years. How much will the couple have to pay lump sum at the end of 25 years? 3