Hoyt, Inc. has estimated current year sales (in millions) for the next four quarters.

Q1 $240Q2 $250 Q3 $205 Q4 $350

? Sales for the 1st quarter next year are projected to be $230.? Accounts Receivable at the beginning of the year was $100.? Beginning Accounts Payable were $60.? The beginning cash balance is $50.? Hoyt, Inc. cash collection schedule is as follows: 60% of sales in the current quarter,40% in the 1st quarter after sale. ? Purchases from suppliers in a quarter are equal to 50% of the next quarter?sforecasted sales. ? Suppliers are normally paid in 50% in the quarter purchases are made and 50% in thefollowing quarter. ? Wages, taxes and other expenses are 20% of current quarter sales? Hoyt, Inc. maintains a minimum cash balance of $30

Complete a cash budget for Hoyt, Inc

FUNDAMENTALS OF CORPORATE FINANCE BUS363 Adult Studies Module 1 Belhaven University | January 2016 Course Description This course is an overview of financial analysis that advances decision-making in a business/corporate setting. The course is intended to show students the format and content of annual financial statements, cash budgeting, ratio analysis, time value of money, stock valuation, bond valuation, average return and the standard deviation of a series of returns, CAPM, WACC and the application thereof. The purpose of this course is to give a broad overview of the fundamental finance and accounting concepts to provide a strong framework in developing business finance strategies. Acknowledgement This course was developed by Belhaven University. Worldview Goal for This Course This course will focus on and integrate the concepts of the following quote from the book, Leadership by John C. Maxwell: \"Anyone can follow a path, but only a leader can blaze one. That's often not easy. If you're a leader, a lot of people depend on you: Family and friends need leaders who model purpose-driven lives. Children need leaders who help them reach their potential. Churches need leaders who chart the course and equip the saints. Businesses need leaders who build great places to work while making a profit. Communities need leaders who create a better place to live. As others depend on you, upon whom can you depend? The answer is God, the Ultimate Leader! May God bless you on the journey. May you live in His wisdom. May He preserve your way.\" \"I will lead them in paths they have not known. I will make darkness light before them, and crooked places straight. These things I will do for them.\" Isaiah 42:16 Student Competencies Identify the Christian principles of honesty and the deleterious effect of greed as they relate to financial reporting and ethical business practices. Describe the purpose and content of financial statements. Understand how the basic financial statements articulate to each other Understand the importance and derivation of a cash budget 2 Discuss the use of financial statement ratios analysis to evaluate the financial condition and operating performance of a business entity. Identify the concept and application of the time value of money. Be able to calculate NPV, IRR, MIRR, payback and discounted payback Understand long-term financial planning and growth Understand the characteristics of bonds and be able to calculate their price at a particular point in time Be able to calculate the price of stocks using the DDM Illustrate the basics of risk and return Understand the risk/return relationship and derive the required rate of return through DDM and CAPM Be able to calculate the cost of capital (debt and equity) as well as the weighted average cost of capital (WACC) 3 Assessment Criteria Assignment Problem Sets/Writing Assignments Portfolio Problems Class Participation (40) and Attendance (40) Mid-Term Exam Final Exam Total Points 320 100 80 200 200 900 Grades will be posted no later than seven days following the end of the last class meeting. 837+ 810-836 783-809 747-782 720-746 693-719 657-692 630-656 603-629 567-602 540-566 0-539 A AB+ B BC+ C CD+ D DF Resource Inventory Ross, Stephen A., Randolph W. Westerfield, and Bradford D. Jordon (2010). Fundamentals of corporate finance (Alternate Edition) (10th ed.). New York, NY: McGraw-Hill Irwin. ISBN: 978-0077479459. The New American Standard Bible Belhaven Online Resources: Research Articles: Locate articles by accessing the link and following to Academic Search Premiere. http://bcblazenet.belhaven.edu/Blazenet/Library/Library.aspx Financial Calculator: Students should purchase a Texas Instruments (TI) BAIIPlus financial calculator (there is an app for iPhones for $14.99) or a TI83-86 graphing calculator for use in solving the assigned problems in various chapters of the textbook. There are instructions for the graphing calculators. Just Google \"finance apps on the TI83\" and click on one of the sites. Each student will be responsible for understanding how to operate the calculator of his or her choice relative to the solving of the applicable problems assigned for homework. 4 Required Formatting The required formatting for your papers, assignments, projects, discussions, or anything else that maybe research based use APA formatting. Communication Communicate questions directly to the professor, except in cases where you need to contact technical support. Your Belhaven University email address will be utilized for the class, so be sure to check it frequently. Plagiarism Defined Plagiarism involves the presentation of some other person's work or idea as if it were the work of the presenter and is a violation of the Belhaven Honor Code. Plagiarism includes submitting a paper or parts of a paper written by someone other than the student. Plagiarism also includes quoting from source materials without using quotation marks or block indentations to show that the material was quoted as required in acceptable documentation. Self-plagiarism is also a violation and is defined as using one's own prior work to gain credit for current works of the learner without properly citing the original source, such as a previous paper or homework activity. For more information regarding plagiarism go to: http://www.plagiarism.org/ Plagiarism is a Sin The Bible teaches that God honors honesty and fair dealing. God will bless the person who \"walks blamelessly and does what is right and speaks truth\" from the heart (English Standard Version, Ps. 15:2; see also Prov. 20:7). Only responsible, honest research fulfills this high ethical standard. Good research and writing is hard work. The Bible also teaches that God blesses diligent, righteous labor (Proverbs 12:24, 27). The Bible stresses that work should be performed in such a manner as will please God who always sees not only what pleases people when they are watching (Colossians 3:22-24). Responsible Research Responsible research is a critical component of education, and any individual conducting research must learn how to investigate, read, understand, systematize, interpret, and finally explain complex ideas and issues in writing. An individual conducting research must also understand that ideas found in literature, media presentations, interviews or any other form of media do not belong to the researcher and therefore must be given credit through proper documentation. It is required that everyone conducting research provides proper credit through correct use of documentation, because to not do so would only be considered plagiarism, but would also be considered disrespectful to the originator of the idea. To insure that all papers possess originality faculty members will use a program referred to as Turnitin. Any paper exceeding 20% of non-original material or noticeable undocumented information will be subject to a discount in points at the discretion of the faculty. For further information regarding plagiarism, responsible research, or originality please refer to the Faculty Expectations of the Student document. 5 Unit One Reading Assignments o Read Chapter 2 and Chapter 3 in Fundamentals of Corporate Finance o Read Proverbs 14:2, Proverbs 1:5, Proverbs 3:3-4, and Proverbs 10:9. What role does honesty play in business? What are the consequences of unethical business practices and behavior? o Read Luke 16:10-11, I Timothy 5:8, I Timothy 6:9-10, and Deuteronomy 8:18. Consider how the passage alters our worldview as relative to this course. What is wealth according to God's word? What should an individual do with the wealth and prosperity that God has provided? Problem Set and Writing Assignment 1: (due at the beginning of class) Use the below information to answer the following questions: (Be sure to show your work in a word or excel file format) 2007 2008 Sales $2870 $3080 Depreciation 413 413 Cost of goods sold 987 1121 Other Expenses 238 196 Interest 192 221 Cash 1505 1539 Accounts Receivables 1992 2244 Short-term Notes 291 273 Payable Long-term debt 5040 5880 Net fixed assets 12,621 12,922 Accounts Payable 1581 1533 Tax rate 34% 34% Inventory 3542 3640 *Payout ratio 52% 52% *Dividends = payout ratio x net income. A. Create the Income Statements for 2007 and 2008 (including dividends paid and retained earnings). B. Create the Balance Sheets for 2007 & 2008. C. Create the statement of Cash Flows for 2008. D. What is the CFFA for 2008? 2. Longhorn Grill has operating income (EBIT) of $2,250,000. The company's depreciation expense is $450,000, its interest expense is $120,000, and its income tax rate is 40%. Assume the firm has no amortization expense. What is its net income? 3. Smith Corporation reported net income of $200,000 for 2008. Its EBITDA amounted to $800,000 and interest expense was $100,000. Smith's corporate income tax rate was 30%. Calculate the amount of depreciation expense that was reported in its income statement. 6 4. Total assets = $715, fixed assets = $395, current liabilities = $170, equity = $250, and long-term debt = $295. The only item missing from the balance sheet is current assets. What is the value of net working capital? 5. ET Industries has net working capital of $12,700, current assets of $38,200, equity of $53,400, and longterm debt of $11,600. What is the amount of the net fixed assets? 6. Bella, Inc. has net income of $3,500,000. The company's depreciation expense is $650,000, its interest expense is $200,000, and its income tax rate is 40%. What is its taxable income? o Based on Proverbs 14:2, Proverbs 1:5, Proverbs 3:3-4, and Proverbs 10:9. What role does honesty play in business? What are the consequences of unethical business practices and behavior? Problem Set and Writing Assignment 2: (due at the beginning of class) (Be sure to show your work in a word or excel file format) 1. Ratio Analysis. Hope Corporation's forecasted 2010 financial statements follow, along with some industry average ratios. Forecasted Balance Sheet as of December 31, 2010 Cash $ 72,000 Accounts receivables $ 439,000 Inventories $ 894,000 Total current assets $1,405,000 Land and building $ 238,000 Machinery $ 132,000 Other fixed assets $ 61,000 Total assets $1,836,000 Forecasted Income Statement for 2010 Sales $4,290,000 Cost of goods sold $3,580,000 Gross operating profit $ 710,000 General admin & selling expenses $ 236,320 Depreciation $ 159,000 Misc. $ 134,000 Earnings before Taxes $ 180,680 Taxes $ 72,272 Net Income Accounts and notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity $ 432,000 $ 170,000 $ 602,000 $ 404,290 $ 575,000 $ 254,710 $1,836,000 Per-Share Data EPS $ 4.71 $ 0.95 5.00 23.57 23000 DPS P/E Ratio Market price Number of shares outstanding $ $ 108,408 7 Hope's Financial Ratios Industry Financial Ratios Ratio/Comment Quick Ratio Current Ratio Inventory Turnover Days Sales Outstanding Fixed Asset Turnover Total Asset Turnover Return on Assets Return on Equity Debt Ratio Profit Margin on Sales P/E Ratio 1x 2.7x 7x 40 days 13x 2.6x 9.10% 18.20% 55% 3.50% 6x Quick Ratio Current Ratio Inventory Turnover Days Sales Outstanding Fixed Asset Turnover Total Asset Turnover Return on Assets Return on Equity Debt Ratio Profit Margin on Sales P/E Ratio a. Calculate the indicated ratios for Hope's in the appropriate blanks. b. Outline Hope's strengths and weaknesses as compared to its industry. Be detailed in your ratio analysis. c. Recommend at least three areas for correction. Be sure to support your recommendations. 2. A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2.00. If its return on equity is 15 percent, what is its net income? 3. You have the following data for a company. What is the return on assets (ROA)? Return on equity = 15%; Earnings before taxes = $50,000; Total asset turnover = 1.2; Profit margin = 7.5%; Tax rate = 35%. 4. A company has net income of $218,000, a profit margin of 8.70%, and an accounts receivable balance of $132,850. What is the company's days' sales in receivables? 5. Pearce's has a long-term debt ratio of .45 and a current ratio of 1.25. Current liabilities are $875, sales are $5,780, profit margin is 9.5%, and ROE is 18.5%. What is the amount of net fixed assets? o Why is being trustworthy essential to success in the business world? Use at least two of the following scriptures to answer this question: Psalm 101:7, Proverbs 4:20-27, Proverbs 13:11, and Proverbs 28:12-13. o In addition, submit a one-page writing/essay discussing the scriptures from the weekly reading assignment and how they relate to analyzing financial statements. In The Classroom During the initial class the instructor will be discussing the goals, assignments concerning the course. Instructor will also present information regarding your program as need to know information concerning Belhaven University. The instructor will also be providing introductory guidance into using the university's learning management system that every student will need to know how to perform the online portions of the class. The professor will also provide a lecture on the current session topics including this week's reading assignments. 8 Unit Two Reading Assignments o Read Chapter 4 and Chapter 6 in Fundamentals of Financial Management o Read Psalm 101:7, Proverbs 6:16-19, Proverbs 13:11, and Proverbs 28:12-13. Consider how the passage alters our worldview as relative to this course. Why is being trustworthy essential to success in the business world? How have you cheated God by being dishonest in handling financial matters? o Read Proverbs 11:30, Psalm 37:21, Deuteronomy 15:6 and Exodus 22:25. How do the Scriptures characterize the love of money? How would you define greed? Problem Set and Writing Assignment 1: (due at beginning of class) (Be sure to show your work in a word or excel file format) o Use the following balance sheet and income statement to answer the questions below: Mick's Place Assets Current Assets Cash Accounts Receivable Inventory Total CA Fixed Assets Net PPE Total Assets 2004 2005 815 906 2405 4608 7828 2510 4906 8322 15164 22992 19167 27489 Liabilities & Owner's Equity Current Liabilities Accounts Payable 2004 2005 983 1292 Notes Payable Other Total CL 720 105 1808 840 188 2320 Long-term Debt Owner's Equity Common Stock Retained Earnings Total OE Total Liabilities & OE 4817 4960 10000 6367 16367 22992 10000 10209 20209 27489 Income Statement Sales Cost of Good Sold Depreciation EBIT Int EBT Taxes NI 2005 33500 18970 1980 12550 486 12064 4222 7842 A. Suppose Mick's is projecting a 20% increase in sales for the coming year, and that cost of goods sold and general/administrative expenses remain a constant percentage of sales. Also assume that the amount of depreciation and interest paid and the firm's tax rate (35%) remain unchanged. Create the Pro Forma Income Statement for 2005. Assume the firm's dividend payout is 50%. What will the firm pay out in dividends in 2005? 9 B. Assume all information given in part A. Also, assume all assets and current liabilities are proportional to sales but long-term debt and equity are not proportional to sales. If the firm's tax rate remains unchanged, the dividend payout is 50%, what is the external financing needed (EFN) for 2006? Create the Pro Forma Balance Sheet for 2005. C. Given all the information in part A & B. If the firm is only operating at 82% of capacity, what are full capacity sales and what is the external financing needed (EFN) for 2005? D. Suppose Mick's wishes to maintain a sustainable growth rate of 30% per year. Is this growth rate possible? What must the dividend payout ratio be to make this feasible? o In addition, submit a one-page writing/essay discussing at least two of the scriptures from the weekly reading assignment and how they relate to business uncertainties and the future. Problem Set and Writing Assignment 2: (due at beginning of class) (Be sure to show your work in a word or excel file format) 1. You decide to begin saving towards the purchase of a new car in 5 years. If you put $1,000 at the end of each of the next 5 years in a savings account paying 6% compounded annually, how much will you accumulate after 5 years? 2. James Smith has a 4-year ordinary annuity that pays $1,000 per year and has an interest rate of 6%. a. Calculate the future value of this ordinary annuity. b. Assuming this was an annuity due, calculate the future value of this annuity. 3. You have contacted a number of car dealerships to determine the best interest rate on a new automobile loan. A Ford dealership has quoted you a 5-year, 10% loan in the amount of $35,000 that will require monthly payments. a. What is the monthly loan payment? b. What will be the loan's effective annual interest rate (EAR)? 4. Marcus has won the grand prize in a lottery and must choose between the following three options: a. Receive a lump sum payment of $9,000,000. b. Receive annual end of the year payments of $1,000,000 for the next 12 years. c. Receive annual end of the year payments of $1,500,000 for the next 8 years. Which option should Marcus choose based on an annual investment rate of 8%? 5. How much money does Kristi need to have in her retirement savings account today if she wishes to withdraw $25,000 per year for 30 years? She expects to earn an average rate of 8%. 6. What is the future value of $4,900 invested for 8 years at 7 percent compounded semiannually? 7. In 2005, soccer player David Beckham signed a contract reported to be worth $51 million. The contract called for $2 million immediately and $10 million in 2006. The remaining $39 million was to be paid as $9 million in 2007, $7 million in 2008, $6 million in 2009, $5 million in 2010, $4 million in 2011 and in 2012, $2 million in 2013, and $1 million in 2014 and 2015. Assuming all the payments, except the first $2 million are paid at the end of each year and the discount rate is 9%, what kind of deal did the soccer player snag? 8. What is the present value of the following set of cash flows at a 10% discount rate? Year 1 2 3 4 Cash Flow $600 -$600 $600 -$600 9. What is the future value of the set of cash flows (from the previous problem) 4 years from now? Assume an interest rate of 10%. 10 10. Starting today, George is going to contribute $300 on the first of each month to his retirement account. His employer will contribute an additional 50% of the amount George contributes. If both George and his employer continue to do this and he can earn a monthly rate of .68%, how much will George have in his retirement account 35 years from now? o In addition, submit at least a one-page writing/essay discussing at least two of the scriptures from the weekly reading assignment and answer the following two questions: 1. How do the Scriptures characterize the love of money? 2. How would you define greed? In The Classroom After completing the reading assignments be prepared to participate in an in-class discussion, demonstrating sound critical thinking skills and a solid grasp of the reading material. A lecture on the current week topics will be provided by the instructor. The instructor will engage students in a discussion forum that includes the questions from the reading assignments. The instructor will engage students in a discussion based activity. Briefly review for the mid-term which is to be given during Unit 3. 11 Unit Three Reading Assignments o Read Chapter 9 and Chapter18 in Fundamentals of Financial Management o Read Luke 14:28-30 and 12:16-21, James 4:13-16, Proverbs 16:12, and 1 Timothy 6:17-19. Be ready to discuss how these passages shape our Christian worldview concerning business uncertainties and the future. o Read Matthew 25:14-30, Luke 9:25, Luke 16:10, Timothy 6:9-10 and Proverbs 6:1-5. What is the wisdom of taking risks and what types of risks are not reasonable? What does Luke 9:25 say about greed? Problem Set and Writing Assignment 1: (due at beginning of class) (Be sure to show your work in a word or excel file format) 1. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent? Year 0 1 2 3 Project A Project B -$275,000 -$202,000 0 113,600 0 81,900 360,000 47,000 2. Radiology Associates is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of three years. Accept or reject this project? Why? 3. You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate? Year 0 1 2 3 Project A Project B Cash Flow Cash Flow -$80,300 -$77,900 $25,500 $25,000 $14,000 $13,000 $47,800 $46,000 4. A proposed project lasts 3 years and has an initial investment of $500,000. The after tax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The firm has a target debt/equity ratio of 0.6. The firm's cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is the NPV of this project? (hint: remember that the D/E is saying that debt is 60% of equity. In other words, you need to find D/A and E/A for the appropriate weights.) 5. Puppy Inc. has the following mutually exclusive investment opportunities. If the appropriate discount rate was 15% what should you do? 12 Year 0 1 2 3 Project X -500 100 475 50 Project Y -800 500 350 350 a. Calculates each project's payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years? b. Calculate each project's discounted payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years? c. What is the NPV for each project? 6. Consider the following two mutually exclusive projects. Time Project A Project B 0 -$300 -$405 1 -$387 $134 2 -$193 $134 3 -$100 $134 4 $600 $134 5 $600 $134 6 $850 $134 7 -$180 $0 What is each project's MIRR with a cost of capital of 12%? Which project should be selected? Problem Set and Writing Assignment 2: (due at beginning of class) (Be sure to show your work in a word or excel file format) . Bella, Inc. has estimated current year sales (in millions) for the next four quarters. Q1 $240 Q2 $250 Q3 $205 Q4 $350 Sales for the 1st quarter next year are projected to be $230. Accounts Receivable at the beginning of the year was $100. Beginning Accounts Payable were $60. The beginning cash balance is $50. Hoyt, Inc. cash collection schedule is as follows: 60% of sales in the current quarter, 40% in the 1st quarter after sale. Purchases from suppliers in a quarter are equal to 50% of the next quarter's forecasted sales. Suppliers are normally paid in 50% in the quarter purchases are made and 50% in the following quarter. Wages, taxes and other expenses are 20% of current quarter sales Bella, Inc. maintains a minimum cash balance of $30 Complete a cash budget for Hoyt, Inc. 13 2. You have collected the following information for the Jake's Place. Item Inventory Accts. Receivable Accts. Payable Beginning $5,000 1,600 2,700 Ending $7,000 2,400 4,800 Credit sales for the year just ended were $50,000, and cost of goods sold was $30,000. a. b. c. d. e. How long does it take for Jake's Place to collect on its receivables? How long does merchandise stay around before it is sold? How long does it take Jake's Place to pay its bills? What is Jake's Place operating cycle? What is Jake's Place cash cycle? o In addition, submit a one-page writing/essay discussing at least two of the scriptures from the weekly reading assignment and how they relate to business uncertainties and the future. In The Classroom After completing the reading assignments be prepared to participate in an in-class discussion, demonstrating sound critical thinking skills and a solid grasp of the reading material. Mid-Term Exam in class A lecture on the current unit topics will be provided by the instructor. The instructor will engage students in a discussion that includes questions from the reading assignments. The instructor will engage students in a discussion based activity. 14 Unit Four Reading Assignments o Read Chapters 7 and 8 in Fundamentals of Corporate Finance o Read Psalm 37:21, Deuteronomy 15:6 and Exodus 22:25. Consider how the passage alters our worldview as relative to this course. Why do the Scriptures admonish the charging and paying of interest on debt? Problem Set and Writing Assignment: (due at beginning of class) (Be sure to show your work in a word or excel file format) 1. Hope Corporation bonds bearing a coupon rate of 12%, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity? 2. George, Inc. bonds have a face value of $1,000 and a 9% coupon paid semiannually; the bonds mature in 8 years. What current yield would be reported in The Wall Street Journal if the yield to maturity is 7%? 3. On January 1, 2004, Pearce and Co. will issue new bonds to finance its expansion plans. Currently outstanding 9%, January 1, 2020 Pearce and Co. bonds are selling for $1,141. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par? 4. Assume there is a 12-year, 9.5% semiannual coupon bond, with a par value of $1,000. The bond sells for $1,152. a. What is the bond's yield to maturity (YTM)? b. What is the bond's current yield? 5. A zero-coupon bond with a par value of $1,000 has 15 years to maturity. If the YTM is 6.2%, what is the current price this bond? 6. One year ago, Blazer, Inc. issued 17-year bonds at par. The bonds have a coupon rate of 6 percent and pay interest annually. Today, the market rate of interest on these bonds is 8.2 percent. How does the price of these bonds today compare to the issue price (what is the percentage difference and is it higher or lower)? 7. Today is January 1, 2012 and you are considering purchasing an outstanding bond that was issued on January 1, 2010. It has a 9% annual coupon and originally had a 20-year maturity. The bonds can be called for 5 years from original issue date at a premium of $1085. Interest rates have declined and the bonds are currently selling for 112% of par. Calculate the YTM and the YTC. 8. If the following bonds are identical except for coupon & price, what is the coupon of bond B? Bond A Bond B Face value $1,000 $1,000 Semiannual Coupon $55 ? Years to maturity 20 20 Price $1,100.00 $940 9. Your company has a required rate of return 7%. The company has completed a new project that is expected to grow dividends at a rate of 50% the first year and 25% the following year, after which growth should be at a constant rate of 6%. The last dividend paid was $1.00. What is the value per share of your firm's stock? 10. Boomer Products, Inc. manufactures \"no-inhale\" cigarettes. As their target customers age and 15 pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required return is 10%, what is the current price of the stock? 11. Bunky's Eats recently paid $1.65 as an annual dividend. Future dividends are projected at $1.68, $1.72, $1.76, and $1.80 over the next four years, respectively. In year 5, the dividend is expected to increase by 2.5 percent annually. What is one share of this stock worth to you if you require an 11 percent rate of return on similar investments? 12. Boo Daddy is a relatively new firm that appears to be on the road to great success. The company paid their first annual dividend today in the amount of $0.15 a share. The company plans to double each annual dividend payment for the next four years. After that time, they are planning on paying a constant dividend of $2.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 10 percent? 13. The Doggy Wash pays a constant annual dividend of $1.30 per share (growth rate (g)=0). How much are you willing to pay for one share if you require a 12 percent rate of return? 14. Bug Buster just paid its annual dividend of $1.25 a share. The firm recently announced that all future dividends will be increased by 3 percent annually. What is one share of this stock worth to you if you require an 11 percent rate of return? 15. Jackson Street Repair's stock currently sells for $55 per share. The market requires a 12% return on the firm's stock. If the company maintains a constant 5% growth rate in dividends, what was the most recent dividend per share paid on the stock? 16. Longhorn, Inc. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25 percent a year for the next three years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent? 17. Hope Company's stock sells for $22 per share, its last dividend was $1.00, and its growth rate is a constant 8%. What is its required rate of return? In The Classroom After completing the reading assignments be prepared to participate in an in-class discussion, demonstrating sound critical thinking skills and a solid grasp of the reading material. A lecture on the current week topics will be provided by the instructor. The instructor will engage students in a discussion that includes the questions from the reading assignments. The instructor will engage students in a discussion based activity. Briefly review for the final which is to be given during Unit 5. 16 Unit Five Reading Assignments o Read Chapters 13 and 14 in Fundamentals of Corporate Finance o Read Proverbs 22:7 and Luke 12:41-48. What are the implications of these Biblical truths when a business is raising capital? Problem Set and Writing Assignment: (due at beginning of class) (Be sure to show your work in a word or excel file format) 1. Use the following information to answer questions below. State Boom Normal Bust Probability Return on A .25 15% .65 10% .10 4% Return on B -3% 4% 9% a. b. c. d. Calculate the expected returns for A and B. Calculate the standard deviations for A and B. Calculate the covariance of the two companies. What is the expected return on a portfolio with weights of 40% in asset A and 60% in asset B? e. What is the standard deviation of a portfolio with weights of 40% in security A and the remainder in security B? f. What is the correlation coefficient of the two securities? 2. Given the following information, what is the company's WACC? Common Stock: 1 million shares outstanding, $40 per share, $1 par value, beta = 1.3 Bonds: 10,000 bonds outstanding, $1,000 face value each, 8% annual coupon, coupons paid semi-annually, 22 years to maturity, market price = $1,101.23 per bond Preferred Stock: 50,000 shares, $7 coupon payment, market price = $108, par value $100 Market risk premium = 8.6%, risk-free rate = 4.5%, marginal tax rate = 34% 3. Margo Corporation is a major producer of lawn care products. Its stock currently sells for $80 per share; there are 10.5 million shares outstanding. Margo also has 400,000 bonds outstanding ($1000 face value per bond). These 10-year bonds pay annually, have a current yield of 10% and trade at 90% of face value. The risk free rate is 8%, the market risk premium is 9%, and Margo has beta equal to 2. The corporate tax rate is 34%. a. Margo is considering expansion of its facilities. Use the SML to determine the cost of equity. b. Compute the WACC for Margo. Portfolio Problems: (due at beginning of class) (Be sure to show your work in a word or excel file format) 1. The company you work for will deposit $150 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 25 years from now and estimate that you will need to withdraw $2,000 per month during retirement, which will last 30 years. If the account 17 pays 12% compounded monthly, how much do you need to put into the account each month, in addition to your company's deposit, in order to meet your retirement needs? 2. Jason Greg is a recent retiree who is interested in investing some of his savings in corporate bonds. Listed below are the bonds he is considering adding to his portfolio. Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 10% semiannual coupon, matures in 12 years, and has a $1,000 face value. Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a YTM of 10%. a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, discount or par. b. Calculate the price of each of these bonds. c. Calculate the current yield for each bond. d. If the yield to maturity for each bond remains at 9%, what will be the price of each bond 1 years from now? e. Mr. Greg is considering another bond, Bond D. It has an 8% semiannual coupon and a $1,000 face value. Bond D is scheduled to mature in 9 years and has a price of $1,150. It is also callable in 5 years at a call price of $1,040. What is the bond's YTM? What is the bond's YTC? If Mr. Greg were to purchase this bond, would he be more likely to receive the YTM or YTC? Explain your answer. f. Price each bond and explain how the number of years to maturity and the coupon rate affect the current price of bonds. Assume a YTM of 7%. 1. A 4-year bond with a 9% annual coupon 2. A 4-year bond with a zero coupon 3. A 15-year bond with a 9% annual coupon 4. A 15-year bond with a zero coupon In The Classroom After completing the reading assignments be prepared to participate in an in-class discussion, demonstrating sound critical thinking skills and a solid grasp of the reading material. Final Exam in Class A lecture on the current week topics will be provided by the instructor. The instructor will engage students in a discussion that includes the questions from the reading assignments. The instructor will engage students in a discussion based activity. 18