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FINC 301 Spring 2016 Section 1 (Chapters 4 and 5) 1. You are planning for your retirement and have decided the following: you will retire in 35 years and would like to have $8,000 per month as retirement income for 30 years of retirement. You have access to an account that earns a 7% rate of return. a. How much will you need to have when you retire to be able to withdraw the desired $8,000 per month during your years of retirement? b. 2. If you plan to save by making equal monthly deposits into your account from now until when you retire, how much does that deposit need to be? A six-year annuity of $8500 quarterly payments will begin 9 years from now. The discount rate is 9%, compounded quarterly. a. How much is this annuity worth 5 years from now? b. How much is this annuity worth today? Section 2 (Chapters 6 and 7) 3. A bond has face value of $1,000, a coupon rate of 12%, YTM of 9%, and matures in 20 years. The bond pays interest semiannually. a. What is the value of this bond? b. c. What is this bond's capital gains yield this year? d. What is this bond's value 6 years from now? e. What will this bond's current yield be 6 years from now? f. 4. What is the current yield for this bond this year? What will this bond's capital gains yield be eight years from now? Consider a stock that most recently paid a dividend of $0.75. The company plans to increase dividends by 50% each year for the next 3 years, then by 20% each year for 4 years, and then level off to a permanent growth rate in dividends of 6%. a. If the required return for this stock is 11%, what is the value of the stock today? b. What are dividend yield and capital gains yield this year? c. What will be the value of the stock in 7 years? d. 5. What will be the dividend yield and capital gains yield in 7 years? Consider a stock that is not planning to pay a dividend until 10 years from now. The first dividend paid (D11) will be $2. After that, the company will maintain a constant dividend growth rate of 5% forever. The required return for this stock is 8%. a. What is the value of the stock in 10 years? b. c. What is the value of the stock today? d. What are dividend yield and capital gains yield this year? e. What is the value of the stock in 3 years? f. What are dividend yield and capital gains yield in 3 years? g. 6. What are dividend yield and capital gains yield in 10 years? What will the dividend yield be 50 years from now? An unconventional bond offers a coupon rate of 5% for the first 5 years of the bond and 7% for the remaining 8 years of the bond. Face value is $1,000 and the yield to maturity is 8%. a. Find bond value, current yield, and capital gains yield this year. b. Find bond value, current yield, and capital gains yield next year. c. Find bond value, current yield, and capital gains yield in 5 years. Section 3 (Chapters 2 and 3) 7. A company has net income of $1,500 and profit margin of 12%. The company's depreciation expense for the year was $500, interest expense was $300, and the average tax rate is 35%. a. What was the company's taxable income? b. c. 8. What was the company's EBIT? What was the company's Operating Cash Flow? Suppose you find that a particular company generates $.40 in sales for every dollar in total assets. How often does this company turn over its total assets? 9. Use the information in the table below to construct an income statement for 2014 and balance sheets for 2014 and 2015. Then, find Operating Cash Flow, change in Net Working Capital, Net Capital Spending, Cash Flow to Creditors, Cash Flow to Shareholders, and Free Cash Flow. The tax rate is 30% and the plowback ratio is 40%. 2014 Sales Costs of Goods Sold Depreciation Expense Interest Expense Total Fixed Assets Accumulated Depreciation Total Current Assets Total Current Liabilities Long-term Debt Common Stock 2000 400 550 400 600 600 2015 1500 700 200 100 3000 650 500 700 1160 Multiple Choice (circle the correct answer) 1. 2. 3. 4. The net present value: a. Decreases as the required rate of return increases. b. Is equal to the initial investment when the internal rate of return is equal to the required return c. Method of analysis cannot be applied to mutually exclusive projects d. Is positively related to the discount rate e. Is unaffected by the timing of an investment's cash flows Which of the following statements is correct? a. A longer payback period is preferred over a shorter payback period b. The payback rule states that you should accept a project if the payback period is less than one year c. The payback period ignores the time value of money d. The payback rule is biased in favor of long-term projects e. The payback period considers the timing and amount of all of a project's cash flows Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? a. Eroded cash flows b. Deviated projections c. Incremental cash flows d. Directly impacted flows e. Assumed flows The Shoe Box is considering adding a new line of winter footwear to its product lineup. Which of the following are relevant cash flows for this project? i. Decreased revenue from products currently being offered if this new footwear is added to the lineup ii. Revenue from the new line of footwear iii. Money spent to date looking for a new product line to add to the store's offerings iv. Cost of new counters to display the new line of footwear b. I and IV only c. II and IV only d. II and III only e. 1, II, and IV only f. All of them are relevant. Open-Ended (Show your work) 5. Vandelay Industries is evaluating a project that costs $1,350,000 and has a 20 year life. Depreciation will be straight-line to zero over the life of the project. Management believes they will be able to sell the equipment at the end of the project for $50,000. Sales are projected to be 50,000 units in the first year, 70,000 units in the second year, and 25,000 units for all additional years. Price per unit is $34.50, variable cost per unit is $15.50 and fixed costs are $300,000 per year. The project also requires an initial investment in net working capital of $150,000 and for the project to maintain a net working capital balance equal to $150,000 plus 15% of sales while the project is ongoing. All net working capital will be recouped at the end of the project. This project will have an additional spillover effect that will impact existing sales negatively. The net pre-tax impact of the spillover effect will be -$75,000 per year. This project will also have a positive spillover effect. Specifically, the project will generate additional sales of 100 units of an existing product at a price of $15 each. The existing product has variable costs of $9 and fixed costs of $5,000 per year. The company's marginal tax rate is 35%. The required return on similar projects is 11%. a. What is the project's NPV? b. c. What is the project's profitability index? d. 6. What is the project's payback period? Why might this company decide to pursue this project? Your company has been approached to bid on a contract to sell 4,200 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.8 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $95,000 to be returned at the end of the project, and the equipment can be sold for $275,000 at the end of production. Fixed costs are $640,000 per year, and variable costs are $155 per unit. In addition to the contract, you feel your company can sell 9,500, 10,400, 12,500, and 9,800 additional units to companies in other countries over the next four years, respectively, at a price of $310. This price is fixed. The tax rate is 40 percent, and the required return is 10 percent. The bid price you plan to submit is $290 per unit. What is the NPV of the project? What is the IRR? How much does the NPV change if you change the bid price to $289 per unit