FIN 515 Entire Course Managerial Finance
Content
FIN 515 Entire Course Managerial
Finance
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FIN 515 Entire Course Managerial Finance
FIN 515 Week 1 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_1_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other
organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a
corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also
find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion,
gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea
(PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of
$17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital
during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position
in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its
coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over
this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70
billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s
equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to
understand the difference between the two firms’ ROEs.
FIN 515 Week 1 Quiz
Question 1
(TCO G) Which do you think provides a more valid measure of how a company is doing,
comparison of current results with historical results or comparison of current results with
the current results of another company?
Question 2
(TCO G) Barnes Corp’s total assets at the end of last year were $415,000,000 and its
net income after taxes was $17,750,000. What was its return on total assets?
Question 3
(TCO G) Between December 31, 2016 and December 31, 2017, ROE at Bobcat
Industries decreased even though sales increased. Using the DuPont Identity, explain
what else could have happened to cause this.
FIN 515 Week 2 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_2_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 4 (pages 132–136):
3. Calculate the future value of $2000 in
a. five years at an interest rate of 5% per year;
b. ten years at an interest rate of 5% per year; and
c. five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest
earned in part (b)?
4. What is the present value of $10,000 received
a. twelve years from today when the interest rate is 4% per year;
b. twenty years from today when the interest rate is 8% per year; and
c. six years from today when the interest rate is 2% per year?
5. Your brother has offered to give you either $5,000 today or $10,000 in 10 years. If the
interest rate is 7% per year, which option is preferable?
6. Consider the following alternatives.
i. $100 received in 1 year
ii. $200 received in 5 years
iii. $300 received in 10 years
a. Rank the alternatives from most valuable to least valuable if the interest rate is 10%
per year.
b. What is your ranking if the interest rate is only 5% per year?
c. What is your ranking if the interest rate is 20% per year?
8. Your daughter is currently 8 years old. You anticipate that she will be going to college
in 10 years. You would like to have $100,000 in a savings account to fund her education
at that time. If the account promises to pay a fixed interest rate of 3% per year, how
much money do you need to put into the account today to ensure that you will have
$100,000 in 10 years?
9. You are thinking of retiring. Your retirement plan will pay you either $250,000
immediately on retirement or $350,000 5 years after the date of your retirement. Which
alternative should you choose if the interest rate is
a. 0% per year;
b. 8% per year; and
c. 20% per year?
14. You have been offered a unique investment opportunity. If you invest $10,000
today, you will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10
years from now. a. What is the NPV of the opportunity if the interest rate is 6% per year?
Should you take the opportunity? b. What is the NPV of the opportunity if the interest
rate is 2% per year? Should you take it now?
36. You are thinking of purchasing a house. The house costs $350,000. You have
$50,000 in cash that you can use as a down payment on the house, but you need to
borrow the rest of the purchase price. The bank is offering a 30-year mortgage that
requires annual payments and has an interest rate of 7% per year. What will your
annual payment be if you sign up for this mortgage?
37. You would like to buy the house and take the mortgage described in Problem 36. You
can afford to pay only $23,500 per year. The bank agrees to allow you to pay this
amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years),
you must make a balloon payment; that is, you must repay the remaining balance on
the mortgage. How much will this balloon payment be?
38. You have just made an offer on a new home and are seeking a mortgage. You need
to borrow $600,000. a. The bank offers a 30-year mortgage with fixed monthly
payments and an interest rate of 0.5% per month. What is the amount of your monthly
payment if you take this loan? b. Alternatively, you can get a 15-year mortgage with
fixed monthly payments and an interest rate of 0.4% per month. How much would your
monthly payments be if you take this loan instead?
*A.1. This problem is from the Appendix to Chapter 4. Your grandmother bought an
annuity from Rock Solid Life Insurance Company for $200,000 when she retired. In
exchange for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The
interest rate is 5%. How long must she live after the day she retired to come out ahead
(that is, to get more in value than what she paid in)?
FIN 515 Week 2 Quiz
Question 1
(TCO B) Your daughter has just given birth to your first grandchild. You decide to start a
college fund for the child. You want the fund to have $300,000 in it when the child turns
18. You think you can get a return of 10% per year on your investment. How much
should you deposit in the fund? Ignore taxes. Show your work. If you use Excel, show
the formula with the parameters, and the answer. If you use a formula, provide the
standard formula, the formula with terms substituted, and the answer. If you use a
calculator, show the inputs and the answer.
Question 2
(TCO B) You have a student loan of $75,000. The interest rate is 8.6% per year. You have
been out of school for 6 months and are ready to start making payments. You want to
use the maximum allowed of 10 years to pay off the loan by making equal monthly
payments. How much are the monthly payments? Ignore taxes. Show your work. If you
use Excel, show the formula with the parameters, and the answer. If you use a formula,
provide the standard formula, the formula with terms substituted, and the answer. If you
use a calculator, show the inputs and the answer.
Question 3
(TCO B) Your cousin wants to buy a car but he really can’t afford it. He needs a loan of
$22,000. The finance manager at the dealership offers him something like a loan in
which your cousin will get the $22,000 and will pay $413 per month for the next 60
months with an additional payment of $3,000 (which the car will surely be worth!) in the
60th month. What interest rate is your cousin really going to pay? Ignore taxes. Show
your work. If you use Excel, show the formula with the parameters, and the answer. If
you use a formula, provide the standard formula, the formula with terms substituted,
and the answer. If you use a calculator, show the inputs and the answer.
FIN 515 Week 3 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_3_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 7 (pages 225–228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you back
$12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its
NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to
determine the maximum deviation allowable in the cost of capital estimate to leave the
decision unchanged.
8. You are considering an investment in a clothes distributor. The company needs
$100,000 today and expects to repay you $120,000 in a year from now. What is the IRR
of this investment opportunity? Given the riskiness of the investment opportunity, your
cost of capital is 20%. What does the IRR rule say about whether you should invest?
19. You are a real estate agent thinking of placing a sign advertising your services at a
local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that
it will generate additional revenue of $500 per month. What is the payback period?
21. You are deciding between two mutually exclusive investment opportunities. Both
require the same initial investment of $10 million. Investment A will generate $2 million
per year (starting at the end of the first year) in perpetuity. Investment B will generate
$1.5 million at the end of the first year and its revenues will grow at 2% per year for
every year after that.
a. Which investment has the higher IRR?
b. Which investment has the higher NPV when the cost of capital is 7%?
c. In this case, for what values of the cost of capital does picking the higher IRR
give the correct answer as to which investment is the best opportunity?
Chapter 8 (260–262)
1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its
pizza that will be low in cholesterol and contain no trans fats. The firm expects that
sales of the new pizza will be $20 million per year. While many of these sales will be to
new customers, Pisa Pizza estimates that 40% will come from customers who switch to
the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of
incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to
its healthier pizza will switch to another brand if Pisa Pizza does not introduce a
healthier pizza. What level of incremental sales is associated with introducing the new
pizza in this case?
6. Cellular Access, Inc. is a cellular telephone service provider that reported net income
of $250 million for the most recent fiscal year. The firm had depreciation expenses of
$100 million, capital expenditures of $200 million, and no interest expenses. Working
capital increased by $10 million. Calculate the free cash flow for Cellular Access for the
most recent fiscal year.
12. A bicycle manufacturer currently produces 300,000 units a year and expects output
levels to remain steady in the future. It buys chains from an outside supplier at a price
of $2 a chain. The plant manager believes that it would be cheaper to make these
chains rather than buy them. Direct in-house production costs are estimated to be only
$1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete
after 10 years. This investment could be depreciated to zero for tax purposes using a
10-year straight-line depreciation schedule. The plant manager estimates that the
operation would require $50,000 of inventory and other working capital upfront (year 0),
but argues that this sum can be ignored because it is recoverable at the end of the 10
years. Expected proceeds from scrapping the machinery after 10 years are $20,000.
If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%,
what is the net present value of the decision to produce the chains in-house instead of
purchasing them from the supplier?
FIN 515 Week 3 First Course Project
The purpose of this project is to help you develop skills not only in performing the
calculations behind financial analysis but interpreting the numbers as well.
You are to pick a company. You should pick one either from the industry in which you are
currently working or an industry in which you are interested. You could also pick a
division of a company. It is imperative to use that sufficient data about your company
and that it is available. One way to do this is to pick a publicly held company. If you pick
a privately held company or a division of a company, make sure that the data necessary
to do a significant financial analysis is available.
If you use data that is not publicly available, be sure to talk to your manager and to
make absolutely sure that revealing that data is not a problem.
You will also need to find a standard against which to compare your findings. This could
be a different company in the same industry. This could also be the same company at a
different time. Additionally, average or benchmark numbers are available for several
industries. If you decide to use a different company in the same industry or the same
company at a different time, make sure that there are enough differences between the
two to make an analysis meaningful.
After you have selected a company, put yourself in the place of an analyst who has
been asked to perform an analysis of the company and provide a recommendation to
management.
Use ratio analysis, common size analysis, or other techniques to determine areas in
which the company is doing well as well as areas that management should look at.
Then, present your analysis and recommendations in the form of a paper.
A good place to start would be to perform a complete DuPont analysis of the company
and compare it to the standard. The DuPont analysis might provide guidance as to what
particular areas of the company should be examined next and what ratios should be
calculated. If the DuPont analysis does not reveal anything useful, you might wish to
calculate several of the ratios that are available to you.
Deliverable
The completed paper should be about 1,000 words long. In the paper, you do not have
to explain the ratios in depth. You may assume that the reader has a basic
understanding of finance and knows what ratio analysis is, although he or she might not
be able to list all the ratios and how to calculate them from memory. The reader is not
going to want a lot of background about financial analysis. He or she really wants
information that he or she can apply to the given situation, which is the company that
you have selected.
If you like, you can write the paper in the form of a memo to management. You do not
have to cite your source for how to calculate the ratios. You do need to provide a
reference to where you got that data not only for your subject company but for the
other company or standard to which you compared your company.
The spirit of this assignment is for you to calculate and interpret the results. The
purpose is not for you to find calculations and interpretations that have been
done by someone else.
The paper is expected to conform to the standards for graduate school writing.
The purpose of your analysis is internal evaluation. Refrain from using stock
market valuation ratios.
When you have completed the project, place it in one Word document and place that
document in the appropriate dropbox.
Week 4 Problem Set
Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%.
The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current
market piece of these bonds? The bonds will mature in 5 years.
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a
coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The
bond has a par value of $1,000. There are eight years to maturity. The yield to maturity
is 9%. What is the current price of the bond?
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are
$40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is
9%. What is the price of the bond?
Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a
YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the
bond currently sell for?
Bond-6. A given bond has five years left to maturity. Interest is paid annually and the
annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells
for $1,000. What is the yield to maturity?
9-1.Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year,
and its equity cost of capital is 15%. What price must you expect it to sell for right after
paying the dividend in 1 year in order to justify its current price?
9-5.NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue
to pay this dividend forever. What is the price per share if its equity cost of capital is
15% per year?
9-6.Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s
dividend to grow by 6% per year, what is its price per share if its equity cost of capital is
11%?
9-7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is
8%, and its dividends are expected to grow at a constant rate. a. What is the expected
growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s
share price?
9-12.Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts
expect this dividend to grow at 12% per year thereafter until the fifth year. After then,
growth will level off at 2% per year. According to the dividend-discount model, what is
the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
FIN 515 Week 4 Midterm
1. (TCO G) The firm’s asset turnover measures
2. (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last
year. This fall could be attributed to
3. (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you
will need $1,000,000 to retire. Assuming you don’t deposit any additional money into
the account, what annual return will you need to earn to meet this goal?
4. (TCO B) You take out a 4 year car loan for $18,000. The loan has a 4% annual interest
rate. The payments are made monthly. What are the monthly payments? Show your
work
5. (TCO B) You currently have $10,000 in your retirement account. If you deposit $500
per month and the account pays 5% interest, how much will be in the account in 10
years? Show your work.
6. (TCO B) You have a two children, A and B. Child A is not going to college but is
working in a business to learn the ropes. Child A plans on opening a business someday.
Child B is attending college. You put a certain amount of money into an account. From
this account, Child B will receive $2,000 per month for the next four years. Whatever is
left at that time will go to Child A to help start the business. You want Child A to receive
$96,000 at that time. The account pays 7% annually, compounded monthly. How much
money do you need to start the account? Show your work.
7. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s
NPV? Show your work.
8. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash
inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s
payback period? Show your work.
9. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s
IRR? Show your work.
10. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash
inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s
discounted payback period? Show your work.
11. (TCO F) Company A has the opportunity to do any, none, or all of the projects for
which the net cash flows per year are shown below. The projects are not mutually
exclusive. The company has a cost of capital of 15%. Which should the company do and
why? You must use at least two capital budgeting methods. Show your work. Explain
your answer thoroughly.
FIN 515 Week 5 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_5_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 10 (pages 345–348)
4. You bought a stock one year ago for $50 per share and sold it today for $55 per
share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from capital
gain?
20. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million,
that it expects will be repaid today. Each loan has a 5% probability of default, in which
case the bank is not repaid anything. The chance of default is independent across all
the loans. Bank B has only one loan of $100 million outstanding, which it also expects
will be repaid today. It also has a 5% probability of not being repaid. Explain the
difference between the type of risk each bank faces. Which bank faces less risk? Why?
22. Consider the following two, completely separate, economies. The expected return
and volatility of all stocks in both economies is the same. In the first economy, all stocks
move together—in good times all prices rise together and in bad times they all fall
together. In the second economy, stock returns are independent—one stock increasing
in price has no effect on the prices of other stocks. Assuming you are risk-averse and
you could choose one of the two economies in which to invest, which one would you
choose? Explain.
30. What does the beta of a stock measure?
35. Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using
the data in Table 10.6 (also shown above), calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.
Chapter 11 (pages 390–396):
2. You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco
Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected
returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and
12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and ColgatePalmolive falls by $13. What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return
of the portfolio at the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of
0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio
is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock
and 40% Costco stock, according to the CAPM?
Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading for $10 per share. In
addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of
capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?
27. You would like to estimate the weighted average cost of capital for a new airline
business. Based on its industry asset beta, you have already estimated an unlevered
cost of capital for the firm of 9%. However, the new business will be 25% debt financed,
and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%,
what is your estimate of its WACC?
FIN 515 Week 6 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_6_Problem_Set.docx (where flastname is your first initial and
your last name), and submit it to the appropriate Dropbox.
Chapter 29 (pages 983-984):
1. What inherent characteristic of corporations creates the need for a system of checks
on manager behavior?
2. What are some examples of agency problems?
3. What are the advantages and disadvantages of the corporate organizational
structure?
4. What is the role of the board of directors in corporate governance?
Second Project
The purpose of this project is for you to have some practice working with financial
concepts in the real world. This will involve integrating some material from throughout
the course. The project will also involve the development of your own approach to
doing the work. The project does not provide a step-by-step procedure for you to follow.
Your task is to determine the WACC for a given firm using what you know about WACC
as well as data you can find through research. Your deliverable is to be a brief report in
which you state your determination of WACC, describe and justify how you determined
the number, and provide relevant information as to the sources of your data.
With the help of your professor, you have selected a company for which to research and
find the WACC. Your research is to be independent from any information you may find at
thatswacc.com or similar sites although you might want to use such sites to provide a
reasonableness check on the WACC you calculate.
Assumptions
As you recall, the formula for WACC is
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is
ri= rf + βi * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk
Premium is 4% unless you can develop a better number.
rf is the risk free rate. The YTM on 10 year US Treasury securities is a good
approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their equity
is http://finance.yahoo.com. By looking around this site, you should be able to find the
market capitalization (E) as well as the β for any publicly traded company.
There are not many places left where data about corporate bonds is still available. One
of them is http://finra-markets.morningstar.com/BondCenter. To find data for a
particular company’s bonds, find the Quick Search feature, then be sure to specify
corporate bonds and type in the name of the issuing company. This should give you a
list of all of the company’s outstanding bond issues. Clicking on the symbol for a given
bond issue will lead you to the current amount outstanding and the yield to maturity.
You are interested in both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost
of debt for the company.
Deliverable
Write a two or three page report that contains the following elements:
1. 1.
Your calculated WACC.
2. 2.
How data was used to calculate WACC. This would be the formula and the
formula with your values substituted.
3. 3.
Sources for your data.
4. 4.
A discussion of how much confidence you have in your answer. What were
the limiting assumptions that you made, if any.
FIN 515 Week 7 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_7_Problem_Set.docx (where flastname is your first initial and
your last name), and submit it to the appropriate Dropbox.
Chapter 26 (page 903):
1. Answer the following questions:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being
equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered
by its suppliers, all else being equal?
4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of
$20 million. A simplified balance sheet for the firm appears below:
a. Calculate The Greek Connection’s net working capital in 2012.
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
c. The industry average accounts receivable days is 30 days. What would the cash
conversion cycle for The Greek Connection have been in 2012 if it had matched the
industry average for accounts receivable days?
5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30.
Calculate the cost of the trade credit if your firm does not take the discount and pays on
day 30.
Chapter 27 (page 925):
1. Which of the following companies are likely to have high short-term financing needs?
Why?
a. A clothing retailer
b. A professional sports team
c. An electric utility
d. A company that operates toll roads
e. A restaurant chain
2. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related
equipment. The following table contains financial forecasts as well as current (month 0)
working capital levels. During which months are the firm’s seasonal working capital
needs the greatest? When does it have surplus cash?
FIN 515 Final Exam
1. (TCO A) In the United States, the most common type of business by number of
businesses is the _____. (Points : 5)
2. (TCO A) Sole proprietorships have all of the following advantages except (Points :
5)
3. (TCO B) Which of the following would cause the future value of an annuity to
decrease? (Points : 5)
4. (TCO B) Which of the following is an annuity due? (Points : 5)
5. (TCO G) What are the names of the four components of the DuPont Identity and
how are they calculated? What does each measure? (Points : 20)
6. (TCO D) A stock pays an annual dividend of $2.50 and that dividend is not
expected to change. Similar stocks pay a return of 10%. What is P0? (Points : 20)
7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid one
year from today. The dividend is expected to grow at a 7% annual rate. The
return on equity for similar stocks is 12%. What is P0? (Points : 20)
8. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It
has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate.
What does the bond currently sell for? (Points : 10)
9. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was issued
two years ago and had a maturity of 10 years. The coupon rate is 7% and the
interest payments are made semiannually. What is its YTM? (Points : 10)
10. (TCO D) Using examples, explain the difference between systematic risk and
nonsystematic risk. Explain why the distinction is important for both investors
and issuers of stock.(Points : 30)
11. (TCO E) A company has 10 million shares outstanding trading for $7 per share. It
also has $300 million in outstanding debt. If its equity cost of capital is 15%, and
its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is
its weighted average cost of capital? (Points : 30)
12. (TCO A) Relate how the job of the financial manager can be explained using the
balance sheet. (Points : 25)
13. (TCO H) Other things being equal, would a firm prefer a longer or shorter Cash
Conversion Cycle? What are some examples of ways a firm could attain this?
(Points : 30)
14. (TCO F) A company has the opportunity to do any of the projects for which the
net cash flows per year are shown below. The company has a cost of capital of
12%. Which should the company do and why? You must use at least two capital
budgeting methods. Show your work
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FIN 515 Entire Course Managerial Finance
FIN 515 Week 1 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_1_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other
organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a
corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also
find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion,
gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea
(PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of
$17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital
during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position
in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco
Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its
coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over
this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70
billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s
equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to
understand the difference between the two firms’ ROEs.
FIN 515 Week 1 Quiz
Question 1
(TCO G) Which do you think provides a more valid measure of how a company is doing,
comparison of current results with historical results or comparison of current results with
the current results of another company?
Question 2
(TCO G) Barnes Corp’s total assets at the end of last year were $415,000,000 and its
net income after taxes was $17,750,000. What was its return on total assets?
Question 3
(TCO G) Between December 31, 2016 and December 31, 2017, ROE at Bobcat
Industries decreased even though sales increased. Using the DuPont Identity, explain
what else could have happened to cause this.
FIN 515 Week 2 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_2_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 4 (pages 132–136):
3. Calculate the future value of $2000 in
a. five years at an interest rate of 5% per year;
b. ten years at an interest rate of 5% per year; and
c. five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest
earned in part (b)?
4. What is the present value of $10,000 received
a. twelve years from today when the interest rate is 4% per year;
b. twenty years from today when the interest rate is 8% per year; and
c. six years from today when the interest rate is 2% per year?
5. Your brother has offered to give you either $5,000 today or $10,000 in 10 years. If the
interest rate is 7% per year, which option is preferable?
6. Consider the following alternatives.
i. $100 received in 1 year
ii. $200 received in 5 years
iii. $300 received in 10 years
a. Rank the alternatives from most valuable to least valuable if the interest rate is 10%
per year.
b. What is your ranking if the interest rate is only 5% per year?
c. What is your ranking if the interest rate is 20% per year?
8. Your daughter is currently 8 years old. You anticipate that she will be going to college
in 10 years. You would like to have $100,000 in a savings account to fund her education
at that time. If the account promises to pay a fixed interest rate of 3% per year, how
much money do you need to put into the account today to ensure that you will have
$100,000 in 10 years?
9. You are thinking of retiring. Your retirement plan will pay you either $250,000
immediately on retirement or $350,000 5 years after the date of your retirement. Which
alternative should you choose if the interest rate is
a. 0% per year;
b. 8% per year; and
c. 20% per year?
14. You have been offered a unique investment opportunity. If you invest $10,000
today, you will receive $500 1 year from now, $1,500 2 years from now, and $10,000 10
years from now. a. What is the NPV of the opportunity if the interest rate is 6% per year?
Should you take the opportunity? b. What is the NPV of the opportunity if the interest
rate is 2% per year? Should you take it now?
36. You are thinking of purchasing a house. The house costs $350,000. You have
$50,000 in cash that you can use as a down payment on the house, but you need to
borrow the rest of the purchase price. The bank is offering a 30-year mortgage that
requires annual payments and has an interest rate of 7% per year. What will your
annual payment be if you sign up for this mortgage?
37. You would like to buy the house and take the mortgage described in Problem 36. You
can afford to pay only $23,500 per year. The bank agrees to allow you to pay this
amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years),
you must make a balloon payment; that is, you must repay the remaining balance on
the mortgage. How much will this balloon payment be?
38. You have just made an offer on a new home and are seeking a mortgage. You need
to borrow $600,000. a. The bank offers a 30-year mortgage with fixed monthly
payments and an interest rate of 0.5% per month. What is the amount of your monthly
payment if you take this loan? b. Alternatively, you can get a 15-year mortgage with
fixed monthly payments and an interest rate of 0.4% per month. How much would your
monthly payments be if you take this loan instead?
*A.1. This problem is from the Appendix to Chapter 4. Your grandmother bought an
annuity from Rock Solid Life Insurance Company for $200,000 when she retired. In
exchange for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The
interest rate is 5%. How long must she live after the day she retired to come out ahead
(that is, to get more in value than what she paid in)?
FIN 515 Week 2 Quiz
Question 1
(TCO B) Your daughter has just given birth to your first grandchild. You decide to start a
college fund for the child. You want the fund to have $300,000 in it when the child turns
18. You think you can get a return of 10% per year on your investment. How much
should you deposit in the fund? Ignore taxes. Show your work. If you use Excel, show
the formula with the parameters, and the answer. If you use a formula, provide the
standard formula, the formula with terms substituted, and the answer. If you use a
calculator, show the inputs and the answer.
Question 2
(TCO B) You have a student loan of $75,000. The interest rate is 8.6% per year. You have
been out of school for 6 months and are ready to start making payments. You want to
use the maximum allowed of 10 years to pay off the loan by making equal monthly
payments. How much are the monthly payments? Ignore taxes. Show your work. If you
use Excel, show the formula with the parameters, and the answer. If you use a formula,
provide the standard formula, the formula with terms substituted, and the answer. If you
use a calculator, show the inputs and the answer.
Question 3
(TCO B) Your cousin wants to buy a car but he really can’t afford it. He needs a loan of
$22,000. The finance manager at the dealership offers him something like a loan in
which your cousin will get the $22,000 and will pay $413 per month for the next 60
months with an additional payment of $3,000 (which the car will surely be worth!) in the
60th month. What interest rate is your cousin really going to pay? Ignore taxes. Show
your work. If you use Excel, show the formula with the parameters, and the answer. If
you use a formula, provide the standard formula, the formula with terms substituted,
and the answer. If you use a calculator, show the inputs and the answer.
FIN 515 Week 3 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_3_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 7 (pages 225–228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you back
$12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its
NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to
determine the maximum deviation allowable in the cost of capital estimate to leave the
decision unchanged.
8. You are considering an investment in a clothes distributor. The company needs
$100,000 today and expects to repay you $120,000 in a year from now. What is the IRR
of this investment opportunity? Given the riskiness of the investment opportunity, your
cost of capital is 20%. What does the IRR rule say about whether you should invest?
19. You are a real estate agent thinking of placing a sign advertising your services at a
local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that
it will generate additional revenue of $500 per month. What is the payback period?
21. You are deciding between two mutually exclusive investment opportunities. Both
require the same initial investment of $10 million. Investment A will generate $2 million
per year (starting at the end of the first year) in perpetuity. Investment B will generate
$1.5 million at the end of the first year and its revenues will grow at 2% per year for
every year after that.
a. Which investment has the higher IRR?
b. Which investment has the higher NPV when the cost of capital is 7%?
c. In this case, for what values of the cost of capital does picking the higher IRR
give the correct answer as to which investment is the best opportunity?
Chapter 8 (260–262)
1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its
pizza that will be low in cholesterol and contain no trans fats. The firm expects that
sales of the new pizza will be $20 million per year. While many of these sales will be to
new customers, Pisa Pizza estimates that 40% will come from customers who switch to
the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of
incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to
its healthier pizza will switch to another brand if Pisa Pizza does not introduce a
healthier pizza. What level of incremental sales is associated with introducing the new
pizza in this case?
6. Cellular Access, Inc. is a cellular telephone service provider that reported net income
of $250 million for the most recent fiscal year. The firm had depreciation expenses of
$100 million, capital expenditures of $200 million, and no interest expenses. Working
capital increased by $10 million. Calculate the free cash flow for Cellular Access for the
most recent fiscal year.
12. A bicycle manufacturer currently produces 300,000 units a year and expects output
levels to remain steady in the future. It buys chains from an outside supplier at a price
of $2 a chain. The plant manager believes that it would be cheaper to make these
chains rather than buy them. Direct in-house production costs are estimated to be only
$1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete
after 10 years. This investment could be depreciated to zero for tax purposes using a
10-year straight-line depreciation schedule. The plant manager estimates that the
operation would require $50,000 of inventory and other working capital upfront (year 0),
but argues that this sum can be ignored because it is recoverable at the end of the 10
years. Expected proceeds from scrapping the machinery after 10 years are $20,000.
If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%,
what is the net present value of the decision to produce the chains in-house instead of
purchasing them from the supplier?
FIN 515 Week 3 First Course Project
The purpose of this project is to help you develop skills not only in performing the
calculations behind financial analysis but interpreting the numbers as well.
You are to pick a company. You should pick one either from the industry in which you are
currently working or an industry in which you are interested. You could also pick a
division of a company. It is imperative to use that sufficient data about your company
and that it is available. One way to do this is to pick a publicly held company. If you pick
a privately held company or a division of a company, make sure that the data necessary
to do a significant financial analysis is available.
If you use data that is not publicly available, be sure to talk to your manager and to
make absolutely sure that revealing that data is not a problem.
You will also need to find a standard against which to compare your findings. This could
be a different company in the same industry. This could also be the same company at a
different time. Additionally, average or benchmark numbers are available for several
industries. If you decide to use a different company in the same industry or the same
company at a different time, make sure that there are enough differences between the
two to make an analysis meaningful.
After you have selected a company, put yourself in the place of an analyst who has
been asked to perform an analysis of the company and provide a recommendation to
management.
Use ratio analysis, common size analysis, or other techniques to determine areas in
which the company is doing well as well as areas that management should look at.
Then, present your analysis and recommendations in the form of a paper.
A good place to start would be to perform a complete DuPont analysis of the company
and compare it to the standard. The DuPont analysis might provide guidance as to what
particular areas of the company should be examined next and what ratios should be
calculated. If the DuPont analysis does not reveal anything useful, you might wish to
calculate several of the ratios that are available to you.
Deliverable
The completed paper should be about 1,000 words long. In the paper, you do not have
to explain the ratios in depth. You may assume that the reader has a basic
understanding of finance and knows what ratio analysis is, although he or she might not
be able to list all the ratios and how to calculate them from memory. The reader is not
going to want a lot of background about financial analysis. He or she really wants
information that he or she can apply to the given situation, which is the company that
you have selected.
If you like, you can write the paper in the form of a memo to management. You do not
have to cite your source for how to calculate the ratios. You do need to provide a
reference to where you got that data not only for your subject company but for the
other company or standard to which you compared your company.
The spirit of this assignment is for you to calculate and interpret the results. The
purpose is not for you to find calculations and interpretations that have been
done by someone else.
The paper is expected to conform to the standards for graduate school writing.
The purpose of your analysis is internal evaluation. Refrain from using stock
market valuation ratios.
When you have completed the project, place it in one Word document and place that
document in the appropriate dropbox.
Week 4 Problem Set
Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%.
The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current
market piece of these bonds? The bonds will mature in 5 years.
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a
coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The
bond has a par value of $1,000. There are eight years to maturity. The yield to maturity
is 9%. What is the current price of the bond?
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are
$40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is
9%. What is the price of the bond?
Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a
YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the
bond currently sell for?
Bond-6. A given bond has five years left to maturity. Interest is paid annually and the
annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells
for $1,000. What is the yield to maturity?
9-1.Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year,
and its equity cost of capital is 15%. What price must you expect it to sell for right after
paying the dividend in 1 year in order to justify its current price?
9-5.NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue
to pay this dividend forever. What is the price per share if its equity cost of capital is
15% per year?
9-6.Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s
dividend to grow by 6% per year, what is its price per share if its equity cost of capital is
11%?
9-7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is
8%, and its dividends are expected to grow at a constant rate. a. What is the expected
growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s
share price?
9-12.Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts
expect this dividend to grow at 12% per year thereafter until the fifth year. After then,
growth will level off at 2% per year. According to the dividend-discount model, what is
the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
FIN 515 Week 4 Midterm
1. (TCO G) The firm’s asset turnover measures
2. (TCO G) Suppose Novak Company experienced a reduction in its ROE over the last
year. This fall could be attributed to
3. (TCO B) You plan on retiring in 20 years. You currently have $275,000 and think you
will need $1,000,000 to retire. Assuming you don’t deposit any additional money into
the account, what annual return will you need to earn to meet this goal?
4. (TCO B) You take out a 4 year car loan for $18,000. The loan has a 4% annual interest
rate. The payments are made monthly. What are the monthly payments? Show your
work
5. (TCO B) You currently have $10,000 in your retirement account. If you deposit $500
per month and the account pays 5% interest, how much will be in the account in 10
years? Show your work.
6. (TCO B) You have a two children, A and B. Child A is not going to college but is
working in a business to learn the ropes. Child A plans on opening a business someday.
Child B is attending college. You put a certain amount of money into an account. From
this account, Child B will receive $2,000 per month for the next four years. Whatever is
left at that time will go to Child A to help start the business. You want Child A to receive
$96,000 at that time. The account pays 7% annually, compounded monthly. How much
money do you need to start the account? Show your work.
7. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s
NPV? Show your work.
8. (TCO F) A project requires an initial cash outlay of $60,000 and has expected cash
inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s
payback period? Show your work.
9. (TCO F) A project requires an initial cash outlay of $95,000 and has expected cash
inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s
IRR? Show your work.
10. (TCO F) A project requires an initial cash outlay of $40,000 and has expected cash
inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s
discounted payback period? Show your work.
11. (TCO F) Company A has the opportunity to do any, none, or all of the projects for
which the net cash flows per year are shown below. The projects are not mutually
exclusive. The company has a cost of capital of 15%. Which should the company do and
why? You must use at least two capital budgeting methods. Show your work. Explain
your answer thoroughly.
FIN 515 Week 5 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_5_Problem_Set.docx, where flastname is your first initial and
you last name, and submit it to the appropriate dropbox.
Chapter 10 (pages 345–348)
4. You bought a stock one year ago for $50 per share and sold it today for $55 per
share. It paid a $1 per share dividend today.
a. What was your realized return?
b. How much of the return came from dividend yield and how much came from capital
gain?
20. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million,
that it expects will be repaid today. Each loan has a 5% probability of default, in which
case the bank is not repaid anything. The chance of default is independent across all
the loans. Bank B has only one loan of $100 million outstanding, which it also expects
will be repaid today. It also has a 5% probability of not being repaid. Explain the
difference between the type of risk each bank faces. Which bank faces less risk? Why?
22. Consider the following two, completely separate, economies. The expected return
and volatility of all stocks in both economies is the same. In the first economy, all stocks
move together—in good times all prices rise together and in bad times they all fall
together. In the second economy, stock returns are independent—one stock increasing
in price has no effect on the prices of other stocks. Assuming you are risk-averse and
you could choose one of the two economies in which to invest, which one would you
choose? Explain.
30. What does the beta of a stock measure?
35. Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using
the data in Table 10.6 (also shown above), calculate the expected return of investing in
a. Starbucks’ stock.
b. Hershey’s stock.
c. Autodesk’s stock.
Chapter 11 (pages 390–396):
2. You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco
Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected
returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and
12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and ColgatePalmolive falls by $13. What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return
of the portfolio at the new prices?
50. Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of
0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio
is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock
and 40% Costco stock, according to the CAPM?
Chapter 12 (page 431):
26. Unida Systems has 40 million shares outstanding trading for $10 per share. In
addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of
capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?
27. You would like to estimate the weighted average cost of capital for a new airline
business. Based on its industry asset beta, you have already estimated an unlevered
cost of capital for the firm of 9%. However, the new business will be 25% debt financed,
and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%,
what is your estimate of its WACC?
FIN 515 Week 6 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_6_Problem_Set.docx (where flastname is your first initial and
your last name), and submit it to the appropriate Dropbox.
Chapter 29 (pages 983-984):
1. What inherent characteristic of corporations creates the need for a system of checks
on manager behavior?
2. What are some examples of agency problems?
3. What are the advantages and disadvantages of the corporate organizational
structure?
4. What is the role of the board of directors in corporate governance?
Second Project
The purpose of this project is for you to have some practice working with financial
concepts in the real world. This will involve integrating some material from throughout
the course. The project will also involve the development of your own approach to
doing the work. The project does not provide a step-by-step procedure for you to follow.
Your task is to determine the WACC for a given firm using what you know about WACC
as well as data you can find through research. Your deliverable is to be a brief report in
which you state your determination of WACC, describe and justify how you determined
the number, and provide relevant information as to the sources of your data.
With the help of your professor, you have selected a company for which to research and
find the WACC. Your research is to be independent from any information you may find at
thatswacc.com or similar sites although you might want to use such sites to provide a
reasonableness check on the WACC you calculate.
Assumptions
As you recall, the formula for WACC is
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is
ri= rf + βi * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk
Premium is 4% unless you can develop a better number.
rf is the risk free rate. The YTM on 10 year US Treasury securities is a good
approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their equity
is http://finance.yahoo.com. By looking around this site, you should be able to find the
market capitalization (E) as well as the β for any publicly traded company.
There are not many places left where data about corporate bonds is still available. One
of them is http://finra-markets.morningstar.com/BondCenter. To find data for a
particular company’s bonds, find the Quick Search feature, then be sure to specify
corporate bonds and type in the name of the issuing company. This should give you a
list of all of the company’s outstanding bond issues. Clicking on the symbol for a given
bond issue will lead you to the current amount outstanding and the yield to maturity.
You are interested in both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost
of debt for the company.
Deliverable
Write a two or three page report that contains the following elements:
1. 1.
Your calculated WACC.
2. 2.
How data was used to calculate WACC. This would be the formula and the
formula with your values substituted.
3. 3.
Sources for your data.
4. 4.
A discussion of how much confidence you have in your answer. What were
the limiting assumptions that you made, if any.
FIN 515 Week 7 Problem Set
Answer the following questions and solve the following problems in the space
provided. When you are done, save the file in the format
flastname_Week_7_Problem_Set.docx (where flastname is your first initial and
your last name), and submit it to the appropriate Dropbox.
Chapter 26 (page 903):
1. Answer the following questions:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being
equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered
by its suppliers, all else being equal?
4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of
$20 million. A simplified balance sheet for the firm appears below:
a. Calculate The Greek Connection’s net working capital in 2012.
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
c. The industry average accounts receivable days is 30 days. What would the cash
conversion cycle for The Greek Connection have been in 2012 if it had matched the
industry average for accounts receivable days?
5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30.
Calculate the cost of the trade credit if your firm does not take the discount and pays on
day 30.
Chapter 27 (page 925):
1. Which of the following companies are likely to have high short-term financing needs?
Why?
a. A clothing retailer
b. A professional sports team
c. An electric utility
d. A company that operates toll roads
e. A restaurant chain
2. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related
equipment. The following table contains financial forecasts as well as current (month 0)
working capital levels. During which months are the firm’s seasonal working capital
needs the greatest? When does it have surplus cash?
FIN 515 Final Exam
1. (TCO A) In the United States, the most common type of business by number of
businesses is the _____. (Points : 5)
2. (TCO A) Sole proprietorships have all of the following advantages except (Points :
5)
3. (TCO B) Which of the following would cause the future value of an annuity to
decrease? (Points : 5)
4. (TCO B) Which of the following is an annuity due? (Points : 5)
5. (TCO G) What are the names of the four components of the DuPont Identity and
how are they calculated? What does each measure? (Points : 20)
6. (TCO D) A stock pays an annual dividend of $2.50 and that dividend is not
expected to change. Similar stocks pay a return of 10%. What is P0? (Points : 20)
7. (TCO D) A stock has just declared an annual dividend of $2.25 to be paid one
year from today. The dividend is expected to grow at a 7% annual rate. The
return on equity for similar stocks is 12%. What is P0? (Points : 20)
8. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It
has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate.
What does the bond currently sell for? (Points : 10)
9. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was issued
two years ago and had a maturity of 10 years. The coupon rate is 7% and the
interest payments are made semiannually. What is its YTM? (Points : 10)
10. (TCO D) Using examples, explain the difference between systematic risk and
nonsystematic risk. Explain why the distinction is important for both investors
and issuers of stock.(Points : 30)
11. (TCO E) A company has 10 million shares outstanding trading for $7 per share. It
also has $300 million in outstanding debt. If its equity cost of capital is 15%, and
its debt cost of capital is 9%, and its effective corporate tax rate is 40%, what is
its weighted average cost of capital? (Points : 30)
12. (TCO A) Relate how the job of the financial manager can be explained using the
balance sheet. (Points : 25)
13. (TCO H) Other things being equal, would a firm prefer a longer or shorter Cash
Conversion Cycle? What are some examples of ways a firm could attain this?
(Points : 30)
14. (TCO F) A company has the opportunity to do any of the projects for which the
net cash flows per year are shown below. The company has a cost of capital of
12%. Which should the company do and why? You must use at least two capital
budgeting methods. Show your work
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