Part -1:
1. What is the main formula that determines a firm's value? How do cash flows affect the value?
2. With respect to a balance sheet with categories Assets, Liabilities, and Equity, construct a simple mathematical equation that links the three. How is the Income Statement different from the Statement of Cash Flows? Which one is the most important for discerning the company's true operating story and then forecasting its future prospects?
3. Discuss in a sentence the relevance of historic and competitive benchmarking with respect to financial ratios (i.e., advantages and challenges for each). What, if anything, is revealed in the analysis? What makes benchmarking difficult?
4. Why is discounting used when describing PV and compounding used when depicting FV?Would you prefer your savings account to have more frequent or less frequent compounding and why? Why are effective rates of return used in finance?
5. What causes a bond to trade at a discount from its issuance price? What causes a bond to trade at a premium to its issuance price?
6. a) What is the future value of a 20-year ordinary annuity of $50 if the interest rate is 8%?
b) What is the present value of the annuity?
c) What are the future and present values if the annuity were an annuity due?
d) If I plan to buy a $200,000 house with a 30-year mortgage at 9%, what is my monthly payment?
e) How much principal would I pay in the first month of the mortgage?
Use the following financial information for Ridley Inc. to complete Problems 7 - 9
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Assets
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2016
|
2015
|
|
Cash
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$ 21,000
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$ 20,000
|
|
Short-Term Invest.
|
3,759
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3,240
|
|
Accounts Receivable
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52,500
|
48,000
|
|
Inventories
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84,000
|
56,000
|
|
Total Current Assets
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$ 161,259
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$ 127,240
|
|
Net Fixed Assets
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$ 218,400
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$ 200,000
|
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Total Assets
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$ 379,659
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$ 327,240
|
|
|
|
|
|
Liabilities And Equity
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2016
|
2015
|
|
Accounts Payable
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$ 33,600
|
$ 32,000
|
|
Notes Payable
|
19,929
|
6,480
|
|
Accruals
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12,600
|
12,000
|
|
Total Current Liabilities
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$ 66,129
|
$ 50,480
|
|
Long-Term Debt
|
67,662
|
58,320
|
|
Total Liabilities
Common Stock
|
133,791
183,793
|
108,800
178,440
|
|
Retained Earnings
|
62,074
|
40,000
|
|
Total Equity
|
$ 245,868
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$ 218,440
|
|
Total Liabilities & Equity
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$ 379,659
|
$ 327,240
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
2016
|
2015
|
|
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Sales
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$ 420,000
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$ 400,000
|
|
|
COGS except depr.
|
300,000
|
298,000
|
|
|
Depreciation
|
19,660
|
18,000
|
|
|
Other Expenses
|
27,600
|
22,000
|
|
|
EBIT
|
$ 72,740
|
$ 62,000
|
|
|
Interest Expense
|
5,740
|
4,460
|
|
|
EBT
|
$ 67,000
|
$ 57,540
|
|
|
Taxes (40%)
|
26,800
|
23,016
|
|
|
Net Income
|
$ 40,200
|
$ 34,524
|
|
|
|
|
|
|
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Other Data
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2016
|
2015
|
|
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Stock Price
|
$ 90.00
|
$ 96.00
|
|
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Shares Outstanding
|
4,052,000
|
4,000,000
|
|
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Tax Rate
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40%
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40%
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|
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Lease Payments
|
$ 20,000
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$ 20,000
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|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows
|
2016
|
|
|
Operating Activities
|
|
|
|
Net Income
|
40,200
|
|
|
Adjustments:
|
|
|
|
Noncash Adjustments:
|
|
|
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Depreciation & Amortization
|
19,660
|
|
|
Changes in Working Capital:
|
|
|
|
Change in Accounts Receivable
Change in Inventories
Change in Accounts payable
|
(4,500)
(28,000)
1,600
|
|
|
Change in Accruals
|
600
|
|
|
Net Cash Provided (Used) by Operating
|
29,560
|
|
|
Investing Activities
|
|
|
|
Cash used to acquire fixed assets
|
(38,060) (gross)
|
|
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Change in short-term investments
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(519)
|
|
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Net Cash Provided (Used) By Investing
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(38,579)
|
|
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Financing Activities
|
|
|
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Change in Notes Payable
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13,449
|
|
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Change in Long-Term Debt
|
9,342
|
|
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Change in Common Stock
|
5,353
|
|
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Payment of Cash Dividends
|
(18,125)
|
|
|
Net Cash Provided (Used) by Financing
|
10,019
|
|
|
Summary
|
|
|
|
Net Change in Cash
|
1,000
|
|
|
Cash at Beginning of Year
|
20,000
|
|
|
Cash at End of Year
|
21,000
|
|
7. a) What can you conclude from the statement of cash flows?
b) What is RidleyInc's NOPAT?
c) What is RidleyInc'sOperating Capital in 2016 and 2015?
d) What is RidleyInc's FCF in 2016?
e) What are RidleyInc's "net uses" of its FCF?
8. a) Calculate the current and quick ratios for Ridley in 2015 and 2016. What do these ratios imply regarding the company's liquidity? Would your answer change if you know the industry average current ratio is 2.1 and quick ratio is 1.2?
b) Calculate the total asset turnover, DSO, and inventory turnover ratios for 2015 and 2016. Without even comparing to industry averages, what do these ratios tell us about Ridley's asset management? Do I want these ratios to increase or decrease over time?
c) What is Ridley's ROE? Use the Dupont formula to decompose the ROE into three ratios.
9. a) What is the value of a 20-year, 12% semiannual coupon bond with a par value of $1000 if its required rate of return is 8%?
b) What is the yield to maturity on an 8-year, 8% semiannual coupon bond selling for $900? What is the yield to maturity if the same 8-year, 8% semiannual coupon bond is selling for $1200?
c) Draw a "normal" yield curve and explain the difference between a normal and an abnormal yield curve.
Part -2:
1. What is the difference between a short call and a short put option, what are the investor's expectations of the movement of the stock, how about the seller who is short the options, what do they expect? Of the five inputs discussed, what are three important inputs in the Black-Scholes option pricing model? For each of the three that you have chosen, what happens to the call option premium, all else being equal, when that variable increases?
2. Discuss the nature of the numerators and denominators in the dividend discount model and the free cash flow valuation model. What makes these approaches similar; what makes these different?
3. Discus the three pairs of elements of the weighted average cost of capital formula. What does the WACC denote? (For example, what does WACC = 9.7% mean?) Which WACC element is calculated "after tax" and Why?
4. What asset pricing model does the WACC use to compute cost of equity? In this model, what are the market risk premium and beta? Using this model that you described, what would be the cost of equity if the Beta is 0?
5. Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?
Stock Amount Beta
A $1,075,000 1.20
B 675,000 0.50
C 750,000 1.40
D 500,000 0.75
$3,000,000
6. Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns?
Economic
Conditions Prob. Return
Strong 30% 32.0%
Normal 40% 10.0%
Weak 30% - 16.0%
7. The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?
8. To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You have obtained the following information.
(1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00.
(2) The company's tax rate is 40%.
(3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20.
(4) The target capital structure consists of 35% debt and 65% common equity.
The firm uses the CAPM to estimate the cost of common stock. What is its WACC?
9. Westwood Painting Co. is considering a project that has the following cash flow and WACC data. Find the project's
a) NPV
b) IRR
c) Modified IRR
d) Discounted Payback Period
WACC: 12.25%
Year 0 1 2 3 4
Cash flows -$850 $300 $320 $340 $360
10. Carolina Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. Which project should Carolina Company choose?
WACC: 7.75%
Year 0 1 2 3 4
CFS -$1,050 $675 $650
CFL -$1,050 $360 $360 $360 $360