Corporate Financial Management Review Sheets Chapters 4-9 Chapter 4 q Time

Corporate
Financial Management Review Sheets
Chapters
4-9

Chapter
4

q Time Value of Money

o
A
credit card account that charges interest at the rate of 1.0% per month would
have an effective annually compounded rate of _______ and an APR of
_______. (Ans: 12.68%;
12.00%)

o
What
is the present value of your trust fund if it promises to pay you $35,000 on
your 35th birthday (6 years from today) and earns 9% compounded annually? (Ans: $20,869.36)

o
Give
me $10,000 today and I’ll return $25,000 to you in five years,” offers the
investment broker. To the nearest
percent, what annual interest rate is being offered?(Ans: 20%)

o
How
much money would you have to put away at the end of each year to have
$1,000,000 when you retire 40 years from now if you can earn 6% on your money?(Ans:
$6,461.54)

o
How much can be accumulated if $250 is deposited
at the end of each month for the next 35 years and the account earns 6% APR
(i.e. 0.5% per month). (Ans:
$356,177.57)

o
Assume
the total expense for your current year in college equals $40,000. Approximately how much would you have needed
to invest 20 years ago in an account paying 6% compounded annually to cover
this amount? (Ans:
$12,472.19)

Chapter
8

Bond
Valuation
o
Bond
definitions
o
Expected
return = (Coupon payment + capital gain (loss)) divided by original investment
o
Interest
rate risk
o
Credit
risk
o
How
much would you expect to pay for a $1,000 par (face) value bond with a 6%
coupon that matures in 7 years if the market interest rate is 4%? (Ans.: $1,120.04)
o
How
much would you expect to pay for a $1,000 par (face) value bond with a 6%
coupon that matures in 7 years if the market interest rate is 9%? (Ans.: $849.01)
o
What
is the Yield-to-Maturity of a 5-year 10% coupon bond that currently is priced
at $945.25?(Ans.: 11.5%)

Chapter
9

Stock
Valuation
o
Dividend
Discount Model: definitions
o
Gordon
Growth Model of DDM: relationships in the formula

Po = Div1/(r-g)

r = (Div1/Po)+g

o
Pie-in-the-Sky Corp., makers of heavenly apple
pies, is expecting earnings next year of $5 per share. The company expects that
it can realize a return on equity of 15%. Traditionally, it pays out about 40%
of its earnings in the form of dividends. Based on the companys risk profile,
investors require a return of 12%. Given this information:

i. Calculate
the stock price using the Gordon Growth Model. (Ans.: Div1=2, g=.15x.60 = .09, r=.12, Po =
2/(.12-.09) = 66.67)

ii. Calculate
the market value of total equity for the firm if there are currently 10,000,000
shares outstanding. (Ans.:
$666,700,000.00)

iii. What
would happen to the stock price and total equity value if
the return on equity fell to 10%? (Ans.: g=.10X.60 =.06, Po = 33.33, total market value = $333,300,000.00

o
Construct a Market Value Balance sheet for the
firm given the following (FYI: There are no other liabilities or stock issues other
than those mentioned below.):

i. The
company has issued 15 year $1,000 bonds 8 years ago with a total face value
$20,000,000. The coupon rate on the bond is 4%, but market interest rate on
similar bonds are now 5%. What is the
market value of these bonds?(Ans.: FV=1000, N=7, I=5, PMT=40: PV=? 942.14. There are 20,000 Bonds 20,000,000
divided by 1000 face value of each bond. Therefore total market value of all
the bonds is 20,000 x 942.14 or $18,842,800.

ii. The
company also has 10,000,000 shares of common stock outstanding. The companys
earnings are expected to be $10/sh and it plans to pay out 40% of its earnings
to its stockholders. Given the riskiness of the stock, the required rate of
return is 20% and its return on investment is 16.67%. Calculate the price per
share and the market value of the total equity position. (Ans.: Div1=4, r=.20, g=
.1667x.60 = .10, Po = 4/(.20-.10) = 40. The total market value of equity is
10,000,000 x 40 or 400,000,000

iii. The
book value of assets in place (plant and equipment) is $175,000,000. Indicate
the value of investment opportunities.

Assets Liabilities &
Shareholder Eq.
P&E $175,000,000 Liabilities $ 18,842,800
Inv. Opp. 243,842,800 Sh. Equity 400,000,000

Total Assets $418,842,800 Total Liab. & Sh. Eq. $418,842,800

Chapter
5

Investment
Decision Rules

Net
Present Value
o
Decision
rule
o
Mutually
exclusive projects

o
What
is the NPV of a project that costs $75,000 and returns $50,000 annually for
three years if the opportunity cost is 10%?(Ans.:$49,342.60)

q IRR Rule
q Payback
q Profitability Index

Project A Project B
Initial
Cost: $100,000 $200,000
Cash
Flows: $50,000 $75,000
50,000 100,000
50,000 75,000
50,000 125,000

Opportunity
Cost of Capital is 5%
1.) What are the NPV & IRR of each project?A:
77,297.53 (34.9); B: 129,757.15 (28.5)
2.) If the projects were independent which would
you choose?Both
3.) If the projects were mutually exclusive which
would you choose?B
4.)
What is the payback period on each?2
years; 2.3 years
5.) Under what conditions would you use the
Profitability Index instead of the NPV rule?Hard
Capital Rationing
6.) Assume you are the financial manager
with hard capital rationing budget of $9 million. You may invest in the
following independent projects. Investment and cash flow figures are in
millions.

Project

Investment

Net Present Value

A

3

1

B

5

1

C

7

3

D

6

2

E

2

1

Using
the Profitability Index, which projects should you choose given the budget
constraint? Which would you choose if there was no capital rationing? Show all
work!(Ans.: PI= .33, .20, .43, .33, .50.
Choose projects E and C. Chose all if no
constraints.)

Chapter
6

Incremental
Cash Flows
q include all direct costs
q exclude sunk costs
q recognize investment in working
capital

Consider
the following investment project:

Mr.
Phil Enthropic, a project analyst at Noxxe-Mobile Corp., would like his project
included in next years capital budget. According to his report, the new equipment
would cost $227,538 and its projected cash flows would be as follows:
ANS
Year
1 50,000 36,000
Year
2 70,000 56,000
Year
3 70,000 56,000
Year
4 70,000 56,000
Year
5 80,000 66,000

The
cost of capital is 10%

a) What is the NPV calculated by the
analyst? If his numbers are correct should you accept the project? NPV 25,844.47
b)
Assume
that the analyst included shipping and installation costs of $7,538 in his
estimation of the purchase price. Is this procedure correct? Why? It is a
relevant cost shipping & installation are necessary.
c)
Assume
that no consideration was given to the fact that the floor space used for this
project could be rented each year for $15,000. How would this affect the
calculation?This opportunity cost must be considered subtract 15,000 per year
from cash flows.
d)
Included
in his analysis, Mr. Entropic calculates that lighting, heat and air
conditioning costs the company $10,000 per year, and since the new equipment
occupies 10% of the total floor space, cash flows must be reduced by $1,000 per
year to reflect overhead costs for the new equipment. Should this deduction be
made?No: not a relevant cost deduction made in error add back
e)
Given
your answers to b, c, and d. What is your calculation of Net Present Value for
this project and would you include it in next years capital budget?NPV =
-27,226.55

Chapter 7

q Project Analysis
o
Capital
Budgeting process
o
What
if questions?
o
Sensitivity
Analysis
o
Scenario
Analysis
o
Simulation
Analysis
o
Break-Even
Analysis
o
Operating
Leverage

At Macrohard, Inc. the cost of secret project X is
$100,000. According to a confidential management report, the following can be
expected in each of the five years of the machines life.
Year 0 Years 1-5 Ans A Ans B
Investment $100,000 -120,000 -100,000
Sales $350,000
350,000 450,000
Variable
costs@ 77% 269,500
269,500
346,500
Fixed costs
30,000 30,000 30,000
Depreciation 20,000 24,000 20,000
Pretax Profit 30,500 26,500 53,500
Taxes @ 40% 12,200 10,600 21,400
After-tax
Profits 18,300 15,900 32,100
Cash
Flows 38,300 39,900 52,100

Assume the
cost of capital is 10%.

NPV = $45,187

a.)
What
if the price of the machine turns out to be $120,000 instead of $100,000
(assume straight line depreciation)? What happens to net present value?NPV = 31,252
b.) Instead, what if the economy booms and
sales come in at $450,000 per year (variable costs remain at 77% of sales)?
What happens to net present value?NPV = 97,500
c.)
Calculate
the accounting break-even level of sales:
50,000/.23 = 217,391
d.) Calculate the breakeven level of
sales in units if the price per unit is $35:
50000/(35-26.95) = 6211
e.) Assume that a rival (Gill Bates, Inc.)
is working on a similar project. If they can develop their product, you project
that your sales estimate will be 10% lower than originally thought and that
your variable costs will rise to 78.5% of sales due to higher promotional
costs. Should you go ahead with the project?

Year 0 Years 1-5 Ans
Investment $100,000 -100,000
Sales (down 10%) $350,000
315,000
Variable
costs@ 77% (up to 78.5%) 269,500
247,275

Fixed costs
30,000 30,000 Depreciation 20,000 20,000
Pretax Profit 30,500 17,725 Taxes @ 40% 12,200 7,090

After-tax
Profits 18,300 10,635
Cash Flows 38,300 30,635

Assume the
cost of capital is 10%.

NPV = 16,130.75Corporate
Financial Management Review SheetsChapters
4-9Chapter
4q Time Value of Moneyo
A
credit card account that charges interest at the rate of 1.0% per month would
have an effective annually compounded rate of _______ and an APR of
_______. (Ans: 12.68%;
12.00%)o
What
is the present value of your trust fund if it promises to pay you $35,000 on
your 35th birthday (6 years from today) and earns 9% compounded annually? (Ans: $20,869.36)o
Give
me $10,000 today and I’ll return $25,000 to you in five years,” offers the
investment broker. To the nearest
percent, what annual interest rate is being offered?(Ans: 20%)o
How
much money would you have to put away at the end of each year to have
$1,000,000 when you retire 40 years from now if you can earn 6% on your money?(Ans:
$6,461.54)o
How much can be accumulated if $250 is deposited
at the end of each month for the next 35 years and the account earns 6% APR
(i.e. 0.5% per month). (Ans:
$356,177.57)o
Assume
the total expense for your current year in college equals $40,000. Approximately how much would you have needed
to invest 20 years ago in an account paying 6% compounded annually to cover
this amount? (Ans:
$12,472.19)Chapter
8
Bond
Valuationo
Bond
definitionso
Expected
return = (Coupon payment + capital gain (loss)) divided by original investmento
Interest
rate risko
Credit
risko
How
much would you expect to pay for a $1,000 par (face) value bond with a 6%
coupon that matures in 7 years if the market interest rate is 4%? (Ans.: $1,120.04)o
How
much would you expect to pay for a $1,000 par (face) value bond with a 6%
coupon that matures in 7 years if the market interest rate is 9%? (Ans.: $849.01)o
What
is the Yield-to-Maturity of a 5-year 10% coupon bond that currently is priced
at $945.25?(Ans.: 11.5%)Chapter
9
Stock
Valuationo
Dividend
Discount Model: definitionso
Gordon
Growth Model of DDM: relationships in the formulaPo = Div1/(r-g)r = (Div1/Po)+go
Pie-in-the-Sky Corp., makers of heavenly apple
pies, is expecting earnings next year of $5 per share. The company expects that
it can realize a return on equity of 15%. Traditionally, it pays out about 40%
of its earnings in the form of dividends. Based on the companys risk profile,
investors require a return of 12%. Given this information:
i. Calculate
the stock price using the Gordon Growth Model. (Ans.: Div1=2, g=.15x.60 = .09, r=.12, Po =
2/(.12-.09) = 66.67)
ii. Calculate
the market value of total equity for the firm if there are currently 10,000,000
shares outstanding. (Ans.:
$666,700,000.00)
iii. What
would happen to the stock price and total equity value if
the return on equity fell to 10%? (Ans.: g=.10X.60 =.06, Po = 33.33, total market value = $333,300,000.00o
Construct a Market Value Balance sheet for the
firm given the following (FYI: There are no other liabilities or stock issues other
than those mentioned below.):
i. The
company has issued 15 year $1,000 bonds 8 years ago with a total face value
$20,000,000. The coupon rate on the bond is 4%, but market interest rate on
similar bonds are now 5%. What is the
market value of these bonds?(Ans.: FV=1000, N=7, I=5, PMT=40: PV=? 942.14. There are 20,000 Bonds 20,000,000
divided by 1000 face value of each bond. Therefore total market value of all
the bonds is 20,000 x 942.14 or $18,842,800.
ii. The
company also has 10,000,000 shares of common stock outstanding. The companys
earnings are expected to be $10/sh and it plans to pay out 40% of its earnings
to its stockholders. Given the riskiness of the stock, the required rate of
return is 20% and its return on investment is 16.67%. Calculate the price per
share and the market value of the total equity position. (Ans.: Div1=4, r=.20, g=
.1667x.60 = .10, Po = 4/(.20-.10) = 40. The total market value of equity is
10,000,000 x 40 or 400,000,000
iii. The
book value of assets in place (plant and equipment) is $175,000,000. Indicate
the value of investment opportunities.Assets Liabilities &
Shareholder Eq.Inv. Opp. 243,842,800 Sh. Equity 400,000,000
Total Assets $418,842,800 Total Liab. & Sh. Eq. $418,842,800Chapter
5Investment
Decision Rules
Net
Present Valueo
Decision
ruleo
Mutually
exclusive projectso
What
is the NPV of a project that costs $75,000 and returns $50,000 annually for
three years if the opportunity cost is 10%?(Ans.:$49,342.60)q IRR Ruleq Paybackq Profitability IndexProject A Project BInitial
Cost: $100,000 $200,000Cash
Flows: $50,000 $75,000 50,000 100,000 50,000 75,000 50,000 125,000Opportunity
Cost of Capital is 5%1.) What are the NPV & IRR of each project?A:
77,297.53 (34.9); B: 129,757.15 (28.5)2.) If the projects were independent which would
you choose?Both3.) If the projects were mutually exclusive which
would you choose?B4.)
What is the payback period on each?2
years; 2.3 years5.) Under what conditions would you use the
Profitability Index instead of the NPV rule?Hard
Capital Rationing6.) Assume you are the financial manager
with hard capital rationing budget of $9 million. You may invest in the
following independent projects. Investment and cash flow figures are in
millions. Net Present ValueA31B51C73D62E21Using
the Profitability Index, which projects should you choose given the budget
constraint? Which would you choose if there was no capital rationing? Show all
work!(Ans.: PI= .33, .20, .43, .33, .50.
Choose projects E and C. Chose all if no
constraints.)Chapter
6Incremental
Cash Flowsq include all direct costsq exclude sunk costsq recognize investment in working
capitalConsider
the following investment project:Mr.
Phil Enthropic, a project analyst at Noxxe-Mobile Corp., would like his project
included in next years capital budget. According to his report, the new equipment
would cost $227,538 and its projected cash flows would be as follows: ANSYear
1 50,000 36,000Year
2 70,000 56,000Year
3 70,000 56,000Year
4 70,000 56,000Year
5 80,000 66,000The
cost of capital is 10%a) What is the NPV calculated by the
analyst? If his numbers are correct should you accept the project? NPV 25,844.47b)
Assume
that the analyst included shipping and installation costs of $7,538 in his
estimation of the purchase price. Is this procedure correct? Why? It is a
relevant cost shipping & installation are necessary.c)
Assume
that no consideration was given to the fact that the floor space used for this
project could be rented each year for $15,000. How would this affect the
calculation?This opportunity cost must be considered subtract 15,000 per year
from cash flows.d)
Included
in his analysis, Mr. Entropic calculates that lighting, heat and air
conditioning costs the company $10,000 per year, and since the new equipment
occupies 10% of the total floor space, cash flows must be reduced by $1,000 per
year to reflect overhead costs for the new equipment. Should this deduction be
made?No: not a relevant cost deduction made in error add backe)
Given
your answers to b, c, and d. What is your calculation of Net Present Value for
this project and would you include it in next years capital budget?NPV =
-27,226.55 q Project Analysiso
Capital
Budgeting processo
What
if questions?o
Sensitivity
Analysiso
Scenario
Analysiso
Simulation
Analysiso
Break-Even
Analysiso
Operating
LeverageAt Macrohard, Inc. the cost of secret project X is
$100,000. According to a confidential management report, the following can be
expected in each of the five years of the machines life. Year 0 Years 1-5 Ans A Ans BInvestment $100,000 -120,000 -100,000Sales $350,000
350,000 450,000Variable
costs@ 77% 269,500
269,500
346,500Fixed costs
30,000 30,000 30,000Depreciation 20,000 24,000 20,000Pretax Profit 30,500 26,500 53,500Taxes @ 40% 12,200 10,600 21,400After-tax
Profits 18,300 15,900 32,100Cash
Flows 38,300 39,900 52,100Assume the
cost of capital is 10%.NPV = $45,187a.)
What
if the price of the machine turns out to be $120,000 instead of $100,000
(assume straight line depreciation)? What happens to net present value?NPV = 31,252b.) Instead, what if the economy booms and
sales come in at $450,000 per year (variable costs remain at 77% of sales)?
What happens to net present value?NPV = 97,500c.)
Calculate
the accounting break-even level of sales:50,000/.23 = 217,391d.) Calculate the breakeven level of
sales in units if the price per unit is $35:50000/(35-26.95) = 6211 e.) Assume that a rival (Gill Bates, Inc.)
is working on a similar project. If they can develop their product, you project
that your sales estimate will be 10% lower than originally thought and that
your variable costs will rise to 78.5% of sales due to higher promotional
costs. Should you go ahead with the project? Year 0 Years 1-5 Ans Investment $100,000 -100,000 Sales (down 10%) $350,000
315,000 Variable
costs@ 77% (up to 78.5%) 269,500
247,275
Fixed costs
30,000 30,000 Depreciation 20,000 20,000 Pretax Profit 30,500 17,725 Taxes @ 40% 12,200 7,090
After-tax
Profits 18,300 10,635 Cash Flows 38,300 30,635 Assume the
cost of capital is 10%.

The post Corporate
Financial Management Review Sheets
Chapters
4-9

Chapter
4

q Time appeared first on Infinite Essays.

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