MBA570_Homework_2 qUES
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. If you use additional documents to perform calculations,
label them with your name and course number (MBA 570) and submit them as well. Each
question is worth 10 points.
1. Honda Motor Company is considering offering a $4,000 rebate on its minivan, lowering the
vehicle’s price from $25,000 to $21,000. The marketing group estimates that this rebate will
increase sales over the next year from 48,000 to 68,000 vehicles. Suppose Honda’s profit
margin with the rebate is $2,000 per vehicle. If the change in sales is the only consequence of
this decision, what are its benefits and costs?
The benefits are $__________ million. (Round to one decimal place.)
The costs are $__________ million. (Round to one decimal place.)
Is this a good idea? (Answer Yes or No.)
2. Suppose the current market price of corn is $4.14 per bushel. Your firm has a technology that
can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $1.33 per
bushel, at what market price of ethanol does conversion become attractive?
The price at which the conversion becomes attractive is $__________ per gallon. (Round to
nearest cent.)
3. Suppose the risk-free interest rate is 6%.
a. Having $200 today is equivalent to having $__________ in one year. (Round to the
nearest cent.)
b. Having $200 in one year is equivalent to having $__________ today. (Round to the
nearest cent.)
c. Which would you prefer, $200 today or $200 in one year? (Enter response here)
d. Does your answer depend on when you need the money? Why or Why not?
A.
B.
C.
D.
Yes, because if you didn’t need it, it’s not worth $200.
Yes, because if you did need it today, it is more valuable than $200.
No, because if you did need it, you could borrow the $200.
No, because if you didn’t need it, then the $200 can be invested and would be worth
more than $200 in one year.
4. Your firm has a risk-free investment opportunity where it can invest $165,000 today and
receive $174,000 in one year. The project will be attractive when the interest rate is any
positive value less than or equal to __________%. (Round to two decimal places.)
5. Your firm has identified three potential investment projects. The projects and their cash flows
are shown below:
Project
A
B
C
Cash Flow Today (millions)
- $7
$4
$17
Cash Flow in One Year
(millions)
$24
$2
-$11
Suppose all cash flows are certain and the risk-free interest rate is 11%.
a. What is the NPV of each project?
The NPV of project A is $__________ million. (Round to two decimal places.)
The NPV of project B is $__________ million. (Round to two decimal places.)
The NPV of project C is $__________ million. (Round to two decimal places.)
b. If the firm can choose only one of these projects, which should it choose based on the
NPV decision rule? (Select the best choice.)
A.
B.
C.
D.
Project B
Project C
Project A
Cannot tell
c. If the firm can choose any two of these projects, which should it choose based on the
NPV decision rule? (Select the best choice.)
A.
B.
C.
D.
Projects A and B
Projects B and C
Projects A and C
Cannot tell
6. Compute the following:
a. The present value of $2,000 received 14 years from today when the interest rate is 10%
per year is $__________. (Round to the nearest dollar.)
b. The present value of $2,000 received 23 years from today when the interest rate is 12%
per year is $__________. (Round to the nearest dollar.)
c. The present value of $2,000 received 7 years from today when the interest rate is 5% per
year is $__________. (Round to the nearest dollar.)
7. Your daughter is currently 5 years old. You anticipate that she will be going to college in 13
years. You would like to have $156,000 in a savings account to fund her education at that
time. If the account promises to pay a fixed interest rate of 5% per year, you should deposit
$__________ today to ensure that you will have $156,000 in 13 years. (Round to the nearest
dollar.)
8. Suppose you receive $180 at the end of each year for the next three years:
a. If the interest rate is 10%, the present value of these cash flows is $__________. (Round
to the nearest cent.)
b. The future value in three years of the present value you computed in (a) is $__________.
(Round to the nearest cent.)
c. Suppose you deposit the cash flows in a bank account that pays 10% interest per year:
The balance in the account at the end of year one is $__________ (Round to the nearest
cent.)
The balance in the account at the end of year two is $__________ (Round to the nearest
cent.)
The balance in the account at the end of year three is $__________ (Round to the
nearest cent.)
The final bank balance in (c) is __________ the bank balance from part (b). (Select the
best answer.)
A. equal to
B. lower than
C. higher than
9. You have just received a windfall from an investment you made in a friend’s business. He
will be paying you $49,024 at the end of this year, $98,048 at the end of the following year,
and $147, 072 at the end of the year after that (three years from today). The interest rate is
6.4% per year.
a. The present value of your windfall is $__________ (Round to the nearest dollar.)
b. The future value of your windfall in three years (on the date of the last payment) is
$__________ (Round to the nearest dollar.)
10. You have an investment opportunity that requires an initial investment of $7,500 today and
will pay $11,500 in one year. The internal rate of return (IRR) of this opportunity is
$__________%. (Round to the nearest integer.)
MBA570_Homework_3
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
11. You have been offered a very long-term investment opportunity. You can invest $1,100
today and expect to receive $128,000 in 40 years. Your cost of capital for this (very risky)
opportunity is 16%.
a. The IRR of this investment opportunity is __________ %. (Round to one decimal place.)
The IRR rule says that you __________. (Select the best answer.)
E. should not invest
F. should be indifferent
G. should invest
b. The NPV of this investment opportunity is __________ %. (Round to the nearest cent.)
The NPV rule says that you __________. (Select the best answer.)
A. should not invest
B. should be indifferent
C. should invest
12. You are a real estate agent thinking of placing a sign advertising your services at a local bus
stop. The sign will cost $10,000 and will be posted for one year. You expect that it will
generate additional revenue of $1,900 a month. The payback period is __________ months.
(Round to two decimal places.)
13. You are considering making a movie. The movie is expected to cost $10.5 million upfront
and take a year to make $4.9 million in the year it is released (end of year 2) and $1.7 million
for the following four years (end of years 3 through 6).
a. The payback period of this investment is __________ years. (Round up to nearest
integer.)
b. If you require a payback period of two years, would you make this movie? (Enter yes or
no.)
c. If the cost of capital is 10.3%, the NPV is $__________ million. (Round to two decimal
places.)
14. AOL is considering two proposals to overhaul its network infrastructure. They have two bids.
The first bid from Huawei will require a $15 million upfront investment and will generate
$20 million in savings for AOL each year for the next three years. The second bid from Cisco
requires an $81 million upfront investment and will generate $60 million in savings each year
for the next three years.
a. What is the IRR for AOL associated with each bid?
The IRR associated with the bid from Huawei is __________ %. (Round to one decimal
place.)
The IRR associated with the bid from Cisco is __________ %. (Round to one decimal
place.)
b. If the cost of capital for this investment is 14%, what is the NPV for each bid?
The NPV for Huawei’s bid is $__________ million. (Round to two decimal places.)
The NPV for Cisco’s bid is $__________ million. (Round to two decimal places.)
c. Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of
the lease, AOL will pay $26 million upfront, and $35 million per year for the next three
years. AOL’s savings will be the same as with Cisco’s original bid.
The IRR of the Cisco bid is now __________%. (Round to one decimal place.)
The new NPV is $__________ million. (Round to two decimal places.)
d. AOL should:
A.
B.
C.
D.
choose Huawei.
choose Cisco without lease.
choose Cisco with lease.
take none of the bids.
15. Natasha’s Flowers, a local florist, purchases fresh flowers each day at the local flower
market. The buyer has a budget of $1,000 per day to spend. Different flowers have different
profit margins, and also a maximum amount the shop can sell. Based on past experience the
shop has estimated the following NPV for purchasing each type:
Roses
Lilies
Pansies
Orchids
NPV per
bunch
$2
$10
$6
$21
Cost per
bunch
$20
$29
$30
$80
Max.
bunches
25
10
10
5
(Select based on descending order of their profitability-index values. Round the investment
amounts to the nearest integer.)
The combination of flowers Natasha’s Flowers should purchase each day is (select one of the
three for each):
$__________ of (roses, pansies, lilies) Select one of the three.
$__________ of (orchids, pansies, lilies) Select one of the three.
$__________ of (lilies, orchids, pansies) Select one of the three.
16. 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 $21 million per year. While many of these sales will be to new customers,
Pisa Pizza estimates that 46% will come from customers who switch to the new, healthier
pizza instead of buying the original version.
a. Assuming customers will spend the same amount on either version, the incremental sales
associated with introducing the new pizza are $__________ million. (Round to the
nearest integer.)
b. Suppose that 59% of the customers who will switch from Pisa Pizza’s original to its
healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier
pizza. In this case, the incremental sales associated with introducing the new pizza are
$__________ million. (Round to the nearest integer.)
17. Cellular Access Inc. is a cellular telephone service provider that reported net operating profit
after tax (NOPAT) of $259 million for the most recent fiscal year. The firm had depreciation
expenses of $128 million, capital expenditures of $152 million, and no interest expenses.
Working capital increased by $12 million. The free cash flow for Cellular Access for the
most recent fiscal year is $__________ million. (Round to the nearest million.)
18. Castle View Games would like to invest in a division to develop software for video games.
To evaluate this decision, the firm first attempts to project the working capital needs for its
operation. Its chief financial officer has developed the following estimates (in millions of
dollars):
Cash
Accounts receivable
Inventory
Accounts payable
Year 1
7
18
4
16
Year 2
12
22
9
19
Year 3
14
23
10
25
Year 4
15
22
12
28
Year 5
16
25
16
32
Assuming that Castle View currently does not have any working capital invested in this
division, calculate the cash flows associated with the changes in working capital for the first
five years of this investment. (Note: Enter decreases as negative numbers.)
a. The change in working capital for year 1 is $__________ million. (Round to the nearest
million.)
b. The change in working capital for year 2 is $__________ million. (Round to the nearest
million.)
c. The change in working capital for year 3 is $__________ million. (Round to the nearest
million.)
d. The change in working capital for year 4 is $__________ million. (Round to the nearest
million.)
e. The change in working capital for year 5 is $__________ million. (Round to the nearest
million.)
19. Markov Manufacturing recently spent $12 million to purchase some equipment used in the
manufacturing of disk drives. The firm expects that this equipment will have a useful life of
five years, and its marginal corporate tax rate is 39%. The company plans to use straight-line
depreciation.
a. The annual depreciation expense associated with this equipment is $__________ million.
(Round to two decimal places.)
b. The annual depreciation tax shield is $__________ million. (Round to two decimal
places.)
c. Rather than straight-line depreciation, suppose Markov will use the MACRS depreciation
for five-year property. Calculate the depreciation tax shield each year for this equipment
under the following accelerated depreciation schedule:
Year
1
2
3
4
5
6
MACRS Depreciation
Table
5 Years
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
The depreciation tax shield for year 0 is $__________ million. (Round to two decimal
places.)
The depreciation tax shield for year 1 is $__________ million. (Round to two decimal
places.)
The depreciation tax shield for year 2 is $__________ million. (Round to two decimal
places.)
The depreciation tax shield for year 3 is $__________ million. (Round to two decimal
places.)
The depreciation tax shield for year 4 is $__________ million. (Round to two decimal
places.)
The depreciation tax shield for year 5 is $__________ million. (Round to two decimal
places.)
d. If Markov has a choice between straight-line and MACRS depreciation schedules, and its
marginal corporate tax rate is expected to remain constant, which should it choose? Why?
A. With MACRS, the firm receives the depreciation tax shields sooner; thus, MACRS
leads to a higher NPV of Markov’s FCF.
B. With straight-line depreciation, the firm’s depreciation expenses are lower initially,
leading to higher earnings; thus, straight-line depreciation leads to a higher NPV of
Markov’s FCF.
C. With either method, the total depreciation tax shield is the same; therefore, it does not
matter which method is used.
D. None of the above.
e. How might your answer to part (d) change if Markov anticipates that its marginal
corporate tax will change substantially over the next five years?
A. Markov may be better off using the straight-line method if it expects its tax rate to
decrease substantially in later years.
B. Markov may be better off using the straight-line method if it expects its tax rate to
increase substantially in later years.
C. Even if its tax rate is expected to change, Markov is better off using MACRS
depreciation rather than straight-line depreciation.
D. None of the above.
10. Bauer Industries is an automobile manufacturer. Management is currently evaluating a
proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost
of capital of 12% to evaluate this project. Based on extensive research, it has prepared the
following free cash flow projections (in millions of dollars):
Free Cash Flow
Revenues
– Manufacturing expenses (other
than depreciation)
– Marketing expenses
– Depreciation
= EBIT
Year 0
Years 1-9
100.00
Year 10
100.00
– 32.00
– 32.00
– 8.00
– 14.00
45.60
– 8.00
– 14.00
45.60
– Taxes (35%)
= Unlevered net income
+ Depreciation
– Increases in net working capital
– Capital expenditures
+ Continuation value
= Free cash flow
– 15.96
29.64
– 15.96
29.64
– 5.00
– 5.00
39.04
12.00
51.04
– 144.00
– 144.00
a. For this base case scenario, the NPV of the plant to manufacture lightweight trucks is
$__________ million. (Round to two decimal places.)
b. Based on input from the marketing department, Bauer is uncertain about its revenue
forecast. In particular, management would like to examine the sensitivity of the NPV to
the revenue assumptions.
The NPV of this project if revenues are 10% higher than forecast is $__________.
(Round to two decimal places.)
The NPV of this project if revenues are 10% lower than forecast is $__________.
(Round to two decimal places.)
MBA570_Homework_4
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
20. A 5-year bond with a face value of $1,000 has a coupon rate of 10.50%, with semi-annual
payments.
a. The coupon payment for this bond is $__________. (Round to two decimal places.)
b. Look at the timeline below and fill in the correct cash flows for the timeline (note:
periods are in six-month intervals).
Period
Cash flow
0
1
2
9
10
CF1
CF2
CF9
CF10
Compute the following cash flows. (Round to two decimal places.)
CF1 is $__________.
CF2 is $__________.
CF9 is $__________.
CF10 is $__________.
21. The following table summarizes prices of various default free zero coupon bonds (expressed
as a percentage of face value):
Maturity (years)
Price (per $100 face value)
1
$96.22
2
$91.69
3
$87.15
4
$82.46
a. Compute the yield to maturity for each bond.
Yield on the 1-year bond is __________% (Round to two decimal places.)
Yield on the 2-year bond is __________% (Round to two decimal places.)
Yield on the 3-year bond is __________% (Round to two decimal places.)
Yield on the 4-year bond is __________% (Round to two decimal places.)
Yield on the 5-year bond is __________% (Round to two decimal places.)
b. Is the following graph showing the zero-coupon yield curve? (Enter yes or no.)
7
6
.
6
5
5
.
5
5
4
. 4
5
3
.
3
5
2
.
0
5
1
2
c. The above yield curve is:
3
4
5
5
$77.33
A. upward sloping.
B. downward sloping.
C. flat.
22. Suppose a 10-year, $1,000 bond with a 7% coupon rate and semiannual coupons is trading
for a price of $1,180.46.
a. The bond’s yield to maturity (expressed as an APR with semiannual compounding is
__________%. (Round to two decimal places.)
b. If the bond’s yield to maturity changes to 8% APR, the price of the bond would be
$__________. (Round to nearest cent.)
23. Assume the zero-coupon yields on default-free securities are as summarized in the following
table:
Maturity
Zero-coupon yields
1 year
5.50%
2 years
6.00%
3 years
6.60%
4 years
6.80%
5 years
7.00%
a. The price of a three-year, default-free security with a face value of $1,000 and an annual
coupon rate of 7% is $__________. (Round to two decimal places.)
b. The yield to maturity for this bond is __________%. (Round to two decimal places.)
24. The following table summarizes yields to maturity on several 1-year, zero-coupon securities:
Security
Treasury
AAA Corporate
BBB Corporate
B Corporate
Yield
2.94%
3.42%
3.69%
4.26%
a. The price (expressed as a percentage of the face value) of a 1-year, zero-coupon
corporate bond with a AAA rating and a face value of $1,000 is $__________. (Round to
the nearest cent.)
b. The credit spread on AAA-rated corporate bonds is __________%. (Round to two
decimal places.)
c. The credit spread on B-rated corporate bonds is __________%. (Round to two decimal
places.)
d. How does the credit spread change with the bond rating? Why?
E. The credit spread decreases as the bond rating increases, because lower rated bonds
are riskier.
F. The credit spread increases as the bond rating falls, because lower rated bonds are
riskier.
G. The credit spread decreases as the bond rating falls, because lower rated bonds are
riskier.
H. The credit spread increases as the bond rating increases, because higher rated bonds
are riskier.
25. Anle Corporation has a current price of $22, is expected to pay a dividend of $1 in one year,
and its expected price right after paying that dividend is $27.
a. Anle’s expected dividend yield is __________%. (Round to two decimal places.)
b. Anle’s expected capital gain rate is __________%. (Round to two decimal places.)
c. Anle’s cost of capital is __________%. (Round to two decimal places.)
26. Summit Systems will pay a dividend of $1.62 this year. If you expect Summit’s dividend to
grow by 6.6% per year, and its equity cost of capital is 11.7%, its price per share is
$__________. (Round to the nearest cent.)
27. Heavy Metal Corporation is expected to generate the following cash flows over the next five
years:
Year
FCF ($ million)
1
51.3
2
66.5
3
79.9
4
73.1
5
83.3
After that, the free cash flows are expected to grow at the industry average of 4.2% per year.
Using the discounted free cash flow model and a weighted average cost of capital of 14.8%:
a. The enterprise value will be $__________ million. (Round to two decimal places.)
b. If Heavy Metal has no excess cash, debt of $297 million, and 36 shares outstanding, its
stock price per share will be $__________. (Round to two decimal places.)
28. You read in the paper that Summit Systems will pay a dividend of $1.00 this year. At that
point you expect Summit’s dividend to grow by 5.5% per year. Today you read in the paper
that Summit Systems has revised its growth prospects and expects its dividends to grow at a
rate of 4.0% per year forever. If the firm’s equity cost of capital is 10.0%:
a. The value of a share of Summit Systems stock based on the original expected dividend
growth of 5.5% per year is $__________. (Round to the nearest cent.)
b. If you tried to sell your Summit Systems stock after reading this news, the price you
would likely get for a share is $__________. (Round to the nearest cent.)
Why is this so?
A. You would receive $22.22 if you act very quickly because it takes a day or two to
incorporate the information about the new growth rate.
B. You would receive $16.67 because markets are efficient and would incorporate the
information about the new growth rate immediately.
C. You would receive $22.22 because when you bought the stock, the dividend growth
rate was still 5.5%.
D. You would receive a price between $16.67 and $22.22 because you should get a
blend of the old and new dividend growth rates.
11. In early 2009, Coca-Cola Company had a share price of $43.24. Its dividend was $1.24, and
you expect Coca-Cola to raise this dividend by approximately 6.7% per year in perpetuity.
Note: For simplicity, assume that all dividends are paid at the end of the year.
c. If Coca-Cola’s equity cost of capital is 8.2%, based on your estimate of the dividend
growth rate, the price per share you would expect would be $__________. (Round to the
nearest cent.)
d. Given Coca-Cola’s share price, you would conclude that its future dividend growth rate
should be __________%. (Round to one decimal place.)
*************************************************************************
MBA570_Homework_5
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
29. You have found three investment choices for a one-year deposit: 11% APR compounded
monthly, 11% APR compounded annually, and 9% APR compounded daily. Assuming there
are 365 days in the year:
a. The EAR for the first investment choice is __________%. (Round to three decimal
places.)
b. The EAR for the second investment choice is __________%. (Round to three decimal
places.)
c. The EAR for the third investment choice is __________%. (Round to three decimal
places.)
30. Your son has been accepted into college. This college guarantees that your son’s tuition will
not increase for the four years he attends college. The first $9,000 tuition payment is due in
six months. After that, the same payment is due every six months until you have made a total
of eight payments. The college offers a bank account that allows you to withdraw money
every six months and has a fixed APR of 9% (semiannual) guaranteed to remain the same
over the next four years.
If you intend to make no further deposits and would like to make all of the tuition payments
from this account, leaving this account empty when the last payment is made, the amount
you need to deposit today is $__________. (Round to the nearest cent.)
31. Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow
$11,000 to purchase your dream Harley Davidson, your monthly payment would be
$__________. (Round to two decimal places.)
32. If the rate of inflation is 4.9%, the nominal rate necessary for you to earn a 3.4% real interest
rate on your investment is __________%. (Round to one decimal place.)
33. Consider a project that requires an initial investment of $96,000 and will produce a single
cash flow of $147,000 in 5 years.
e. If the 5-year interest rate is 5.2% (EAR), the NPV in this case is $__________. (Round to
the nearest dollar.)
f. If the 5-year interest rate is 10.2% (EAR), the NPV in this case is $__________. (Round
to the nearest dollar.)
g. The highest 5-year interest rate (EAR) such that this project is still profitable is
__________%. (Round to one decimal place.)
34. Wal-Mart’s five-year borrowing rate is 3.23% and GE Capital’s is 9.81%. Which would you
prefer? $500 from Wal-Mart paid today or a promise that the firm will pay you $700 in five
years? Which would you choose if GE offered you the same alternative?
The PV of the loan from GE Capital is $__________. (Round to the nearest cent.)
The PV of the loan from Wal-Mart is $__________. (Round to the nearest cent.)
You would prefer:
E. $700 from GE Capital in 5 years and $500 from Wal-Mart today.
F. $500 from GE Capital today and $500 from Wal-Mart today.
G. $500 from GE Capital today and $700 from Wal-Mart in 5 years.
H. $700 from GE Capital in 5 years and $700 from Wal-Mart in five years.
35. Your best taxable investment opportunity has an EAR of 5.8%. Your best tax-free investment
opportunity has an EAR of 2.5%. If your tax rate is 32%, the taxable / tax-free (select one)
investment opportunity has the higher interest rate with __________%. (Round to one
decimal place.)
36. Consider the price paths of the following two stocks over six time periods:
Stock 1
Stock 2
1
13
13
2
15
9
3
17
6
4
15
14
5
16
13
6
19
16
Neither stock pays dividends. Assume you are an investor with the disposition effect and you
bought at time 1 and right now, it is time 3. Assume throughout this question that you do no
trading (other than what is specified) in these stocks.
a. Which stock(s) would you be inclined to sell? Which would you be inclined to buy?
Which would you be inclined to hold onto? You would sell / buy/ hold stock 1 and sell /
buy / hold stock 2. (Select one for each stock.)
b. How would your answer change if right now is time 6? You would sell / buy/ hold stock
1 and sell / buy / hold stock 2. (Select one for each stock.)
c. What if you bought at time 3 instead of time 1 and today is time 6? You would sell / buy/
hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)
d. What if you bought at time 3 instead of time 1 and today is time 5? You would sell / buy/
hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.)
37. Each of the six firms in the table below is expected to pay the listed dividend payment every
year in perpetuity.
Firm
S1
S2
S3
B1
B2
B3
Dividend ($ million)
9.8
9.8
9.8
98.0
98.0
98.0
Cost of Capital (%/year)
8.4
12.9
14.8
8.4
12.9
14.8
a. Using the cost of capital in the table:
Firm S1 market value is $__________ million. (Round to one decimal place.)
Firm S2 market value is $__________ million. (Round to one decimal place.)
Firm S3 market value is $__________ million. (Round to one decimal place.)
Firm B1 market value is $__________ million. (Round to one decimal place.)
Firm B2 market value is $__________ million. (Round to one decimal place.)
Firm B3 market value is $__________ million. (Round to one decimal place.)
b. Rank the three S firms by their market values. For a self-financing portfolio that went
long on the firm with the largest market value and shorted the firm with the lowest
market value, the expected return of a self-financing portfolio is __________%. (Round
to one decimal place.)
Repeat with the B firms. The expected return of a self-financing portfolio is
__________%. (Round to one decimal place.)
c. Rank all six firms by their market values. For a self-financing portfolio that went long on
the firm with the largest market value and shorted the firm with the lowest market value,
the expected return of a self-financing portfolio is __________%. (Round to one decimal
place.)
d. Repeat part (c) but rank the firms by the dividend yield instead of the market value. The
expected return of a self-financing portfolio is __________%. (Round to one decimal
place.)
12. Consider the following stocks, all of which will pay a liquidating dividend in a year and
nothing in the interim.
Expected
Market
Liquidating
Capitalization
Dividend
($ million)
($ million)
Beta
Stock A
908
1,000
0.74
Stock B
840
1,000
1.54
Stock C
841
1,000
1.37
Stock D
879
1,000
0.76
e. Calculate the expected return for each stock.
The expected return of Stock A is __________%. (Round to two decimal places.)
The expected return of Stock B is __________%. (Round to two decimal places.)
The expected return of Stock C is __________%. (Round to two decimal places.)
The expected return of Stock D is __________%. (Round to two decimal places.)
f. The correlation between the expected return and market capitalization of the stocks is
__________. (Round to five decimal places.)
MBA570_Homework_6
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
38. The
the
figure below shows
one-year return
distribution for RCS
Probability
%
3
stock:5
3
0
2
5
2
0
1
5
1
0
5
0
A
B
C
D
E
A: -30% return
B: -10% return
C: 0% return
D: 10% return
E: 30% return
Note: Make sure to round all intermediate calculations to at least five decimal places
a. The expected return is __________%. (Round to two decimal places.)
b. The standard deviation is __________%. (Round to two decimal places.)
39. You bought a stock one year ago for $50.77 per share and sold it today for $56.73 per share.
It paid a $1.14 per share dividend today.
a. Your realized rate of return was __________%. (Round to two decimal places.)
b. How much of the return came from dividend yield and how much came from capital
gain?
The return that came from dividend yield is __________%. (Round to two decimal
places.)
The return that came from capital gain is __________%. (Round to two decimal places.)
40. Using the data in the table below, calculate the return for investing in the stock from January
2, 2003, to January 2, 2004, assuming all dividends are reinvested in the stock immediately.
Date
1/2/03
2/5/03
5/14/03
8/13/03
11/12/03
1/2/04
Price
$34.58
$30.59
$29.94
$31.24
$38.88
$41.32
Dividend
$0.22
$0.21
$0.20
$0.18
The return for the entire period is __________%. (Round to two decimal places.)
41. The last for yours of returns are as follows:
1
- 2.4%
3
28.5%
3
11.5%
4
3.9%
a. The average annual return is __________%. (Round to two decimal places.)
b. The variance of the stock’s returns is __________%. (Round to five decimal places.)
c. The standard deviation of the stock’s returns is __________%. (Round to two decimal
places.)
42. Consider an investment with the following returns over four years:
Year
Return
1
19%
3
9%
3
16%
4
13%
h. The compound annual growth rate (CAGR) for this investment over the four years is
__________%. (Round to two decimal places.)
i. The average annual return for this investment over the four years is __________%.
(Round to two decimal places.)
j. Which is a better measurement of the investment’s performance? If the investment’s
returns are independent and identically distributed, which is a better measure of the
investment’s expected return next year?
CAGR / arithmetic average (select one) is a better measurement of the investment’s
performance while CAGR / arithmetic average (select one) is a better measure of the
investment’s expected return next year.
6. Consider two local banks. Bank A has 89 loans outstanding; each for $1.0 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 loans. Bank B
has only one loan of $89 million outstanding, which it also expects will be repaid today. It
also has a 5% probability of not being repaid. Calculate the following:
a. The expected payoff of Bank A is $__________ million. (Round to the nearest million.)
b. The expected payoff of Bank B is $__________ million. (Round to the nearest million.)
c. The standard deviation of the overall payoff of Bank A is $__________ million. (Round
to four decimal places.)
d. The standard deviation of the overall payoff of Bank B is $__________ million. (Round
to four decimal places.)
7. Suppose the market premium is 4% and the risk-free interest rate is 3%. Using the data in the
table below, calculate the expected return of investing in each company’s stock.
Starbucks
1.04
Beta
Hershey
0.19
Autodesk
2.31
The expected return of Starbuck’s stock is __________ %. (Round to two decimal places.)
The expected return of Hershey’s stock is __________ %. (Round to two decimal places.)
The expected return of Autodesk’s stock is __________ %. (Round to two decimal places.)
Why don’t all investors hold Autodesk’s stock rather than Hershey’s stock?
A. Hershey’s stock has less market risk, so investors don’t need as high an expected return
to hold it.
B. They would if the numbers in the table were reliable. The problem is that they are just
estimates, so investors cannot rely on them.
C. Investors make mistakes; nobody should hold Hershey.
D. Investors care about other things besides return; for example, the company’s profits.
8. Suppose all possible investment opportunities in the world are limited to the five stocks listed
in the table below. What does the market portfolio consist of (what are the portfolio
weights)?
Stock
A
B
Price/Share ($)
6
15
Number of Shares
Outstanding (millions)
10
12
C
D
E
8
42
43
3
1
20
Enter the percentage that each stock makes up of the total portfolio. (Round to two decimal
places.)
Stock
A
B
C
D
E
Portfolio Weight
__________%
__________%
__________%
__________%
__________%
9. In June 2009, Cisco Systems had a market capitalization of $135 billion. It had A-rated debt
of $5 billion as well as cash and short-term investments of $28 billion, and its estimated
equity at the time was 1.18.
a. Cisco’s enterprise value is $__________ billion. (Round to the nearest integer.)
b. Assuming Cisco’s debt has a beta of zero, the beta of Cisco’s underlying business
enterprise is __________. (Round to two decimal places.)
10. Unida Systems has 43 million shares outstanding trading for $9 per share. In addition, Unida
has $97 million in outstanding debt. Suppose Unida’s equity cost of capital is 17%, its debt
cost of capital is 9%, and the corporate tax rate is 33%.
a. Unida’s unlevered cost of capital is __________%. (Round to one decimal place.)
b. Unida’s after-tax debt cost of capital is __________%. (Round to one decimal place.)
c. Unida’s weighted average cost of capital is __________%. (Round to one decimal place.)
MBA570_Homework_7
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
43. Consider a project with free cash flows in one year of $141,799 or $181,108, with each
outcome equally likely. The initial investment required for the project is $60,000, and the
project’s cost of capital is 20%. The risk-free interest rate is 6% :
a. The NPV for this project is $__________. (Round to the nearest dollar.)
b. Suppose that to raise the funds for the initial investment, the project is sold to investors as
an all-equity firm. The equity holders will receive the cash flows of the project in one
year. How much money can be raised this way? In other words, the initial market value
of the unlevered equity is $__________. (Round to nearest dollar.)
c. Suppose the initial $60,000 is instead raised by borrowing at the risk-free investment rate.
The cash flows of the levered equity and its initial value according to MM are (fill in the
table below rounding to the nearest dollar):
Date 0
Debt
Levered Equity
Initial Value
$60,000
$__________
Date 1
Cash Flow
Strong Economy
$__________
$__________
Cash Flow
Weak Economy
$__________
$__________
44. Acort Industries owns assets that will have a 60% probability of having a market value of
$55 million in one year. There is a 40% chance that the assets will be worth only $25 million.
The current risk-free rate is 8%, and Acort’s assets have a cost of capital of 16%.
c. If Acort is unlevered, the current market value of its unlevered equity is $__________
million. (Round to three decimal places.)
d. Suppose instead that Acort has debt with a face value of $21 million due in one year.
According to MM, the current market value of its levered equity is $__________ million.
(Round to three decimal places.)
e. The expected return of Acort’s equity without and with leverage is (fill in the table below
rounding to two decimal places):
Without Leverage
With Leverage
Expected Return
__________%
__________%
f. The lowest possible realized return of Acort’s equity without and with leverage is (fill in
the table below rounding to two decimal places):
Without Leverage
With Leverage
Expected Return
__________%
__________%
45. Suppose Microsoft has no debt and an equity cost of capital of 9.5%. The average debt-tovalue ratio for the software industry is 12.8%. If Microsoft took on the average amount of
debt for its industry, the cost of its equity would be __________%. (Round to two decimal
places.)
46. Hubbard Industries is an all-equity firm whose shares have an expected return of 10%.
Hubbard does a leveraged recapitalization, issuing debt and repurchasing stock, until its debtequity ratio is 0.54. Due to the increased risk, shareholders now expect a return of 15%.
Assuming there are no taxes and Hubbard’s debt is risk-free, the interest rate on the debt is
__________%. (Round to two decimal places.)
47. Arnell Industries has just issued $20 million in debt (at par). The firm will pay interest only
on this debt. Arnell/s marginal tax rate is expected to be 30% for the foreseeable future.
k. Suppose Arnell pays interest of 10% per year on its debt. The annual interest tax shield is
$__________ million. (Round to three decimal places.)
l. The present value of the interest tax shield is $__________ million. (Round to one
decimal place.)
m. Suppose instead that the interest rate on the debt is 6%. In this case, the present value of
the interest tax shield is $__________ million. (Round to one decimal place.)
7. Rogot Instruments makes fine violins and cellos. It has $1.9 million in debt outstanding,
equity valued at $2.3 million, and pays corporate income tax at a rate of 31%. Its cost of
equity is 12% and its cost of debt is 6%.
e. Rogot’s pre-tax weighted average cost of capital is __________%. (Round to two decimal
places.)
f. Rogot’s effective after-tax weighted average cost of capital is __________%. (Round to
two decimal places.)
8. Rumolt Motors has 71 million shares outstanding with a share price of $25 per share. In
addition, Rumolt has issued bonds with a total current market value of $854 million. Suppose
Rumolt’s equity cost of capital is 9% and its debt cost of capital is 5%.
a. Rumolt’s pre-tax weighted average cost of capital is __________%. (Round to two
decimal places.)
b. If Rumolt’s corporate tax rate is 40%, its after-tax weighted average cost of capital is
__________%. (Round to two decimal places.)
9. Milton Industries expects free cash flow of $9 million each year. Milton’s corporate tax rate
is 40%, and its levered cost of capital is 13%. Milton also has outstanding debt of $18.66
million, and it expects to maintain this level of debt permanently.
a. Milton Industries’ value without leverage is $__________ million. (Round to two decimal
places.)
b. Milton Industries’ value with leverage is $__________ million. (Round to two decimal
places.)
9. Markum Enterprises is considering permanently adding an additional $112 million of debt to
its capital structure. Markum’s corporate tax rate is 35%.
a. Absent personal taxes, the value of the interest tax shield from new debt is $__________
million. (Round to two decimal places.)
b. If investors pay a tax rate of 35% on interest income, and a tax rate of 25% on income
from dividends and capital gains, the value of the interest tax shield from new debt is
$__________ million. (Round to two decimal places.)
10. With its current leverage, Arundel Corp. will have net income next year of $7 million. If
Arundel’s corporate tax rate is 35%, and it pays 6% interest on its debt, the additional debt
Arundel can issue this year and still receive the benefit of the interest tax shield next year is
$__________ million. (Round to three decimal places.)
MBA570_Homework_8
Instructions: Either type or write your answers directly on this document and submit the
completed assignment to your ESO. Show your work for the calculations. If you use additional
documents for the calculations, label them with your name and course number (MBA 570) and
submit them as well. Each question is worth 10 points.
48. Gladstone Corporation is about to launch a new product. Depending on the success of the
new product, Gladstone may have one of four values next year: $155 million, $130 million,
$97 million, or $82 million. These outcomes are equally likely and the risk is diversifiable.
Gladstone will not make any payouts to investors during the year. Suppose the risk-free
interest rate is 5.2% and assume perfect capital markets.
a. The initial value of Gladstone’s equity without leverage is $__________ million. (Round
to two decimal places.)
b. Now suppose Gladstone has zero-coupon debt with a $100 million face value due next
year. The initial value of Gladstone’s debt is __________%. (Round to two decimal
places.)
c. The yield-to-maturity of Gladstone’s debt is $__________ million. (Round to the nearest
integer.)
d. The initial value of Gladstone’s equity is $__________ million. (Round to two decimal
places.)
e. Gladstone’s total value with leverage is $__________ million. (Round to two decimal
places.)
49. Suppose Tefco Corp. has a value of $155 million if it continues to operate, but has
outstanding debt of $187 million that is now due. If the firm declares bankruptcy, bankruptcy
costs will equal $19 million, and the remaining $136 million will go to creditors. Instead of
declaring bankruptcy, management proposes to exchange the firm’s debt for a fraction of its
equity in a workout. The minimum fraction of the firm’s equity that management would need
to offer to creditors for the workout to be successful is __________% of the firm. (Round to
one decimal place.)
50. Kohwe Corp. plans to issue equity to raise $60 million to finance a new investment. After
making the investment, Kohwe expects to earn free cash flows of $9 million each year.
Kohwe currently has 5 million shares outstanding and has no other assets or opportunities.
Suppose the appropriate discount rate for Kohwe’s future free cash flows is 9%, and the only
capital market imperfections are corporate taxes and financial distress costs.
a. The NPV of Kohwe’s investment is $__________ million. (Round to one decimal place.)
b. Kohwe’s price per share today is $__________. (Round to nearest cent.)
c. Suppose Kohwe borrows the $60 million instead. It will pay interest only on this loan
each year, and maintain an outstanding balance of $60 million on the loan. Suppose that
Kohwe’s corporate tax rate is 40%, and expected free cash flows are still $9 million each
year. Kohwe’s price per share today if the investment is financed with debt is
$__________. (Round to nearest cent.)
d. Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $8
million per year due to reduced sales and other financial distress costs. Assume that the
appropriate discount rate for Kohwe’s future free cash flows is still 9%. Kohwe’s price
per share today given the financial distress costs of leverage is $__________. (Round to
nearest cent.)
51. Marpor Industries has no debt and expects to generate free cash flows of $16 million each
year. Marpor believes that if it permanently increases its level of debt to $35 million, the risk
of financial distress may cause it to lose some customers and receive less favorable terms
from its suppliers. As a result, Marpor’s expected free cash flows with debt will be only $15
million per year. Suppose Marpor’s tax rate is 35%, the risk-free rate is 6%, the expected
return of the market is 13%, and the beta of Marpor’s free cash flows is 1.1 (with or without
leverage).
a. Marpor’s value without leverage is $__________ million. (Round to the nearest integer.)
b. Marpor’s value with the new leverage is $__________ million. (Round to two decimal
places.)
52. Zymase is a biotechnology startup. Researchers at Zymase must choose one of three different
research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown in
the table below. The risk of each project is diversifiable.
Strategy
A
B
C
Probability
100%
50%
50%
10%
90%
Payoff ($ million)
80
140
0
330
20
n. Which project has the highest expected payoff?
A. Project A
B. Project B
C. Project C
o. Suppose Zymase has debt of $40 million due at the time of the project’s payoff. Which
project has the highest expected payoff for equity holders?
A. Project A
B. Project B
C. Project C
p. Suppose Zymase has debt of $110 million due at the time of the project’s payoff. Which
project has the highest expected payoff for equity holders?
A. Project A
B. Project B
C. Project C
q. If management chooses the strategy that maximizes the payoff to equity holders, the
expected agency cost to the firm from having $40 million in debt due is $__________
million. (Round to the nearest million.)
r. If management chooses the strategy that maximizes the payoff to equity holders, the
expected agency cost to the firm from having $110 million in debt due is $__________
million. (Round to the nearest million.)
10. RFC Corp. has announced a $1.90 dividend. If RFC’s price last price cum-dividend is $21,
assuming perfect capital markets, RFC’s first ex-dividend price should be $__________.
(Round to two decimal places.)
11. EJH Company has a market capitalization of $2.1 billion and 35 million shares outstanding.
It plans to distribute $95 million through an open market repurchase. Assuming perfect
capital markets:
g. The price per share of EJH right before the repurchase is $__________. (Round to two
decimal places.)
h. The number of shares to be repurchased is __________ million. (Round to two decimal
places.)
i. The price per share of EJH right after the repurchase will be $__________. (Round to two
decimal places.)
12. The HNH Corporation will pay a constant dividend of $4 per share, per year, in perpetuity.
Assume all investors pay a 15% tax on dividends and that there is no capital gains tax. The
cost of capital for investing in HNH stock is 13%.
c. The price per share of HNH stock is $__________. (Round to two the nearest cent.)
d. Assume that management makes a surprise announcement that HNH will no longer pay
dividends but will use the cash to repurchase stock instead. The price per share of HNH
stock is now $__________. (Round to two the nearest cent.)
11. Assume capital markets are perfect. Kay Industries has $125 million invested in short-term
Treasury securities paying 7%, and it pays out the interest payments on these securities each
year as a dividend. The board is considering selling the Treasury securities and paying out
the proceeds as a one-time dividend payment. Assume that Kay must pay a corporate tax rate
of 40%, and investors pay no taxes.
a. If the board went ahead with this plan, what would happen to the value of Kay stock upon
the announcement of a change in policy?
A.
B.
C.
D.
The value of Kay would fall by $125 million.
The value of Kay would rise by $125 million.
The value of Kay would rise by $125 x 40% = $50 million.
The value of Kay would remain the same.
b. What would happen to the value of Kay stock on the ex-dividend date of the one-time
dividend?
A. The value of Kay would rise by $125 million.
B. The value of Kay would remain the same.
C. It is difficult to tell because the price reaction depends on investor preferences.
D. The value of Kay would fall by $125 million.
c. Given these price reactions, will this decision benefit investors?
A.
B.
C.
D.
It is difficult to tell because the price reaction depends on investor preferences.
It will benefit investors.
It will hurt investors.
It will neither benefit nor hurt investors.
12. Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share.
a. If Host issues a 20% stock dividend, the new price per share will be $__________.
(Round to the nearest cent.)
b. If Host does a 3:2 stock split, the new price per share will be $__________. (Round to the
nearest cent.)
c. If Host does a 1:3 reverse split, the new price per share will be $__________. (Round to
the nearest cent.)