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FINANCE 6301

#1
PJM

Individual Assignment
Due February 29, 2016

FORMAT: You are to use Excel to solve the problems. You can use Word or Excel for
the questions. Do NOT embed Excel into a Word document. Please use singlespace, 11 pt. or 12 pt. font. Your name needs to be on the first page of the
document AND as part of the document name, i.e. ReichertIndividual1.xls when it is
submitted.
INSTRUCTIONS: Problems are to be worked in order. Numbers in parentheses are
points for each problem. No credit will be given on problems without supporting
work, even if the final answer is correct. Please show any assumptions that you
make. All work is to be done individually. If you have any questions about the
assignment, please contact the instructor. Unless stated otherwise, interest is
compounded annually and payments occur at the end of the period. Face value for
bonds is $1000.
1

(8) You have just received a windfall from an investment in a friends business.
He will be paying you $10,000 at the end of this year, $20,000 at the end of the
following year, and $30,000 at the end of the year after that (3 years from
today). The interest rate is 3.5%.
a) What is the present value of your windfall?
b) What is the future value of your windfall in 3 years (on the date of the last
payment)?

(10) You are saving for your retirement. You have decided that one year from
today you will deposit 2% of your annual salary in an account which will earn 8%
per year. Your salary last year was $50,000, and it will increase at 4% per year
throughout your career. How much money will you have for your retirement,
which will begin in 40 years? HINT: It is easiest to get the PV and then grow that
number to FV.

(10) You have an outstanding student loan with required payments of $500 per
month for the next four years. The interest rate on the loan is 9% APR (monthly
compounding). Looking at your budget, you can afford to pay an extra $250 a
month in addition to your required monthly payments of $500, or $750 in total
each month. How long will it take you to pay off the loan? What is the effective
rate on the account?

(5) Ajax has been offered a $100,000 advance on a contract with Sys-ed. In
exchange, they must supply $45,000 in services each year for 3 years. If the IRR
of the deal is 16.65%, should they take the deal? A similar contract proposed by
Win-ed has an IRR of 14.3%. Which deal should they take? Explain. Assume the
cost of capital is 12%.

(6) You have the following cash flows. The cost of capital is 14%.
Project Investment
CF 1
CF 2
CF 3
A
-400,000
75,000
90,000
180,000

CF 4
210,000

a
b

Calculate the payback period. If the firm has a maximum payback period of
3 years, do you accept the project?
Calculate the internal rate of return (IRR). Do you accept the project?
Explain.

(5) Briefly discuss one reason why the yield curve is important or one way the yield
curve can be used.

(10) You are forecasting the balance sheet and income statement for Star for Y1.
Use the following assumptions: Sales and accounts receivable grow by 25%;
cost of goods sold, inventory and accounts payable grow 20%; and SG&A grows
10%. Interest expense will fall to 9M. The following accounts will not change
(same dollar amount): depreciation expense, dividends, cash, accruals, notes
payable, long-term debt, common stock. The firm will need 100M more in gross
PPE. Calculate the additional funds needed.

STAR: INCOME STATEMENT (M$)


Fiscal Year Ending
Sales
Cost of Goods Sold
SG&A
Depreciation
Earnings Before Interest &
Tax (EBIT)
Interest Expense
Earnings Before Tax
Taxes (40%)
Net Income
Dividends
STAR: BALANCE SHEET (M$)
Fiscal Year Ending
Y0
Cash
10
Accounts Receivable
20
Inventories
30
Current Assets
60
Gross PPE
300
Accumulated Depn
40
Net Fixed Assets
260
TOTAL ASSETS
320
Accruals
Accounts Payable
Notes Payable
Current Liabilities
Long Term Debt
Common Stock
Retained Earnings

15
5
25
45
75
5
195

Y0

Y1
500
240
30
20
210
10
200
80
120
40

Y1

Total Liability &


Equity

320

(10) Suppose that Starbucks issued a bond at face value on June 15, 2010 that
will mature on June 15, 2045. The price of the bond on December 15, 2015 was
$103.23. The coupon rate is 4.3% with coupons paid semiannually. The face
value is $1000.
a What was the yield to maturity when the bond was issued?
b What is the yield to maturity on December 15, 2015 (Assume you do not
get the Dec. 15, 2015 coupon payment)?

(14) Ego Enterprises is considering a new 3-year expansion project that requires a
new machine. The machine costs $2.4 million and can be sold for $600,000 at the
end of 3 years. It will be fully depreciated to a zero book value on a straight line
basis over its 3-year tax life. The project will generate the following revenues
during the 3 years: $2,000,000 for year one; $2,500,000 for year 2 and $3,000,000
in year 3. Operating costs are equal to 20% of the same year sales. Operating
costs do not include depreciation or interest. Ego will have $400,000 annually in
interest expense as part of the financing. To get the project started and for each
year, net operating working capital (NOWC) is 5% of the next years sales. The tax
rate is 40% and the cost of capital is 12%. Find the net present value. Should they
take the project? Explain.

10 (9) Colgate-Palmolive Co has just paid an annual dividend of $1.52. Analysts are
predicting a 7.5% growth rate in earnings (and dividends) over the next 4 years.
After that, assume that Colgate will grow at only 3% per year. If the required
return for Colgate is 9.8%, estimate the price for Colgate. Look up Colgates
current stock price and compare it to what you calculated.
11 (5) Coca-Cola Co. (ticker: KO) just closed at $41.50 per share. Coke is expected
to pay an annual dividend of $1.45 per share at the end of the year. Analysts
were predicting a growth rate in earnings (and dividends) of 3.5% per year. If
this growth rate continues in perpetuity, what is the required return (cost of
capital) for an investment in Coca-Cola stock?
12 (8) Suppose your employer offers you a choice between a $5000 bonus, and 100
shares of the company stock. Whichever one you choose will be awarded today.
The stock is currently trading for $63 per share.
a Suppose that if you receive the stock bonus, you are free to trade it.
Which form of the bonus should you choose? What is its value?
b Suppose that if you receive the stock bonus, you are required to hold it for
at least one year. What can you say about the value of the stock bonus
now? What will your decision depend on?