## Part 1: Please compute the duration on a 7-year, 5% annual bond that currently sells for \$1060.02.

Part 1: Please compute the duration on a 7-year, 5% annual bond that currently sells for \$1060.02. You should use a spreadsheet for this calculation. Please show your equations in the spreadsheet for full points.

Part 2: Blue Sunday Bank has a portfolio of loans and securities as well as deposits and money market borrowings that are expected to produce the following cash inflows and outflows for the bank in the coming five years. Cash inflows are denoted with a “+” and cash outflows are denoted with a “-“.

Expected cash flow (in %bodyamp;rsquo;s)

Timing of cash flow

+ 1.9 million

1 year from today

– 1.4 million

1 year from today

+ 750,000

2 years from today

– 830,000

2 years from today

+ 350,000

3 years from today

– 400,000

3 years from today

+ 65,000

4 years from today

– 45,000

4 years from today

+ 10,000

5 years from today

– 40,000

5 years from today

Assume the current discount rate that applies to these cash flows is 4.5%. On a spreadsheet, compute the duration of the total cash inflows as well as the duration of total cash outflows and then compute the duration gap of this bank.
What kind of hedging should the bank use to reduce its risk? Be specific about the hedging transaction and discuss its expected effect. Again, enter this answer in a cell within your spreadsheet.
Now assume that the bank has total assets of \$30 billion and total liabilities of \$25 billion and all asset and liability cash flows are proportional to the cash flows given in this problem. How much would the value of the bank change if interest rates rise from 4.5% to 5.0%? What about if interest rates changed from 4.5% to 4.2%? Assume that total assets and total liabilities have the same duration profile as the cash flows given in this problem. Show your calculations on the spreadsheet

## Question 2. We are evaluating a project that costs \$748,000, has a 15-year life, and has no salvage value.

Question 2. We are evaluating a project that costs \$748,000, has a 15-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 142,000 units per year. Price per unit is \$39, variable cost per unit is \$21, and fixed costs are \$760,716 per year. The tax rate is 34 percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-12 percent. The best-case NPV is \$ and worst-case NPV is \$. (Negative amount should be indicated by a minus sign. Round your answers to the nearest whole dollar amount. (e.g., 32). Question 7. At an output level of 15,000 units, you have calculated that the degree of operating leverage is 2.5. The operating cash flow is \$30,000 in this case. Ignoring the effect of taxes, fixed costs amount to \$. If output rises to 17,000 units, the operating cash flow will be \$. If output falls to 13,500 units, the operating cash flow will be \$. (Round your answers to the nearest whole dollar amount. (e.g., 32).) Question 10. McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for \$800 per set and have a variable cost of \$500 per set. The company has spent \$185,000 for a marketing study that determined the company will sell 77,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 16,000 sets of its high-priced clubs. The high-priced clubs sell at \$1,200 and have variable costs of \$1,000. The company will also increase sales of its cheap clubs by 17,000 sets. The cheap clubs sell for \$500 and have variable costs of \$300 per set. The fixed costs each year will be \$9,240,000. The company has also spent \$1,294,000 on research and development for the new clubs. The plant and equipment required will cost \$22,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of \$1,242,000 that will be returned at the end of the project. The tax rate is 38 percent, and the cost of capital is 10 percent. McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The sensitivity of the NPV to changes in the price is \$ and the sensitivity of the NPV to the quantity sold is \$. (Do not include the dollar signs (\$). Round your answers to 2 decimal places. (e.g., 32.16)
Question 15. Night Shades Inc. (NSI) manufactures biotech sunglasses. The variable materials cost is \$1.61 per unit, and the variable labor cost is \$2.68 per unit. a. The variable cost per unit is \$. (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) b. Suppose NSI incurs fixed costs of \$570,000 during a year in which total production is 342,000 units. The total costs for the year are \$. c. If the selling price is \$8.1 per unit, the cash break-even point is units. If depreciation is \$171,000 per year, the accounting break-even point is units. (Round your answers to 2 decimal places. (e.g., 32.16)) Question 17. K-Too Everwear Corporation can manufacture mountain climbing shoes for \$17.72 per pair in variable raw material costs and \$15.3 per pair in variable labor expense. The shoes sell for \$109 per pair. Last year, production was 150,000 pairs. Fixed costs were \$700,000. Total production costs were \$. The marginal cost is \$ per pair. The average cost is \$ per pair. If the company is considering a one-time order for an extra 9,000 pairs, the minimum acceptable total revenue from the order is \$. (Round your answers to 2 decimal places. (e.g., 32.16)) Question 19. Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs \$2,360,000 and will last for 6 years. Variable costs are 38 percent of sales, and fixed costs are \$123,000 per year. Machine B costs \$4,510,000 and will last for 8 years. Variable costs for this machine are 28 percent of sales and fixed costs are \$77,000 per year. The sales for each machine will be \$9,020,000 per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. If the company plans to replace the machine when it wears out on a perpetual basis, the EAC for machine A is \$ and the EAC for machine B is \$. Therefore, you should choose machine . (Negative amounts should be indicated by a minus sign. Round your answers to the nearest whole dollar amount. (e.g., 32)

## MGMT 613 – Financial Management

MGMT 613 – Financial Management Module 11 Questions 1. You have a friend, Icahn Betitall, who just started a small business. He is paying a hefty premium for insurance. Icahn’s insurance agent told him that he is insuring against the risk of loss on fire, theft, liability, and business interruption. Icahn also has policies for life, health, and automobiles. Icahn is planning a trip to Las Vegas. He plans to contact his agent and obtain a policy on the risk of losing his money at the blackjack table. 1. What should you tell Icahn about being able to purchase such a policy? 2. What are several methods that Icahn can choose to manage his risk exposure in Las Vegas? 2. Larry Kraft owns a restaurant that is open 7 days a week. He has 25 full-time employees, but he has fairly high employee turnover. He believes that he can stabilize his workforce if he has a pension plan for his employees. Larry hears about a small business retirement plan called the SIMPLE IRA. What are the qualifications and limitations for him to establish this plan? 3. You purchase a tax- free municipal bond paying an annual rate of 6 percent. Find the before- tax rate if you are in the 1. 15- percent tax bracket. 2. 28- percent tax bracket. 3. 36- percent tax bracket. 4. In pension planning, some people rely on the Social Security system for their entire retirement program. Give me one argument for Social Security and one against the system. 5. The Gilbert Guide has grown from its inception in 2003 as a groundbreaking guidebook setting new standards and criteria for assessing the quality of the many types of long- term care available to become the biggest senior care site on the Web, offering an even wider range of resources to help families and caregivers in their time of senior care need.
The Gilbert Guide can be found on the Internet at http:// www. gilbertguide. com. Select one of the resources available and write a paragraph (between 200 and 400 words) about what the resource is and how it is benefits seniors

## The Miller Co. just issued a dividend of \$2.75 per share on its common stock. The company is expected to maintain a constant 5.8 percent growth rate in its dividends indefinitely

1) The Miller Co. just issued a dividend of \$2.75 per share on its common stock. The company is expected to maintain a constant 5.8 percent growth rate in its dividends indefinitely. If the stock sells for \$59 a share, what is the company’s cost of equity? (5 Marks) 2) The McNut Corporation’s common stock has a beta of 1.2. If the risk-free rate is 4.8 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital? (5 Marks) 3) Temple Bank has an issue of preferred stock with a \$4.25 stated dividend that just sold for \$92 per share. What is the bank’s cost of preferred stock? (3 Marks) 4)  Beddeck Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent. Assume the par value of the bond is \$1,000. a) What is the company’s pre-tax cost of debt? (6 Marks) b) If the tax rate is 35 percent, what is the after-tax cost of debt? (2 marks) 5) Smitty’s Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5 percent, and the before tax cost of debt is 7 percent. The relevant tax rate is 35 percent. What is Smitty’s WACC? (6 Marks) 6) Given the following information for Eastern Power Co., find the WACC. Assume the company’s tax rate is 35 percent. (23 Marks) Debt: 8,000 6.5 percent coupon bonds outstanding, \$1,000 par value, 25 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common stock: 310,000 shares outstanding, selling for \$57 per share; the beta is 1.05. Preferred stock: 15,000 shares of 4 percent preferred stock outstanding, currently selling for \$72 per share. Market: 7 percent market risk premium and 4.5 percent risk-free rate.

## Company X has a leverage of 1.81 This means that: (Assume leverage is calculated as Assets/Equity) Assets are funded with 81% debt

1.) Company X has a leverage of 1.81 This means that: (Assume leverage is calculated as Assets/Equity) Assets are funded with 81% debt. Assets are funded with 81% equity. \$1.81 of assets is funded with \$1.00 of equity and \$0.81 of debt. \$1.81 of assets is funded with \$1.00 of debt and \$0.81 of equity. 2) Midyear on July 31st, the Taylor Corporation’s balance sheet reported: Total Assets of \$174.344 million Total Common Stock of \$5.080 million Cash of \$8.040 million Retained Earnings of \$39.651 million. What were the Taylor Corporation’s total liabilities? \$134.693 million. \$129.613 million. \$121.573 million. \$137.653 million. 3) Last year the Brown company increased their equity. In 2012 their equity was \$49,954. Last year (2013) it increased to \$54,851. What are causes of change in equity? Select 3 A change in short term debt of-\$4,846. A change in cash of -\$2,012. A bond issue of\$1,599. Profits of \$12,756 Dividend payment of\$6,353. Issue and retirement of stock . A change of plant and equipment of\$10,100. Depreciation of -\$38,653 Plant Improvements of \$10,100 Change in inventory of-\$1,222. An accounts payable change of\$1,906. 4) The Green Company has just purchased \$39,660,000 of plant and equipment that has an estimated useful life of 15 years. Suppose at the end of 15 years this plant and equipment can be salvaged for \$3,966,000 (1/10th of its original cost). What will be the book value of this purchase (excluding all other Plant and Equipment) after its first year of use? Use generally accepted (FASB) accounting principles. Select: 1 \$37,280,400 \$35,694,000 \$37,016,000 \$33,314,400

## Part Two: Time Value of Money Problem

Part Two: Time Value of Money Problem

You would like to buy a new car in five years for cash. The price of the car today is \$56,000 and you expect that the price will increase by 6% per year. You plan to save for this car starting today with a deposit in your savings account, which currently has a balance of \$1,800 and earns 4% compounded annually.

You know that you will be receiving an inheritance of \$3,500 three years from today, which you will deposit in your savings account for the car. If you make a deposit every month for the next five years beginning one month from today, how much will the deposit have to be in order for you to be able to pay cash for the car?

Required:

Complete the assignment using the formulas embedded in Excel and/or a financial calculator. Include an Excel document that shows your calculations

## TCO 1) Which of the following are capital structure concerns?

TCO 1) Which of the following are capital structure concerns?

I. how to obtain short-term financing
II. the company’s financing mix
III. the cost of funds
IV. how and where to raise money (Points : 4)
I and II
I, II and III
II, III and IV
I, III and IV
All of the above

Question 2. 2. (TCO 1) Market values reflect which of the following: (Points : 4)
The amount someone is willing to pay today for an asset.
The value of the asset based on generally-accepted accounting principles.
The asset’s historical cost.
A and B only
None of the above

Question 3. 3. (TCO 1) Use the following tax table to answer this question:

Taxable Income

Tax Rate

\$0- \$50,000 15%
\$50,001- 75,000 25
\$75,001- 100,000 34
\$100,001- 335,000 39
\$335,001- 10,000,000 34

Riddell, Inc. earned \$144,320 in taxable income for the year. How much tax does the company owe on this income? (Points : 4)
\$39,535
\$49,069
\$51,285
\$56,285
\$78,535

Question 4. 4. (TCO 3) Regional Bank offers you an APR of nine percent compounded quarterly, and Local Bank offers you an EAR of 9.15 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)
Regional Bank, APR
Local Bank, EAR
Regional Bank, EAR
Local Bank, APR

Question 5. 5. (TCO 3) You deposited \$8,000 in your bank account today. Which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (Points : 4)
a decrease in the interest rate
increasing the initial amount of your deposit
decreasing the frequency of the interest payments
extending the length of the investment period

Question 6. 6. (TCO 3) You want to have \$15,000 for a down payment on a house five years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal? (Points : 4)
\$7,858.11
\$8,141.40
\$9,803.58
\$12,464.28
\$14,213.25

Question 7. 7. (TCO 3) Paper Pro needed a new store. The company spent \$65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)
\$91.05
\$284.13
\$556.50
\$682.87
\$731.60

Question 8. 8. (TCO 3) John borrowed \$5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of \$550 to the bank. Which type of loan does John have? (Points : 4)
interest-only
pure discount
compounded
amortized
complex

Question 9. 9. (TCO 3) Fanta Cola has \$1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 13 percent? Assume annual payments. (Points : 4)
\$1078
\$1085
\$927
\$1000

Question 10. 10. (TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market. (Points : 4)
primary
main
secondary
principal
dealer

Question 11. 11. (TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4)
The benefits of leverage are unaffected by the amount of a firm’s earnings.
The use of leverage will always increase a firm’s earnings per share.
The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.
Earnings per share are unaffected by changes in a firm’s debt-equity ratio.
Financial leverage is beneficial to a firm only when the firm has minimal earnings.

Question 12. 12. (TCO 3) A 10-year bond pays 11 percent interest on a \$1000 face value annually. If it currently sells for \$1,195, what is its approximate yield to maturity? (Points : 4)
9.33%
7.94%
12.66%
8.10%

Question 13. 13. (TCO 8) Which of the following is true regarding bonds? (Points : 4)
Bonds do not carry default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
Municipal bonds are not free of default risk.
None of the above is true

Question 14. 14. (TCO 8) Which one of the following bonds is the most sensitive to interest rate movements? (Points : 4)
zero-coupon, five year
seven percent annual coupon, five year
zero-coupon, 10 year
five percent semi-annual coupon, 10 year
five percent annual coupon, 10 year

Question 15. 15. (TCO 6) A call provision in a bond agreement grants the issuer the right to: (Points : 4)
repurchase the bonds prior to maturity at a pre-specified price.
replace the bonds with equity securities.
repurchase the bonds after maturity at a pre-specified price.
change the coupon rate, provided the bondholders are notified in advance.
buy back the bonds on the open market prior to maturity

## Construct a table showing the investor’s profit (not payoff) as a function of the stock price at expiration

Q1. The price of a stock is currently \$30. The price of a two­ year European call option on the
stock with a strikeprice of \$40 is \$15 and the price of a two­year European put option on the stock with a strike price of \$20 is \$12.
Suppose that an investor buys 100 shares of stock, shorts 100 call options, and buys 100 put options. Construct a table showing the investor’s profit (not payoff) as a function of the stock price at expiration. The difference between profit and payoff is explained in week 1. In addition, please
remember that when the investor shorts an option, he receives the option price upfront. For example, if you short sell 1 call option, you will receive \$15 today.
Hints: To answer part a, construct a column in Excel of stock prices at expiration ranging from \$1 to \$60 in increments of \$1. Then use the next 3 columns to calculate the stock, call, put profits (one column for each position). Pay attention to whether the investor is taking a long or a short position of the option. Then add all the profits from these three positions (stock, call, put). Finally, use Excel to graph the portfolio profit (y­axis) as a function of stock price (x­axis). Specifically, use scatterplot in Excel. If you don’t know how, then type “scatterplot” in Excel help and follow the instruction. Your profit for long put option should look similar to Figure 9.2 in page 213 and the profit for short call should look similar to figure 9.3.

b. The set of actions in part A is called a “collar” strategy. Explain when an investor is likely to use this collar strategy.

c. Suppose now that the investor buys 100 stocks, shorts 200 call options, and buys 200 put options. Construct a table showing the investor’s profit or loss as a function of the stock price at expiration. Graph the portfolio profit as a function of stock price. The total profit should look like a zigzag (down/up/down) pattern.

Q3: If you exercise an in­the­money call option, you will make a profit. Explain whether this is true or false.

Q2: What are the differences between (a) exchange­traded call options and (b) warrants/employee stock options/convertibles?

Q4. The current price of a stock is \$94, and a three­month European call option with a
strike price of \$95 currently sells for \$4.70. An investor who feels that the price of the stock will
increase is trying to decide between investing in 100 stocks and investing in 2,000 call options (20 contracts) for 3 months. Both strategies cost an initial investment of \$9,400. How high does the stock price have to rise in3 months for the option strategy to be more profitable than the stock strategy? In other words, at what stock price, will the 2 strategies result in the same profit?

## The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions.

ACC 690: Final Project Guidelines and Rubric: Overview The final project for this course is the creation of an Excel spreadsheet model that shows the consolidation worksheet, intercompany elimination entries, other consolidation entries, and the final income statement and balance sheet for a sample parent and subsidiary company. The project is divided into three milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Four, Seven, and Nine.Assume the following when completing the project:Assume that the parent owned the subsidiary for the entire year for which financial statements are being prepared. The scenario indicates that as of December 31, there is a difference between book value and fair value for inventory and depreciable assets. Assume that these differences existed at the date of acquisition. Record only the differential and do not worry about amortization of the differential. Prepare the consolidation worksheet using the equity method. Assume that the trial balance was prepared prior to any entry the parent company made to record the net loss from the subsidiary. GuidelinesThe Model Assignment: Students will be given the description of a parent company and a subsidiary company along with the two firms’ trial balances at book value as of December 31, 2012, the end of the year for both firms (see Company Informationbelow).The financial data will be presented in English pounds (£) as local currency.Other data pertaining to the consolidation is also to be provided.The student will analyze the data for purpose of consolidation. The student will create a useful Excel model that shows the consolidation worksheet, intercompany elimination entries, other consolidation entries, and the final income statement and balance sheet.Using the consolidated financial statements created, students will then use Excel modeling to translate the consolidated income statement and balance sheet from English pounds to U.S. dollars based on exchange rates provided (the U.S. dollar is the functional currency).Requirements: This project should be prepared as a report for your supervisor.The report should be visually pleasing.As many computations as possible should be done by the model with the exception of entering the original financial statement data.The report should utilize “macros” and other built-in features found in Excel