Chapter 2
Problem 1 (5%):
ABC Inc. has the following balance sheet. How much total operating capital does the firm have? Briefly discuss the importance of a company’s operating income.
Cash $ 20.00 Accounts payable $ 30.00
Short-term investments 50.00 Accruals 50.00
Accounts receivable 20.00 Notes payable 30.00
Inventory 60.00 Current liabilities $110.00
Current assets $150.00 Long-term debt 70.00
Gross fixed assets $140.00 Common stock 30.00
Accumulated deprec. 40.00 Retained earnings 40.00
Net fixed assets $100.00 Total common equity $ 70.00
Total assets $250.00 Total liab. & equity $250.00
Problem 2 (5%):
B Systems Inc. recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow? Briefly discuss.
Chapter 3
Problem 3 (20%):
Financial Statement Analysis Ratio Problem. See below for financial statements and answer the ratios
for 2017E in the table below as well as the following. Remember to discuss overall performance of not
only each ratio but also the trend and industry comparison. Offer suggestions of how areas can be
improved and why.
a. Analyze the historical trend of the company and also compare to the industry of each of the ratios
for 2017E financials shown below and discuss. Show all work and be as comprehensive as possible with
your responses. How important is financial statements and ratio analysis here?
(NOTE the Price to Cash flow ratio is optional)
Provide your calculations on a separate sheet.
b. Discuss the overall performance of the company compared to itself and the industry. Discuss any areas of
Improvement.
c. What is your recommendation the company management? What is your recommendation to company
shareholders?
d. What are two problems and two benefits of ratio financial ratios. What are two limitations of
historical trends and benchmarking companies. Briefly discuss and give examples.
Chapter 5
Problem 4 (10%):Big Inc. is considering Two Projects X and Y, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods.
WACC: 8.00%
Year 0 1 2 3 4
CFx −$1,100 $450 $500 $100 $100
CFy −$2,750 $625 $725 $800 $1,400
a. What are the NPV’s of each of the projects? What are the IRR’s of each?
b. What is the payback period and discounted payback period?
c. What is the Profitability index?
d. What are the MIRR’s? Discuss the importance of the MIRR method over IRR.
e. If these projects are mutually exclusive which should be selected and why? If they are in depended which project(s) should be selected and why?
f. Discuss your results of the methods used above and make a recommendation on the projects to the CEO using the different methods?
Chapter 8
Bonds: Once again with the problems show all your work and calculations including keystrokes for full credit.
Problem 5 (10%):
Ideal Corporation issued 20-year, noncallable, 7.5% semi-annual coupon bonds at par value three year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 17 years to maturity? Are these premium or discount bonds? Why?
Problem 6 (10%):
Company Triple A semi-annual par value bonds currently sell for 105% of par. They have a 6.50% coupon rate and a 25-year maturity and are callable in 6 years at an 8% premium. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.
a. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM and why? Is this a discount or premium bond and why?
b. What is the current yield of the bond?
c. What happens to the YTM if the bond sells at 90% of par.? Compare your results to part a.
Chapter 9 Show all your work, steps and briefly discuss your results.
Problem 7 (10%):
Firefly Corporation is a new company and has been growing at a rate of 20% per year. The growth is expected for another two years and then to 10% for a year and decline to constant rate of 6%.
a. If Firefly’s dividend is $1.60 and required rate of return is 10% what is Firefly stock worth today? If you owned the stock what would you recommend its price is trading at $50 per share.
b. What will be the dividends and capital gains yield once the supernormal growth rate ends?
Problem 8 (10%):
AC’s free cash flow today at year 0 is $1.30. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and then at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. AC has $4 million in short-term investments and $14 million in debt and 2 million shares outstanding.
A. What is the value of the company today based on FCF?
B. What is the best estimate of the stock's current intrinsic price? If the market price is $33 do you buy or sell the stock?
- Essay Questions (20%):
Discuss ANY TWO of the following Essay: Each essay should be at least one side of one-page single spaced in length using your own words, opinions and real examples, not textbook definitions. Please type these up on a separate sheet.
A. Bonds
Discuss the importance of bonds and companies issuing bonds discussing at least two reasons why corporations do so? What are two key attractiveness of corporate bonds and why? How do interest rates play a role in affecting bonds prices and why? Use a real company example and briefly discuss.
B. Stocks
Discuss the importance of stocks from both a company and shareholder perspective. Why do companies issue stock? What is the importance of intrinsic value and what does it represent? List two one pro and one con of why a company would issue stock. Provide a real example and briefly discuss.
C. Capital Budgeting is a very important part of business and especially in finance.
Being able to make investment decisions remain a major priority of just about aby corporations. Discuss the importance of a company using NPV, IRR, PI and the role that they play for companies looking to grow. Provide a specific example of how a company can use them.
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