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by: Allan Hamill DDS

SurveyofFinance MBA530

Marketplace > Wright State University > MBA > MBA530 > SurveyofFinance
Allan Hamill DDS
GPA 3.72


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This 7 page Class Notes was uploaded by Allan Hamill DDS on Thursday October 29, 2015. The Class Notes belongs to MBA530 at Wright State University taught by Staff in Fall. Since its upload, it has received 14 views. For similar materials see /class/231089/mba530-wright-state-university in MBA at Wright State University.


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Date Created: 10/29/15
MBA 530 SolutionP ractice Makeup Examination Name Directions 1 Read each question carefully 2 Answer each question in a neat logical manner 3 SHOW ALL WORK 4 Label your answer clearly 5 Make any assumptions you feel are necessary Be sure to document your assumptions what assumption did you make and why 6 Make sure you have seven 7 unique questions 1 FINANCIAL STATEMENTS 15 points Use the following information for question 1 At the end of 1997 the Akhbari Company has 60000 in accumulated depreciation and 80000 in retained earnings 1999 Sales 300000 00000 Notes Payable 20000 50000 Tax Rate 40 40 Gross Fixed Assets 600000 700000 Total Current Liabilities 130000 150000 Interest Expense 30000 40000 Cash 20000 30000 Accounts Payable COGS 25 of Sales 25 of Sales Total Current Assets 180000 180000 Total Debt 250000 300000 Net Income 42000 48000 Accounts Receivable 30000 20000 Addition to Retained 20000 26000 Earnings a Calculate Net Fixed Assets for 1999 b Calculate Common Stock for 1999 c Calculate Inventory Turnoverfor 1999 d Calculate Dividend Payout Ratio for 1999 335000 Answer 89000 Answer 400 000 130000 3 times Answer 2 RISK 10 points Calculate the coefficient of variation for the following investment State Probability Payoff 20 1 30 A B 40 1 50 C 10 240 D 30 330 0 40398759 Answer Expected Payoff EP 20130 40150 10240 30330 209 State Probability Payoff Payoff E P Payoff E P 12 Probability 20 130 79 1248 20 A B 40 150 59 139240 C 10 240 31 9610 D 30 330 121 4 39230 Variance 712900 Standard deviation 844334 Coef cient of Variation Standard deviation EP 844334 209 m 3 BOND VALUATION 10 points Your company just issued a bond that has a 10year maturity 12 coupon rate interest is paid semiannually and may be called in 4 years at a call price of 1060 The bond currently sells for 1100 i What is the bond s yield to maturity at T0 10369336 compounded semiannually or 10638m effective rate Answer 10 years of semiannual interest 20 payments 1100 9 PV Current price which as given Enter as negative 1 000 9 FV Default face value ofa bond 60 9 PMT Interest payment 12 coupon 1000 face 2 CPT lY 518494306 APR 518494306 2 103698m compounded semiannually OR EAR 1051134943062 1 1063172204 effective rate ii If the bond is called what is the bond s yield to call 10 quot compounded semiannually or 10 effective rate Answer 8 interest payments received before call 1100 9 PV Current price which as given Enter as negative 1 060 9 FV Call price a er 8m payment 60 9 PMT Interest payment 12 coupon 1000 face 2 CPT lY 507475582 APR 500803714 2 1014951165 compounded semiannually OR EAR 1050013037142 1 10 7 3 effective rate 4 STOCK VALUATION 15 points The riskfree rate of return is 11 the market risk premium is 3 the dividend that was just paid D0 was 4 Dividends are expected to grow at a rate of 20 per year for two years then at a rate of 10 for two additional years and finally at a rate of 5 forever If the beta for this stock is 15 what should the stock sell for today T0 55 66545 Answer K155 G1 202years G2102years Gmnsm5 D4 480 D2 576 D3 6336 D4 69696 D5 731808 P4 D5KGmnstam 69696 P0 4801155 57611552 63361155 6696 696961155 5558 5 5 WEIGHTED AVERAGE COST OF CAPITAL PampG 25 points Penafiel and Godoy have an optimal capital structure that consists of 25 debt and 75 common equity They expect to have 60000000 of new retained earnings available for investment for the next year c BONDS Their investment bankers assure them that they could issue 20000000 net of flotation costs of 1000 face value bonds carrying a 12 coupon rate paying annual interest having a 10year maturity at a price of 1200 Flotation costs for this issue would be 50 per bond Bonds issued beyond 20000000 will have a flotation cost of 150 per bond a price of 1200 a 12 coupon rate and a 10year maturity COMMON STOCK The current stock price is 80 The expected dividend is 8 per share Dividends are expected to grow at a rate of 5 forever New shares of stock can be issued at 80 per share and flotation costs would be 6 per share o Penafiel and Godoy have a corporate tax rate of 30 Estimate the WACC for the first dollar of new capital raised 1293010AJ Answer Kd Debt 25 of capital structure 1000 face value 1000 9 FV denomination of bond given 10year maturity 10 9 N 10 interest payments annual interest 12 coupon 120 9 PMT 12 coupon 1000 face value 1200 price 50 flotation cost 1150 9 PV net price 120050 CPT lY 96 6 9YTM on bonds adjusted for flotation cost Kd K9 Equity 75 of capital structure Retained Earnings for 1st dollar of capital 80 current price 80 9 Po 8 expected dividend 8 9 D1 5 growth forever 05 9 g KRE D1Po g 880 05 915 KRE Ke WACC wdKd1Tax Rate weKe WACC 22 6006X180 75 15 WAQ 12 6 8882 iii CAPITAL BUDGETING THE CROMWELL CORPORATION 35 points Today is T0 The Cromwell Corporation is considering replacing their old bottlecapping machine with a newer more efficient one Sales are not expected to change from their current level of 2000000 per year ifthe new machine is purchased The old machine was purchased six years ago T6 for 900000 had a tenyear expected life when it was purchased and is being depreciated toward a zero salvage value using the straightline depreciation method The Cromwell Corporation is convinced they can sell the old machine for 150000 at the end of its useful lifeT4 The old machine could be sold for 300000 today The new machine will cost 1250000 and will be depreciated using the 3year class MACRS schedule 33 45 15 7 The new machine will be sold at T4 for 375000 lfthe new machine is purchased inventory will decrease immediately by 45000 accounts payable will increase immediately by 30000 shipping and installation costs both paid by the Cromwell Corporation will total 80000 operating expenses were 60 of sales with the old machine and will be 40 of sales iwth the new machine The Cromwell Corporation has a tax rate of 30 determine the investment cash outflow T0 Purchase price 1250000 937000 Shipping etc 80000 Market Value old 300000 Answer Tax credit loss 18000 Decrease NWC 75 000 Investment lo 937 000 determine the operating cash inflow T2 1019550 587 000 432550 Answer determine the nonoperating cash flow T4 NEW OLD 262500 at new salvage 375000 Salvage Value 150000 105 000 at old salvage Book Value 0 157500 A at salvage 375000 Gain Loss 150000 75 000 reverse NWC 030 Tax Rate 030 112500 Tax on Gain 45000 82500 375000 Salvage Value 150000 Answer 112 500 Tax on Gain 45 000 at Salvage M 7 NPVIIRRIMIRR 15 points The following represent the nominal cash flows for a proposed investment The beta ofthe investment is 16 The riskfree return is 7 The market risk premium is 8 K required return Kf BKkt Kn 7 168 198 0 l T1 T2 T3 T4 350000 80000 90000 160000 40000 80 000 95 840 185840 185 840 222 63632 38263632 382 63632 458 398311 498 398311 Reinvestment of intermediate cash ows at 198 cost of capital 81 determine the NPV 10836081 Answer CFO 350000 CF1 80000 CFZ 90000 CF3 160000 CF4 40000 198 CPT NPV Since the total cash returned 370 000 is barely more than the original investment 350000 a negative NPV is more likely than not given K and time b determine the IRR 2 quot Answer CFO 350000 CF1 80000 CFZ 90000 CF3 160000 CE 40000 CPT IRR Since NPV is negative IRR must be less than K of 198 It is so the answer is reasonable 0 determine the MIRR 9233353 Answer 498398311 350000 4 1 09238853 9233353 The MIRR will fall between the RR and K It does so the answer is reasonable


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