FIN 534-Homework Set 1

FIN 534-Homework Set 1

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1. What is the free cash flow for 2014?

2. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No

changes in operations occurred. What would happen to reported profit and to net cash flow?

3. Calculate the 2014 current and quick ratios based on the projected balance sheet and income

statement data. What can you say about the company’s liquidity position in 2013?

4. Calculate the 2014 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and

total assets turnover.

5. Calculate the 2014 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA

coverage ratios. What can you conclude from these ratios?

6. Calculate the 2014 profit margin, basic earning power (BEP), return on assets (ROA), and return

on equity (ROE). What can you say about these ratios?

7. Calculate the 2014 price / earnings ratio, price / cash flow ratio, and market / book ratio.FIN 534 – Homework Set #1

© 2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information

and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of

Strayer University.

FIN 534 Homework Set #1 Page 4 of 4

8. Use the extended DuPont equation to provide a summary and overview of company’s financial

condition as projected for 2014. What are the firm’s major strengths and weaknesses?

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1. What is the free cash flow for 2014?

2. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No

changes in operations occurred. What would happen to reported profit and to net cash flow?

3. Calculate the 2014 current and quick ratios based on the projected balance sheet and income

statement data. What can you say about the company’s liquidity position in 2013?

4. Calculate the 2014 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and

total assets turnover.

5. Calculate the 2014 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA

coverage ratios. What can you conclude from these ratios?

6. Calculate the 2014 profit margin, basic earning power (BEP), return on assets (ROA), and return

on equity (ROE). What can you say about these ratios?

7. Calculate the 2014 price / earnings ratio, price / cash flow ratio, and market / book ratio.FIN 534 – Homework Set #1

© 2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information

and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of

Strayer University.

FIN 534 Homework Set #1 Page 4 of 4

8. Use the extended DuPont equation to provide a summary and overview of company’s financial

condition as projected for 2014. What are the firm’s major strengths and weaknesses?

**Tags:**4, All Individual and Learning Team Assignments, All Weeks, Ashford, Assignment 1, Assignment 2, Assignment 3, Assignment 4, Assignment 5, Axia College, Checkpoint, FIN 534 week 1 DQ, FIN 534 week 2 DQ, FIN 534 week 3DQ, FIN 534 week 4 DQ, FIN 534 week 5DQ, FIN 534 week 6 DQ, FIN 534 final Project, FIN 534 week 1 Assignment, FIN 534 week 2 DQ, FIN 534 week 5DQ, FIN 534 A Graded, FIN 534 A++ Work, FIN 534 All discussion Questions, FIN 534 All Individual and Learning Team Assignments, FIN 534 All Weeks, FIN 534 Answered, FIN 534 Assignment, FIN 534 Axia College, FIN 534 Checkpoint, FIN 534 Complete Assignments, FIN 534 Complete Course, FIN 534 DQs, FIN 534 Entire Class, FIN 534 Final Exam, FIN 534 Final Guide, FIN 534 Full Course, FIN 534 help, FIN 534 Homework, FIN 534 Individual Assignment, FIN 534 Learning team Assignment, FIN 534 Material, FIN 534 online class, FIN 534 Phoenix, FIN 534 Product, FIN 534 Questions, FIN 534 Solution, FIN 534 Staryer, FIN 534 Study Guide, FIN 534 Summary, FIN 534 Syllabus, FIN 534 tutorial, FIN 534 University

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FIN 534 Week 9 Assignment 1 - Financial Research Report

FIN 534 Week 9 Assignment 1 - Financial Research Report

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Imagine that you are a financial manager researching investments for your client that align with its investment goals. Use the Internet or the Strayer Library to research any U.S. publicly traded company that you may consider as an investment opportunity for your client. (Note: Please ensure that you are able to find enough information about this company in order to complete this assignment. You will create an appendix, in which you will insert related information.)

The assignment covers the following topics:

•Rationale for choosing the company for which to invest

•Ratio analysis

•Stock price analysis

•Recommendations

Write a ten to fifteen (10-15) page paper in which you:

1. Provide a rationale for the U.S. publicly traded company that you selected, indicating the significant factors driving your decision as a financial manager.

2. Determine the profile of the investor for which this company may be a fit, relative to that potential investor’s investment strategy. Provide support for your rationale.

3. Select any five (5) financial ratios that you have learned about in the text. Analyze the past three (3) years of the company’s financial data, which you may obtain from the company’s financial statements. Determine the company’s financial health. (Note: Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per share, and price earnings ratio.)

4. Based on your financial review, determine the risk level of the company from your investor’s point of view. Indicate key strategies that you may use in order to minimize these perceived risks.

5. Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources, such as peer-reviewed articles or material from the Strayer Library.

6. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

•Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

•Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

•Critique financial management strategies that support business operations in various market environments.

•Analyze financial statements for key ratios, cash flow positions, and taxation effects.

•Review fixed income strategies using time value of money concept, bond valuation methods, and interest rate calculations.

•Estimate the risk and return on financial investments.

•Apply financial management options to corporate finance.

•Determine the cost of capital and how to maximize returns.

•Formulate cash flow analysis for capital projects including project risks and returns.

•Evaluate how corporate valuation and forecasting affect financial management.

•Analyze how capital structure decision-making practices impact financial management.

•Use technology and information resources to research issues in financial management.

•Write clearly and concisely about financial management using proper writing mechanics.

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Imagine that you are a financial manager researching investments for your client that align with its investment goals. Use the Internet or the Strayer Library to research any U.S. publicly traded company that you may consider as an investment opportunity for your client. (Note: Please ensure that you are able to find enough information about this company in order to complete this assignment. You will create an appendix, in which you will insert related information.)

The assignment covers the following topics:

•Rationale for choosing the company for which to invest

•Ratio analysis

•Stock price analysis

•Recommendations

Write a ten to fifteen (10-15) page paper in which you:

1. Provide a rationale for the U.S. publicly traded company that you selected, indicating the significant factors driving your decision as a financial manager.

2. Determine the profile of the investor for which this company may be a fit, relative to that potential investor’s investment strategy. Provide support for your rationale.

3. Select any five (5) financial ratios that you have learned about in the text. Analyze the past three (3) years of the company’s financial data, which you may obtain from the company’s financial statements. Determine the company’s financial health. (Note: Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per share, and price earnings ratio.)

4. Based on your financial review, determine the risk level of the company from your investor’s point of view. Indicate key strategies that you may use in order to minimize these perceived risks.

5. Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources, such as peer-reviewed articles or material from the Strayer Library.

6. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

•Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

•Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

•Critique financial management strategies that support business operations in various market environments.

•Analyze financial statements for key ratios, cash flow positions, and taxation effects.

•Review fixed income strategies using time value of money concept, bond valuation methods, and interest rate calculations.

•Estimate the risk and return on financial investments.

•Apply financial management options to corporate finance.

•Determine the cost of capital and how to maximize returns.

•Formulate cash flow analysis for capital projects including project risks and returns.

•Evaluate how corporate valuation and forecasting affect financial management.

•Analyze how capital structure decision-making practices impact financial management.

•Use technology and information resources to research issues in financial management.

•Write clearly and concisely about financial management using proper writing mechanics.

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FIN 534 Week 8 Homework Set 4

FIN 534 Week 8 Homework Set 4

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EXPECTED NET CASH FLOWS:

Year Project A Project B

0 −$400 −$650

1 −528 210

2 −219 210

3 −150 210

4 1,100 210

5 820 210

6 990 210

7 −325 210

1.Construct NPV profiles for Projects A and B.

2.What is each project’s IRR?

3.If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost

of capital were 17%, what would be the proper choice?

4.What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as

the end of Project B’s life.)

5.What is the crossover rate, and what is its significance?

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for

a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the

estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows

Year P = 0.2 P = 0.6 P = 0.2

0 −$100,000 −$100,000 −$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

6.Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected

values for the net cash flow in each year.)

7.Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case

if the cash flows are perfectly dependent (perfectly positively correlated) over time?

8.Assume that all the cash flows are perfectly positively correlated. That is, assume there are only

three possible cash flow streams over time—the worst case, the most likely (or base) case, and

the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by

each of the columns in the table. Find the expected NPV, its standard deviation, and its

coefficient of variation for each probability.

Use the following information for Question 9:

At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were

$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets

and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically

uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013,

and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in

2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing

new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no

additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of

earnings will be paid out as dividends.

9.What were Wallace’s total long-term debt and total liabilities in 2013?

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EXPECTED NET CASH FLOWS:

Year Project A Project B

0 −$400 −$650

1 −528 210

2 −219 210

3 −150 210

4 1,100 210

5 820 210

6 990 210

7 −325 210

1.Construct NPV profiles for Projects A and B.

2.What is each project’s IRR?

3.If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost

of capital were 17%, what would be the proper choice?

4.What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as

the end of Project B’s life.)

5.What is the crossover rate, and what is its significance?

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for

a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the

estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows

Year P = 0.2 P = 0.6 P = 0.2

0 −$100,000 −$100,000 −$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

6.Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected

values for the net cash flow in each year.)

7.Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case

if the cash flows are perfectly dependent (perfectly positively correlated) over time?

8.Assume that all the cash flows are perfectly positively correlated. That is, assume there are only

three possible cash flow streams over time—the worst case, the most likely (or base) case, and

the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by

each of the columns in the table. Find the expected NPV, its standard deviation, and its

coefficient of variation for each probability.

Use the following information for Question 9:

At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were

$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets

and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically

uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013,

and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in

2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing

new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no

additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of

earnings will be paid out as dividends.

9.What were Wallace’s total long-term debt and total liabilities in 2013?

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FIN 534 Week 6 Homework Set 3

FIN 534 Week 6 Homework Set 3

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Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.

Use the following information for questions 1 through 8:

The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends.

Goodman Industries Landry Incorporated Market Index

Year Stock Price Dividend Stock Price Dividend Includes Dividends

2013 $25.88 $1.73 $73.13 $4.50 17.49 5.97

2012 22.13 1.59 78.45 4.35 13.17 8.55

2011 24.75 1.50 73.13 4.13 13.01 9.97

2010 16.13 1.43 85.88 3.75 9.65 1.05

2009 17.06 1.35 90.00 3.38 8.40 3.42

2008 11.44 1.28 83.63 3.00 7.05 8.96

1.1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2008 because you do not have 2007 data.)

1.2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

1.3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your graph?

1.4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the required return on the market using the SML equation?

1.5. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?

1.6. What dividends do you expect for Goodman Industries stock over the next 3 years if you expect you expect the dividend to grow at the rate of 5% per year for the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.

1.7. Assume that Goodman Industries’ stock, currently trading at $27.05, has a required return of 13%. You will use this required return rate to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs.

1.8. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you should pay for it?

Use the following information for Question 9:

Suppose now that the Goodman Industries (1) trades at a current stock price of $30 with a (2) strike price of $35. Given the following additional information: (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.25.

9. What is the price for a call option using the Black-Scholes Model?

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Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.

Use the following information for questions 1 through 8:

The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends.

Goodman Industries Landry Incorporated Market Index

Year Stock Price Dividend Stock Price Dividend Includes Dividends

2013 $25.88 $1.73 $73.13 $4.50 17.49 5.97

2012 22.13 1.59 78.45 4.35 13.17 8.55

2011 24.75 1.50 73.13 4.13 13.01 9.97

2010 16.13 1.43 85.88 3.75 9.65 1.05

2009 17.06 1.35 90.00 3.38 8.40 3.42

2008 11.44 1.28 83.63 3.00 7.05 8.96

1.1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2008 because you do not have 2007 data.)

1.2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

1.3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your graph?

1.4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the required return on the market using the SML equation?

1.5. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?

1.6. What dividends do you expect for Goodman Industries stock over the next 3 years if you expect you expect the dividend to grow at the rate of 5% per year for the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.

1.7. Assume that Goodman Industries’ stock, currently trading at $27.05, has a required return of 13%. You will use this required return rate to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs.

1.8. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you should pay for it?

Use the following information for Question 9:

Suppose now that the Goodman Industries (1) trades at a current stock price of $30 with a (2) strike price of $35. Given the following additional information: (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.25.

9. What is the price for a call option using the Black-Scholes Model?

**Tags:**4, All Individual and Learning Team Assignments, All Weeks, Ashford, Assignment 1, Assignment 2, Assignment 3, Assignment 4, Assignment 5, Axia College, Checkpoint, FIN 534 week 1 DQ, FIN 534 week 2 DQ, FIN 534 week 3DQ, FIN 534 week 4 DQ, FIN 534 week 5DQ, FIN 534 week 6 DQ, FIN 534 final Project, FIN 534 week 1 Assignment, FIN 534 week 2 DQ, FIN 534 week 5DQ, FIN 534 A Graded, FIN 534 A++ Work, FIN 534 All discussion Questions, FIN 534 All Individual and Learning Team Assignments, FIN 534 All Weeks, FIN 534 Answered, FIN 534 Assignment, FIN 534 Axia College, FIN 534 Checkpoint, FIN 534 Complete Assignments, FIN 534 Complete Course, FIN 534 DQs, FIN 534 Entire Class, FIN 534 Final Exam, FIN 534 Final Guide, FIN 534 Full Course, FIN 534 help, FIN 534 Homework, FIN 534 Individual Assignment, FIN 534 Learning team Assignment, FIN 534 Material, FIN 534 online class, FIN 534 Phoenix, FIN 534 Product, FIN 534 Questions, FIN 534 Solution, FIN 534 Staryer, FIN 534 Study Guide, FIN 534 Summary, FIN 534 Syllabus, FIN 534 tutorial, FIN 534 University

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FIN 534 Homework Set 5 Week 10 Solution

FIN 534 Homework Set 5 Week 10 Solution

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FIN 534 – Homework Set #5

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 3:

Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

Calculate Boehm’s total dividends for 2014 under each of the following policies:

1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

2. It continues the 2013 dividend payout ratio.

3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.

Use the following information for Questions 5 and 6:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not?

6. Would the firm’s break-even point increase or decrease if it made the change?

Use the following information for Questions 7 and 8:

Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in thousands of dollars).

Firm AFirm B

Current assets $150,000$120,000

Fixed assets (net) 150,000180,000

Total assets $300,000$300,000

Current liabilities $20,000$80,000

Long-term debt 80,00020,000

Common stock 100,000100,000

Retained earnings 100,000100,000

Total liabilities and equity $300,000$300,000

Earnings before interest and taxes for both firms are $30 million, and the effective federal plus-state tax rate is 35%.

7. What is the return on equity for each firm if the interest rate on current liabilities is12% and the rate on long-term debt is 15%?

8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%, and that the rate on existing long-term debt remains unchanged. What would be the return on equity for Firm A and Firm B under these conditions?

9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rate is 120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes. What would the dollar price of the car be now, assuming the car’s price changes only with exchange rates?

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FIN 534 – Homework Set #5

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 3:

Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

Calculate Boehm’s total dividends for 2014 under each of the following policies:

1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

2. It continues the 2013 dividend payout ratio.

3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.

Use the following information for Questions 5 and 6:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not?

6. Would the firm’s break-even point increase or decrease if it made the change?

Use the following information for Questions 7 and 8:

Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in thousands of dollars).

Firm AFirm B

Current assets $150,000$120,000

Fixed assets (net) 150,000180,000

Total assets $300,000$300,000

Current liabilities $20,000$80,000

Long-term debt 80,00020,000

Common stock 100,000100,000

Retained earnings 100,000100,000

Total liabilities and equity $300,000$300,000

Earnings before interest and taxes for both firms are $30 million, and the effective federal plus-state tax rate is 35%.

7. What is the return on equity for each firm if the interest rate on current liabilities is12% and the rate on long-term debt is 15%?

8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%, and that the rate on existing long-term debt remains unchanged. What would be the return on equity for Firm A and Firm B under these conditions?

9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rate is 120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes. What would the dollar price of the car be now, assuming the car’s price changes only with exchange rates?

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