#FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
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Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
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Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.
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FIN 515 WEEK 7 PROBLEM SET
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FIN 515 Week 7 Problem Set
Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_7_Problem_Set.docx (where flastname is your first initial and your last name), and submit it to the appropriate Dropbox.
Chapter 26 (page 903):
1. Answer the following questions:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal?
4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
a. Calculate The Greek Connection’s net working capital in 2012.
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?
5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.
Chapter 27 (page 925):
1. Which of the following companies are likely to have high short-term financing needs? Why?
a. A clothing retailer
b. A professional sports team
c. An electric utility
d. A company that operates toll roads
e. A restaurant chain
2. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm’s seasonal working capital needs the greatest? When does it have surplus cash?
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DEVRY FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.
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FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_1_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox.
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.
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DEVRY FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?
42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.
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DEVRY FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
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FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set
Chapter 1
1. What is the most important difference between a corporation and all other organizational forms?
2. What does the phrase limited liability mean in a corporate context?
3. Which organizational forms give their owners limited liability?
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
5. Explain the difference between an S corporation and a C corporation.
Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.
a. Compare the gross margins for Starbucks and Peet’s.
b. Compare the net profit margins for Starbucks and Peet’s.
c. Which firm was more profitable in 2011?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change over this period?
b. How did Mydeco’s inventory days change over this period?
c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009 and 2013.
b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.
a. By how much did Mydeco increase its debt from 2009 to 2013?
b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?
c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?
For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.
a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.
b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.
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FIN 515 Week 6 Problem Set
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1. What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
2. What are some examples of agency problems?
3. What are the advantages and disadvantages of the corporate organizational structure?
4. What is the role of the board of directors in corporate governance?
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DEVRY FIN 515 Week 3 Problem Set
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Chapter 7 (pages 225–228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
8. You are considering an investment in a clothes distributor. The company needs $100,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 20%. What does the IRR rule say about whether you should invest?
19. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback period?
21. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.
· a. Which investment has the higher IRR?
· b. Which investment has the higher NPV when the cost of capital is 7%?
· c. In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
Chapter 8 (260–262)
1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $20 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 40% will come from customers who switch to the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?
6. Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.
12. A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require $50,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored because it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $20,000.
If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?
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FIN 515 WEEK 6 PROBLEM SET
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FIN 515 Week 6 Problem Set
Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_6_Problem_Set.docx (where flastname is your first initial and your last name), and submit it to the appropriate Dropbox.
Chapter 29 (pages 983-984):
1. What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
2. What are some examples of agency problems?
3. What are the advantages and disadvantages of the corporate organizational structure?
4. What is the role of the board of directors in corporate governance?
Second Project
The purpose of this project is for you to have some practice working with financial concepts in the real world. This will involve integrating some material from throughout the course. The project will also involve the development of your own approach to doing the work. The project does not provide a step-by-step procedure for you to follow.
Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data.
With the help of your professor, you have selected a company for which to research and find the WACC. Your research is to be independent from any information you may find at thatswacc.com or similar sites although you might want to use such sites to provide a reasonableness check on the WACC you calculate.
Assumptions
As you recall, the formula for WACC is
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is
ri= rf + βi * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk Premium is 4% unless you can develop a better number.
rf is the risk free rate. The YTM on 10 year US Treasury securities is a good approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company.
There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter. To find data for a particular company’s bonds, find the Quick Search feature, then be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company.
Deliverable
Write a two or three page report that contains the following elements:
1. 1. Your calculated WACC.
2. 2. How data was used to calculate WACC. This would be the formula and the formula with your values substituted.
3. 3. Sources for your data.
4. 4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any.
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DEVRY FIN 515 Week 4 Problem Set
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Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?
Bond-5. A given bond has 5 years to maturity. It has a face value of $1,000. It has a YTM of 5% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for?
Bond-6. A given bond has five years left to maturity. Interest is paid annually and the annual coupon rate is 9%. The par value of the bond is $1,000. The bond currently sells for $1,000. What is the yield to maturity?
9-1.Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in 1 year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in 1 year in order to justify its current price?
9-5.NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?
9-6.Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?
9-7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share price?
9-12.Procter & Gamble will pay an annual dividend of $0.65 1 year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
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FIN 515 Week 5 Problem Set
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Chapter 10 (pages 345–348) 4. You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today. a. What was your realized return? b. How much of the return came from dividend yield and how much came from capital gain?
20. Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?
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FIN 515 Week 4 Problem Set
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Bonds-1. Interest on a certain issue of bonds is paid annually with a coupon rate of 8%. The bonds have a par value of $1,000. The yield to maturity is 9%. What is the current market piece of these bonds? The bonds will mature in 5 years.
Bonds-2. A certain bond has 12 years left to maturity. Interest is paid annually at a coupon rate of 10%. The bonds are currently selling for $850. What is their YTM?
Bonds-3. A certain bond pays a semiannual coupon rate at a 10% annual rate. The bond has a par value of $1,000. There are eight years to maturity. The yield to maturity is 9%. What is the current price of the bond?
Bonds-4. A particular corporate bond has a par value of $1,000. Coupon payments are $40 and are paid twice a year. Seven years are left on the life of the bond.The YTM is 9%. What is the price of the bond?
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FIN 515 Week 3 Problem Set
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Chapter 7 (pages 225–228):
1. Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
8. You are considering an investment in a clothes distributor. The company needs $100,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 20%. What does the IRR rule say about whether you should invest?
19. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5,000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback period?
21. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.
a. Which investment has the higher IRR?
b. Which investment has the higher NPV when the cost of capital is 7%?
c. In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
Chapter 8 (260–262)
1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $20 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 40% will come from customers who switch to the new, healthier pizza instead of buying the original version.
a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza?
b. Suppose that 50% of the customers who will switch from Pisa Pizza’s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?
6. Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.
12. A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make thes
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FIN 515 Week 2 Problem Set
http://fin515entirecourse.com/fin-515-week-2-problem-set,
Chapter 4 (pages 132–136):
3. Calculate the future value of $2000 in
a. five years at an interest rate of 5% per year;
b. ten years at an interest rate of 5% per year; and
c. five years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?
4. What is the present value of $10,000 received
a. twelve years from today when the interest rate is 4% per year;
b. twenty years from today when the interest rate is 8% per year; and
c. six years from today when the interest rate is 2% per year?
5. Your brother has offered to give you either $5,000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
6. Consider the following alternatives.
i. $100 received in 1 year
ii. $200 received in 5 years
iii. $300 received in 10 years
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