FIN 401- Final Exam Guide - Comprehensive Notes for the exam ( 73 pages long!)

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orangeminnow913

28 Mar 2018

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Step 1) decide whether to buy or sell shares you want to receice: Compare to div. payout; if short(sell), if long or excess(buy) Therefore; # share to buy/sell = (amount from step 1) / (p1) Given d/e ratio, d+e = v, therefore find d/v, e/v. #share repurchased = (repurchase amount)/ (p of cum div. ) Price/share = ve / (old share shares repurchased) (share price) P of ex div = share price tomorrow. P of cum div = current share price s(are pr)ce doesn"t c(ange. 48. (i and ii), 49. (i and iii) Strategic alliance: agreement b/w firms to cooperate in pursuit of goal. Joint venture: agreement to create separate, co

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Your broke offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen's dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%.

a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, D3. Note that D0 = $2.00.

b. Given that the first dividend payment willl occur 1 year from now, find the present value of the dividen stream; that is, calculate the PVs of D1, D2, D3 and then sum these PVs.

c. You expect the price of the stock 3 years from now to be $34.73; that is, you expect P3 to equal $34.73. Discounted at a 12% rate, what is the present value of this expected furture stock price? In other words, calculate the PV of $34.73.

d. If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for it today?

e. Calculate the present value of this stock. Assume that g = 5% and that it is constant.

f. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain.

redant669

You are proposing a new venture, to branch out into animals and cartoon characters but this will require some new equipment and a capital outlay. Pertinent financial information is given below.

BALANCE SHEET

Cash	2,000,000	Accounts Payable and Accruals	18,000,000
Accounts Receivable	28,000,000	Notes Payable	40,000,000
Inventories	42,000,000	Long-Term Debt	60,000,000
		Preferred Stock	10,000,000
Net Fixed Assets	133,000,000	Common Equity	77,000,000

Total Assets	205,000,000	Total Claims	205,000,000

ï¿½ Last yearï¿½s sales were $225,000,000.

ï¿½ The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent annual coupon, and are currently selling for $874.78.

ï¿½ You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.

ï¿½ The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D₀) was $.80. New stock could be sold with 15% flotation costs.

ï¿½ The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stockï¿½s beta is 1.22.

ï¿½ Stockholders require a risk premium of 5 percent above the return on the firms bonds.

ï¿½ The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.

ï¿½ Your firm does not use notes payable for long-term financing.

ï¿½ The firm considers its current market value capital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firmï¿½s capital structure, rather than its book value.)

ï¿½ The firm is currently using its assets at capacity.

ï¿½ The firmï¿½s management requires a 2 percent adjustment to the cost of capital for risky projects.

ï¿½ Your firmï¿½s federal + state marginal tax rate is 40%.

ï¿½ Your firmï¿½s dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.

ï¿½ The firm has the following investment opportunities currently available in addition to the expansion you are proposing:

Project	Cost	IRR
A	10,000,000	20%
B	20,000,000	18%
C	15,000,000	14%
D	30,000,000	12%
E	25,000,000	10%

Your expansion would consist of a new product introduction (You should label your venture as Project I, for ï¿½introductionï¿½). You estimate that your product will have a six-year life span (after all how many people will really buy this stuff), and the equipment used to manufacture the project falls into the MACRS 5-year class. Your venture would require a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $4,000,000. At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $4,000,000 salvage value.

Your venture, which management considers fairly risky, would increase fixed costs by a constant $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $5,000,000 in year 1, $10,000,000 in year 2, $14,000,000 in year 3, $16,000,000 in year 4, $12,000,000 in year 5, and $8,000,000 in year 6.

The following list of steps provides a structure that you should use in analyzing your new venture.

Note: Carry all final calculations to two decimal places.

Find the WACC:

1. Find the costs (rate of return under current market conditions) of the individual capital components:
a. long-term debt (Hint: PV=-$874.78, FV = $1000, PMT=$100, n=15 solve for i)
b. preferred stock
c. retained earnings (avg. of CAPM and bond yield + risk premium approaches)
d. new common stock

2. Compute the value of the long-term elements of the capital structure, and determine the target percentages for the optimal capital structure. (Carry weights to four decimal places. For example: 0.2973 or 29.73%)

Find the Cash Flow from the project:

3. Compute the Year 0 investment for Project I.

4. Compute the annual operating cash flows for years 1-6 of the project.

5. Compute the additional non-operating cash flow at the end of year 6.

Find alternative capital budgeting measures:

6. Compute the IRR and payback period for Project I.

7. Determine your firmï¿½s cost of capital. (Hint this is the WACC plus an adjustment from the write up)

Make Some Decisions:

8. Compute the NPV for Project I. Should management adopt this project based on your analysis? Explain. Would your answer be different if the project were determined to be of average risk? Explain.

9. Indicate which of the other projects (A through E) should be accepted and why.

indigocamel111

FIN 401- Final Exam Guide - Comprehensive Notes for the exam ( 73 pages long!)

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