Question 1
1. Mega Industries Corporation has eighteen years of a bond outstanding to maturity, an 8.25% nominal coupon, with semiannual payments. The bond has a 6.50% nominal yield to maturity, and can be called at a price of $1,120. a. What is the bond?s nominal yield to maturity when called? b. What is the bonds effective yield? If inflation rate is at 2.95% what is the real rate of return? 2. Copper Corporation's Class Semi bonds have a twelve-year maturity and an 8.75% coupon paid semiannually and those bonds sell at their par value. The firm's Class A bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. a. At what price should the bond sell for? b. Does this bond sell at a discount or premium and why? 3. Flagship Corporation is looking to raise capital by issuing some 26-year bonds. The yield on the bonds is 7.34 percent. The bonds sell 96.75 percent of par value. a. What is the current yield on these bonds? b. What is the effective yield on the bonds? c. What is the Yield to Maturity? What type of bond is this, discount or premium? 4. Big Corporation just paid a dividend of $1.55 per share. The dividends are expected to grow at 28 percent for the next five years and then 14% for two years then level off to a 6 percent growth rate indefinitely. Market value of stock is 45.80 and purchase price was 24.25. a. What is the price of this stock today given a required return of 15 percent? b. What is the stock target price at year 7? If you owned the stock would you sell it? Why? c. If you are looking to buy the stock would you and why? d. What would be the dividend yield and capital gains yield at year 7? 5. Highlight Corporation recently paid a dividend of $2.10 per share. The company will increase its dividend by 8 percent over next two years and will then reduce its dividend growth rate by 2 percentage points per year for two years until it reaches the industry average of 2 percent dividend growth, after which the company will keep a constant growth rate forever. You had bought the stock for $57.30 and its market value is $55. a. What is the price of this stock today given a required return of 11 percent? b. What is the stock price at year 4? What is the dividend yield at year 4? c. Would you recommend buying the stock and why/why not? d. What is the dividend yield and capital gains yield today. 6. Financial Market is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result, it is going to reduce its annual dividend by thirty percent a year for the next seven years. After that, it will maintain a constant dividend. The pay out ratio is 32.5% and the company?s PE is 12. Last year, the company paid $3.60 as the annual dividend per share. You bought the stock at $34. a. What is the market value of this stock if the required rate of return is 14.5 percent? b. What are the dividends yields and capital gains yield today? Briefly discuss your findings. 7. A firm is considering Projects S and L, and X whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the NPV and/or IRR criterion, while the CFO favors the IRR method. You were hired to advise the firm on the best procedure. If the wrong decision criterion were used, how much potential value would the firm lose? Your required return is 6.00% Year 0 1 2 3 4 CFS -$1,025 $380 $380 $380 $380 CFL -$2,150 $765 $765 $765 $765 CFx -3,670 $568 $675 $1630 $1850 a. Calculate Payback, discounted payback, NPV, IRR and Profitability Index for each and briefly discuss your findings. b. Which project would you recommend is they are all mutually exclusive? c. If you had enough funding for all three independent projects which would you recommend and why? 8. Top Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past three years was 15.00%, but investors expect the annual future stock market return to be 13.00%. a. What is the firm's required return? Discuss your findings. b. You have a portfolio of three securities with a beta of 1.05, what are the weights of the portfolio? c. What is the beta of a three-asset portfolio with an expected return of 11? 9. Consider the following information on three stocks: A Portfolio is invested 35 percent in Stock A, B and 30 percent in stock C. What is the expected risk premium on the portfolio if the T-bill rate is 3.3 percent?
Question 2
Using the Dow Jones, Pfizer (PFE), complete the following project. Structure: The paper should be 3 ? 4 pages; however, substantial content will be weighted more than length. The content should be 12pt. Times Roman font. Content: The paper must include the following 5 sections: 1. the background of the company with a life cycle analysis 2. an analysis of Return on Equity 3. the company's projected future growth rate of earnings 4. an analysis of its required rate of return using the CAPM measurement 5. the company?s intrinsic value using the discount valuation techniques Describe the competitive forces in the industry including the company's relative advantages and disadvantages to its competitors and include a discussion on ROE as the basis for growth. This analysis should include demographic trends. DO NOT just state that "GE has grown at 10% in the past and will again in the future". You should tell why you think that GE can grow 10% (for instance, because you think its products will appeal to a certain demographic that is growing at X%). Given the outcome of your research and technical analysis, you will provide a buy or sell recommendation and estimated price target. The structure of the paper should meet basic APA writing standards: a title page, an abstract, in-text citations, double spacing, indented paragraphs, section headings, and a reference page. A scholarly paper must include an abstract that tells the reader the purpose of the research paper, the method of analysis (research approach and quantitative and qualitative measurements), and a brief statement of the conclusion(s). The structural order of the main content of the paper must follow the order of the abstract. The content must be properly subdivided into specific sections. The conclusion should state your interpretation of your research and measurements. . A scholarly paper is free of any spelling, punctuation, or grammatical errors. Sentences and paragraphs must be clear, concise, and factually correct. Scholarly means that the paper has significant scope and depth of research to support any statements. Relevant illustrations or examples will enhance the content. The content should exhibit logical reasoning in your interpretations of the data and several in-text citations to provide authority to your statements and conclusions. To receive full credit your paper must meet or exceed all of the above requirements and any requirements listed in the Additional Requirement section below.
Question 3
We spent a substantial amount of time in Week 4 discussing the payment and taxation of corporate dividends. Some of this discussion simply begs the question as to how commonplace dividend distributions are in the United States. Utilizing at least three (3) commercial or journal related websites, ascertain and detail how common dividend distributions are in today's economic climate, particularly since the economic downturn of 2008 and 2009. Furthermore, ascertain and analyze whether dividend distributions are concentrated in the companies that are publicly traded (such as the New York Stock Exchange or NASDAQ) or whether closely held corporations pay them with equal frequency and/or at the same rates. In your analysis, make sure that you discuss and consider the various considerations that each type of corporation (publicly traded and closely held corporations) balance in determining whether to pay dividends, including the tax consequences of doing so. NOTE: You must either (1) submit complete citations to these online resources so that your instructor may find these studies online or (2) submit complete copies of these online resources with your submission. Failure to do so will result in a zero for the assignment. PLEASE RESEARCH THIS ISSUE ON THE INTERNET AND COMPOSE AN ESSAY INCLUDING YOUR ANALYSIS OF THE ISSUE (20 POINTS).
Question 4
What set of assumptions regarding Home Depot's future growth rate, NOPAT margin, are consistent with its observed stock price of $48.20 on February 1, 2001? Assume that all the other assumptions remain the same as in question 2, except for the market risk premium, which is now assumed to be only 4%.,I need an answer for questions 1 to 4. Home Depot, Inc. in the New Millennium This is a follow on case to an earlier case on Home Depot, which was set in 1986 (its early years) when the company was experiencing growth pains. This new case is set in fiscal year 2000 (fiscal year ending January 31, 2001). By the time of this case, Home Depot has become a storied stock with a tremendous track record of growth and profitability over the past fifteen years. The case allows us to examine the drivers of Home Depot?s strong track record, and assess whether the company?s performance is sustainable at the same level into the future. We can also assess the assumptions about growth and profitability needed to justify the company?s current stock price, and examine whether this performance can be achieved in light of the company?s stated growth strategy. The case has financial performance till January 31, 2000 since the case is set in October 2000. The attached excel worksheet with financial statement data for the fiscal year ending January 31, 2001 is provided to help focus the forecasting and valuation analysis beginning February 1, 2001. At that time, the company was trading at $48.20 which is given in the assignment questions below. Assigned Case Questions: 1. Assess Home Depot?s financial performance from 1986 to 1999. How did the company achieve such a spectacular performance? What explains the decline in performance in 2000? The following data might be helpful in your analysis. Sales Growth and Profitability Ratios Average for fiscal years 1986 to 1999 Fiscal year 1999 Fiscal year 2000 Sales Growth Rate 27.2% 19% Return on Equity (ROE) 25.2% 26.5% 20.9% NOPAT/Sales 4.7% 6.0% 5.6% Sales/Net Assets 4.34 3.75 3.53 Operating ROA 19.6% 22.6% 19.8% Spread 18.4% 22.9% 22.4% Net Financial Leverage 0.37 0.17 0.05 Financial Leverage Gain 5.7% 4.0% 1.1% 2. What is your estimate of the intrinsic value of Home Depot's stock as of February 1, 2001, assuming that it will have: (a) the same sales growth rate as in fiscal 2000 for the next fifteen years, (b) a growth rate of 11% beyond year 15, (c) maintain its fiscal 2000 NOPAT margin for the next 15 years and beyond, (d) maintain its fiscal 2000 net working capital to sales ratio, net operating assets to sales ratio for the next 14 years and beyond, (e) maintain its fiscal 2000 book net debt to net capital ratio for the next fourteen years and beyond, (f) a risk free rate of 5.8%, cost of debt of 6%, common equity beta of 1.09, and a market risk premium of 7%. 3. What set of assumptions regarding Home Depot's future growth rate, NOPAT margin, are consistent with its observed stock price of $48.20 on February 1, 2001? Assume that all the other assumptions remain the same as in question 2, except for the market risk premium, which is now assumed to be only 4%. 4. Do you think Home Depot can achieve the performance assumptions in question 2, based on its growth strategy?
Question 5
ASSIGNMENT Write a memorandum addressing each of the three issues listed below. The memorandum should be no less than one page and no more than three pages in length. FACTS Mr. Kim is the sole shareholder and CEO of KimTech, Inc., a technology company valued at approximately $5,000,000. KimTech is a C corporation for federal tax purposes. In 2007, KimTech had net pretax profits--before deducting Kim's compensation--of $1,000,000. After deducting Kim's base salary of $100,000 and bonus of $800,000, the company was left with a small after-tax profit, which was retained by KimTech (i.e., no dividends were paid to Kim). KimTech has two other officers, a CFO and a VP of Sales and Marketing, each of whom received salaries of $100,000 and no bonuses. Kim's bonus was awarded by the board of directors, which consists of three directors: Kim, who serves as Chairman, the CFO and the VP of Sales and Marketing. In determining Kim's bonus, the board multiplied pretax profits, before Kim's compensation, by 80% (i.e., $1,000,000 x .8 = $800,000 bonus). In recent years, KimTech's value has been appreciating at 7% per year. Assume that the average compensation for CEOs of similar-sized companies in the same industry is $500,000 (salary and bonus combined). APPLICABLE LAW Use the typical tax resources both primary and secondary which include statutes, regulations, and court decisions to formulate your advice regarding each of the three issues listed below: ISSUES 1. Assuming that 2007 is a typical year for KimTech, in terms of profitability and compensation practices, evaluate the reasonableness of Kim's compensation package in light of the five factors enumerated in the Elliotts case. If audited by the IRS, will Kim's compensation be deemed reasonable? Why or why not? What can KimTech do to show that Kim's compensation is reasonable? 2. Assuming that 2007 is a typical year for KimTech, in terms of profitability and compensation practices, evaluate the reasonableness of Kim's compensation using the independent investor/return on equity approach. Is Kim's compensation package reasonable under this test? Why or why not? 3. Is contingent compensation (e.g., a compensation package involving a significant bonus) more likely to result in a determination that compensation is unreasonable than a compensation package that is all, or primarily, a fixed salary? FORMAT Use the following heading and other specifics: MEMORANDUM TO: Mr. Kim FROM: Your Name DATE: Today?s Date RE: Tax Memo #2-Executive Compensation For each issue, begin by restating the issue. Then, explain and discuss the tax rules that apply to the issue, which you gleaned from the sources listed in the Applicable Law section above. Then, conclude with a definitive answer to the issue, supported by citations to the sources used. So, for each issue, you should: State the issue, Explain and discuss the applicable law (IRC sections, regulations, court decision, etc.), and Present your answer in the form of a concluding paragraph that refers to specific language from the IRC sections, regulations, court decisions, and other sources (if applicable) to support the conclusion. CITATIONS Citations are required. You must provide cites whenever you refer to the sources of tax law used in this memorandum. You may cite your sources in numbered footnotes, numbered endnotes, or in parentheses immediately after the sentence mentioning the cited source.
