Question 1
2) The higher an asset?s Beta, a. The more responsive it is to changing market returns b. The less responsive it is to changing market returns c. The higher the expected return will be in a down market d. The lower the expected return will be in an up market 3) The _____________ is/are a graphic depiction of the term structure if interest rates. a. Yield curve b. Supply and demand functions c. Risk-return profile d. Aggregate demand curve 4) ____________ yield curve reflects higher expected future rates of interest. a. An upward sloping b. A flat c. A downward sloping d. A linear 5) What is the nominal rate of return on an IBM bond if the real rate of interest is 3 percent, the inflation premium is 2 percent, the US T-Bill rate is 5 percent, the maturity risk premium on the IBM bond is 3 percent, the default risk premium on the IBM bond is 2 percent, and the liquidity risk premium on the bond is 1 percent? a. 16% b. 13% c. 11% d. 9% 6) The _________ feature permits the issuer to repurchase bonds at a stated price prior to maturity. a. Call b. Conversion c. Put d. Capitalization 7) The _______ feature allows the bondholder to change each bond into a stated number of shares of stock. a. Call b. Conversion c. Put d. Capitalization 8) ________ are debt rated Ba or lower by Moody?s or BB or lower by Standard & Poor?s, and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers of other firms, particularly during the 1980?s. a. Subordinated debentures b. Mortgage bonds c. Junk bonds d. Equipment trust certificates 9) A project that costs your company $585,000 today will generate cash inflows for the next 7 years of $142,000 per year. Your boss uses a discount rate of 15%. All other things equal, and using the ?Net Present Value method,? you will advise the boss to: a. REJECT because the Net Present Value is ($219,960) b. REJECT because the Net Present Value is ($5,720) c. ACCEPT because the Net Present Value is $590,720 d. ACCEPT because the Net Present Value is $5,720 10) The less certain a cash flow, then the _______ the risk, and the _______ the present value of that cash flow a. Lower; higher b. Lower; lower c. Higher; lower d. Higher; higher 11) Holders of equity capital a. Own the firm b. Receive interest payments c. Receive guaranteed income d. Have loaned money to the firm 12) If bankruptcy were to occur, common stockholders would have a prior (senior) claim on assets over: a. Preferred stockholders b. Secured creditors c. Unsecured creditors d. No one 13) An 8% preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of a. $4.00 b. $8.00 c. $8.80 d. $80.00 14) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8% annual dividend. The firm also has 5,000 shares of common stock outstanding. If the preferred stock is cumulative and the Board of Directors has not paid a dividend for the past two years, then in the current year how much must the preferred stockholders be paid prior to paying any dividends to the common shareholders? a. $8,000 b. $16,000 c. $24,000 d. $25,000 15) Treasury stock results from the a. Firm selling stock for greater than its par value b. Cumulative feature on preferred stock c. Repurchase of outstanding stock by the company d. Authorization of additional shares by the Board of Directors
Question 2
In 2008, Dub Tarun founded a firm using $200,000 of his own money, $200,000 I senior (bank) debt, and an additional $100,000 in subordinated debt borrowed from a family friend. The senior debt pays 10% interest, while the sub debt pays 12% interest and is convertible into 10% of the firm?s equity ownership at the option of the investor, J Martin Capital. Both debt issues have 10-year maturities. In March 2009, the firm?s financial structure appeared as follows: DUB TARUN INC., MARCH 2009 ACCOUNTS PAYABLE $100,000 SHORT-TERM NOTES 150,000 TOTAL SHORT-TERM DEBT 250,000 SENIOR DEBT (10% INTEREST RATE) 200,000 SUB DEBT (12% INTEREST RATE, CONVERTIBLE INTO 10% STOCK) 100,000 EQUITY (DUB TARUN) 200,000 TOTAL DEBT AND EQUITY 750,000 Dub has determined that he needs an additional $250,000 if he is going to continue to grow his business. To raise the necessary funds, he intends to use an 8% convertible preferred stock issue. Dub projects that the firm?s EBITDA (earnings before interest, taxes, depreciation, and amortization) in five years will be 650,000. Although Dub isn?t interested in selling his firm, his banker recently told him that businesses like his typically sell for five to seven times their EBITDA. Moreover, by March 2014, Dub expects that the firm will have 300,000 in cash and that the firm?s pro forma debt and equity will be as follows: DUB TARUN INC. PRO FORMA FINANCIAL STRUCTURE, MARCH 2014 ACCOUNTS PAYABLE 200,000 SHORT-TERM NOTES 250,000 TOTAL SHORT-TERM DEBT 450,000 SENIOR DEBT (10%) 400,000 SEB DEBT (12%, CONVERTIBLE INTO 10% OF THE FIRM?S STOCK) 100,000 EQUITY (DUB TARUN) 800,000 ADDITIONAL FINANCING NEEDED 250,000 TOTAL DEBT AND EQUITY 2,000,000 A. What would you estimate the enterprise value of Dub Tarun Inc. to be on March 2014? (HINT: ENTERPRISE VALUE IS TYPICALLY ESTIMATED FOR PRIVATE COMPANIES USING A MULTIPLE OF EBITDA PLUS THE FIRMS CASH BALANCE.) IF THE SUB DEBT CONVERTS TO COMMON IN 2014, WHAT IS YOUR ESTMATE OF THE VALUE OF THE EQUITY OF DUB TARUN IN 2014? B. IF THE ESTIMATED ENTERPRISE VALUE OF THE FIRM EQUALS YOUR ESTIMATE IN QUESTIONS A, WHAT RATE OF RETURN DOES THE SUB DEBT HOLDER REALIZE IF HE CONVERTS IN 2014? WOULD YOU EXPECT THE SUB DEBT HOLDER TO CONVERT TO COMMON STOCK? C. IF THE NEW INVESTOR WERE TO REQUIRE A 45% RATE OF RETURN ON HIS 250,000 PURCHASE OF CONVERTIBLE PREFERRED STOCK, WHAT SHARE OF THE COMPANY WOULD HE NNED, BASED ON YOUR ESTIMATE OF THE VALUE OF THE FIRM?S EQUITY IN 2014, WHAT IS YOUR ESTIMATE OF THE OWNERSHIP DISTRIBUTION OF DUB TARUN?S EQUITY IN 2014, ASSUMING THAT THE NEW INVESTOR GETS WHAT HE REQUIRES (TO EARN HIS 45% REQUIRED RATE OF RETURN) AND THE SUB DEBT HOLDER CONVERTS TO CMMON? WHAT RATES OF RETURN DO EACH OF THE EQUITY HOLDERS IN THE FIRM EXPECT TO REALIZE BY 2014, BASED ON YOUR ESTIMATE OF EQUITY VALUE? DOES THE PLAN SEEM REASONABLE FORM THE PRESPECTIVE OF EAH OF THE INVESTORS? D. WHAT WOULD BE DUB TARUN?S EXPECTD RATE OF RETURN IF THE EBITDA MULTIPLE WERE FIVE OR SEVEN? E. WHAT WAS THE POST-INVESTMENT AND PRE-INVESTMENT VALUE OF DUB TARUN?S EQUITY IN 2009, BASED ON THE INVESTMENT OF THE NEW INVESTOR?,Please complete it by 14th as the daedline to post my answer is 14th.
Question 3
ACCT 613 Multiyear tax case Susan owns a snowmobile manufacturing business, and Bruce owns a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. Susan and Bruce have decided to consolidate their businesses as one operation. In so doing, they expect to increase their sales by 15% annually and cut their costs initially by 30%. Susan and Bruce own their businesses as sole proprietors and provide the following summary of their 2011 taxable incomes: Susan Bruce Business income Sales $600,000 $450,000 Cost of goods sold (400,000) (300,000) Other expenses (100,000) ( 75,000) Business taxable income $100,000 $ 75,000 Other taxable income (net of allowable deductions) 20,000 35,000 2011 taxable income $120,000 $110,000 Susan and Bruce don?t know what type of entity they should use for their combined business. They would like to know the tax implications of forming a partnership versus a corporation. Under either form, Susan will own 55% of the business and Bruce will own 45%. They each require $70,000 from the business initially and would like to increase that by $6,000 per year. Based on the information provided, do a three-year projection of the income of the business and the total taxes for a partnership and for a corporation. In doing the projections, assume that after the initial 30% decrease in total costs, their annual costs will increase in proportion to sales. Also, assume that their nonbusiness taxable income remains unchanged. Use the 2011 tax rate schedules to compute the tax for each year of the analysis. (page 98 in http://www.irs.gov/pub/irs-pdf/i1040gi.pdf)
Question 4
Harrington Explorations Inc. is interested in expanding it copper mining operations Indonesia. The area has long been noted for its rich deposits of copper, ore with copper prices at near record levels, the company is considering an investment of $60 million to open operations into a new vein of ore that was mapped by company geologists four years ago. The investment would be expensed (a combination of depreciation of capital equipment and depletion costs associated with using up the ore deposits) over five years toward a zero value. Because Harrington faces a corporate tax rate of 30%, the tax savings are significant. The company's geologists also estimate that the ore will be of about the same purity as existing deposits, such that it will cost $150 to mine and process a ton of ore containing roughly 15% pure copper. The company estimates that there are 75,000 tons of ore in the new vein that can be mined and processed over the next five years at a pace o 15,000 tons per year. Harrington's CFO asked one of his financial analysts to come up with an estimate of the expected value of the investment using the forward price curve for copper as a guide to the value of the future copper production. The forward price curve for the price per ton of copper spanning the next five years when the proposed investment would be in production is as follows: 2011 - $7,000/Ton 2012 - $7,150/ton 2013 - $7,200/ton 2014 - $7,300/ton 2015 - $7,450/ton In a study commissioned by the CFO last year, the firm's cost of capital was estimated to be 9.5%. The risk-free rate of interest on five year Treasury bonds is 5.5%. A - Estimate the after-tax (certainty-equivalent) project free cash flows for the project over its five year productive life. B - Using the certainty-equivalent valuation methodology, what is the NPV of the project using the certainty-equivalent methodology and its is negative. When the firm's CFO sees the results of the analysis, he suggests that something must be wrong because his own analysis using conventional methods (i.e. expected cash flows and the firm's weighted average cost of capital) produces a positive NPV of more than $450,000. Specifically, the estimates that the price of copper for 2011 would indeed be $7,000 per ton but that this would increase 12% per year over the five-year life of the project. How should the analyst respond to the CFO's concerns? (spreadsheet attached)
Question 5
Esche Company manufactures ice rink resurfacers (known as zambonis). Esche manufactures one of its ice rink resurfacers with an estimated economic life of 12 years and leases it to Spectacor for a period of 10 years under a non-cancelable lease. The normal selling price of the machine is $210,482 and its guaranteed residual value at the end of the lease term is $20,000. Spectacor will pay annual payments of $30,000 at the beginning of each year plus all maintenance, insurance, and taxes. Esche incurred costs of $135,000 in manufacturing the equipment. Esche believes that the collectibility of the lease payments is reasonably predictable and that no additional costs will be incurred during the lease period. The implicit rate used is 10%. Required: 1. What kind of lease is this to the lessor and to the lessee? 2. At lease inception, what is the ? Gross investment? ? Unearned interest revenue? ? Sales price? ? Cost of sales? 3. Prepare a 10 year lease amortization schedule using excel. Turn in the schedule and an excel sheet that shows the formulas you used in excel for the Lr and Le. You can get assistance from excel help on how to do a printout of the cell formulas. 4. Prepare all of the lessor?s entries for the inception of the lease and the first, second and tenth years. Spectacor returns the machine at the end of the lease. Unfortunately, the value of the machine at the end of the lease has a value of only $18,000 (lower than the guaranteed value of $20,000). What would Spectacor be required to do when it returns the machine? What entries would Esche make when the machine is returned? 5. List all the entries made by Spectacor in the final year of the lease. (round all numbers to the nearest dollar)
