Question 1
Required Reading Les Livingstone, Finance made easy, (3nd edition, 2013), available as a modestly priced paperback from Amazon.com. Chapters 1 and 2. Assignment: Answer the problems in the attached file named "Time Value of Money Problems." Submit all answers in a single Excel file. Be sure to show that you understand the concepts. All calculations should be shown, step by step. All answers should be thoroughly explained. If there are excel functions available, you should also use those functions to solve the problems, in addition to the step by step process. Additional consideration will be given to application of these concepts to your own problems. That is, make up your own problems that require use of the tools to solve. ************************ Important topics this week are: Time Value of Money. Risk and Rates of Return. A Power Point slide presentation that fully explains and illustrates this important subject is in the attached file. Also attached are PowerPoint presentations on: Present Value (also known as Discounted Cash Flow, or Time Value of Money). This presentation will explain present value, and show you how to use the Excel financial functions, which will quickly and easily calculate rates of interest, growth rates, and present and future values of cash flows. For your information, the rate of interest is the same thing as the rate of growth, because the rate of interest is the rate at which money grows. To find the rate of interest (or growth) I recommend using the Excel RATE function for a quick and easy solution. Another tip: the "rule of 72" is a handy rule of thumb. It says that any number that is growing at the rate i will double in approximately n periods, and i times n = 72 (approximately). For example: At a 6% rate of interest, $100 will double in 72/6 = 12 periods (because 6 x 12 = 72). In 8 periods, at what rate of interest will $200 double? Answer: at 72/8 = 9% per period (because 8 x 9 = 72). Reminder In all your assignments, make sure that you: 1. Show all your calculations. 2. Use Excel in addition to your computations for item 1. 3. Describe and justify each assumption you have made. 4. Explain, support and justify every statement you make. 5. Support your conclusions with evidence (such as facts and statistics from reliable sources, quotes from the readings, or a well-reasoned logical argument). Examples from your own experience are also helpful. Please bear in mind that analyses and conclusions are only as good as the data and assumptions that they are based on; So ALWAYS support all of your numbers or calculations with reasoning and explanations, and be sure to provide sources for all of your data.
Question 2
31. When the Fed sells bonds, the: Federal funds rate increases. reserve requirement falls. discount rate increases. discount rate decreases. 32. Refer to the graphs. Which of the graphs correctly labels the axes of the AS/AD model? A B C D 33. M2 is the component of the money supply that consists of M1 plus other relatively liquid assets. True. False. 34. Laissez-faire economists believe: government policies do not affect economic activity. government can implement policy proposals that can positively impact the economy. most government policies would probably make things worse. government intervention in the market is necessary for a smoothly operating economy. 35. How many regional banks are in the Federal Reserve System? 6 8 12 15 36. According to Okun's rule of thumb, if the unemployment rate rises from 6 to 9%, then we can expect that output will fall by 3 percent. rise by 6 percent. fall by 6 percent. rise by 3 percent. 37. The primary tool of monetary policy is: the discount rate. the reserve requirement. the prime rate. open market operations. 38. Gold was inconvenient as money due to which characteristic? it was not limited in supply it was not small and light it was not difficult to counterfeit All of the above 39. The marginal propensity to expend equals the ratio of: income to aggregate expenditure. the change in income to a change in aggregate expenditure. aggregate expenditure to income. the change in aggregate expenditure to a change in income. 40. The chairperson of the Federal Reserve Bank is appointed for a 4 year term can serve multiple terms is part of the Federal Open Market Committee (FOMC) All of the above
Question 3
FINANCE 1. If you borrow $10,000 at $900 interest for one year, what is your effective interest cost for the following payment plans? a. Annual payment b. Semi-annual payment c. Quarterly payment d. Monthly payment 2. Use the statement below to solve Problems 3 and 4. Ohlin, Meade, and Assoc. plans to borrow $1 million for 12 months. Citibank gives the firm a stated rate of 10 percent interest. A. What is the effective rate of interest if the loan carries a simple 10 percent interest with a 20 percent compensating balance? B. What is the effective rate of interest if the above loan is an installment loan with 12 payments? 3. Kimberly Ford invested $10,000 10 years ago at 16 percent, compounded quarterly. How much has she accumulated? 4. Mr. Sullivan is borrowing $2 million to expand his business. The loan will be for ten years at 12% and will be repaid in equal quarterly installments. What will the quarterly payments be? 5. Samuel Johnson invested in gold U.S. coins ten years ago, paying $216.53 for one-ounce gold "double eagle" coins. He could sell these coins for $734 today. What was his annual rate of return for this investment? 6. You have an opportunity to buy a $1,000 bond which matures in 10 years. The bond pays $30 every six months. The current market interest rate is 8%. What is the most you would be willing to pay for this bond? 7. State Street Corp. will pay a dividend on common stock of $4.80 per share at the end of the year. The required return on common stock (Ke) is 13.2%. The firm has a constant growth rate of 7.2%. Compute the current price of the stock (Po). 8 . Madison Corporation has a $1000 par value bond outstanding paying annual interest of 7%. The bond matures in 20 years. If the present yield to maturity for this bond is 9%, calculate the current price of the bond using annual compounding. Use annual analysis. 9. The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstanding. Each bond pays interest semi-annually and carries an annual coupon rate of 7%. Some bonds are due in three years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of: a) the bonds with 3 years to maturity? b) the bonds with 10 years to maturity? c) Explain the relationship between the number of years until a bond matures and its price. 10) Royal Petroleum Co. can buy a piece of equipment that is anticipated to provide a 9 percent return and can be financed at 6 percent with debt. Later in the year the firm turns down an opportunity to buy a new machine that would yield a 16 percent return but would cost 18 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm?s capital structure. a. Compute the weighted average cost of capital. b. Which project(s) should be accepted?
Question 4
Your client, the Williams Institute of Technology (WIT) is a 60% partner in the Research industries Partnership (RIP). WIT is widely held Subchapter C corporation and is not subject to the passive loss limitation. WIT is located at 76 Bradford Lane, St. Paul, MN 55164. The controller, Jeanine West, has sent you the following note and a copy of WIT?s 2009 Schedule K-1 from the partnership. Excerpt from clients note: ?RIP expects its 2010 operations to include the following: Net loss from operations $200,000 Capital gain from sale of land $100,000 The land was contributed by Dash, the other partner, when its value was $260,000. The partnership sold the land for $300,000. The partnership used this cash to repay all the partnership debt and pay for operating expenditures, which a tax partner in your firm has said RIP can deduct this year. The net loss of $200,000 reflects that deduction. We want to be sure we can deduct our full share of this loss, but we do not believe we will have enough basis. Items Reported on the 2009 Schedule K-1 WIT?s share of partnership recourse liabilities- $90,000 WIT?s ending capital account balance- $30,000 Draft a letter to the controller that describes the following: ? WIT?s allocation of partnership items ? WIT?s basis in the partnership interest following the allocation. ? Any limitations on loss deductions. ? Any recommendations you have that would allow WIT to claim the full amount of losses in 2010. Assume WIT?s 2009 K?1 accurately reflects the information needed to compute the basis in the partnership interest. Also assume the operating expenditures are fully deductible this year, as the partner said. Your client has experience researching issues in the Internal Revenue Code, so you may use some citations. However, be sure the letter is written in layperson?s terms and cites are minimized.
Question 5
Taylor Corporation wants to raise $20 million. Its stock price is now $20 per share. The new issue will be priced at $18 per share. The underwriters' compensation will be 5 percent of the issue price. The firm will also incur expenses of $200,000. a. How many shares of stock must be sold for the company to net $20 million after costs and expenses? b. The out-of-pocket expenses incurred by the investment banker were $300,000. What profit or loss would the investment banker realize? c. Explain the terms "best efforts basis" and "underwriting" as they are used in investment banking. d. What is the most important single reason for a firm to go public. e. What is the most important single reason for a firm NOT to go public. The Aleander Company plans to issue $20,000,000 of 20-year bonds next June, with semiannual interest payments. The company's current cost of debt is 10 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settle data below for t-bond futures. Delivery Month Settle (1) (5) Dec 102-17 Mar 101-01 June 100-12 a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points. b. Calculate the gain or loss on the corporate bond position. c. Calculate the current value of the futures position. d. Calculate the implied interest rate based on the current value of the futures position e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points. f. Calculate the gain or loss on the futures position. g. Calculate the overall net gain or loss. h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why? How might Wal-Mart (or another large retailer) take advantage of each of the following: Do not merely provide a definition. Provide a specific example of each a. Flexibility option b. Growth option c. Investment timing option d. Abandonment option e. Decision-tree analysis
