nsu fin5130 all modules discussions latest 2017 october

Module 1 discussion Problem set 1 Given the following cash flows for a capital project calculate the Payback period NPV PI IRR and MIRR. The required rate of return is 8 percent. Year CF0 $(50 000.00)1 $15 000.002 $15 000.003 $15 000.004 $15 000.005 $5 000.00Problem set 2 ABC Corporation is considering an investment of €375 million with expected aftertax cash inflows of €115 million per year for seven years and an additional after-tax salvage value of €50 million in Year 7. The required rate of return is 10 percent.What is the investment’sNPV?IRR?MIRR?PI?Payback Period?Problem set 3 You are reviewing a profitable investment project that has a conventional cash flow pattern. Suppose that the cash flows for the project initial outlay and future after-tax cash flows all double you would predict thatthe IRR would increase? decrease? stay the same?the NPV would increase? decrease? stay the same?Problem set 4 Projects 1 and 2 have similar outlays although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects the required rate of return is 10 percent. Year CF for Project 1 CF for Project 20 $(50.00) $(50.00)1 $20.00 $02 $20.00 $03 $20.00 $04 $20.00 $100.00What is the NPV and IRR of the two projects?If the two projects are mutually exclusive what is the appropriate investment decision?Would your answer change if the projects were independent?Problem set 5 A project has the following cash flows. What is the payback period?Year CF0 -50001 27002 33003 14004 3305 340Problem set 6 What is NPV IRR PI MIRR of a project with the following cash flows if the discount rate is 14 percent?Year CF0 -180001 50002 75003 84004 2100Problem set 7 Project A has the following cash flows:Year CF0 -40 0001 8 0002 14 0003 13 0004 12 0005 11 0006 10 000Project B has the following cash flows:Year CF0 -20 0001 7 0002 13 0003 12 000Assuming that the required rate is 12% what is the Equivalent Annual Annuity (EAA) for the two projects? Based on the EAA which project is better?Module 2 discussion Problem set 1 Projected Sales: $18 millionOperating Costs (not including depreciation): $9 millionDepreciation: $4 millionInterest Expense: $3 millionTax rate= 40%What is the project’s operating cash flow for the first year?Problem set 2 The equipment originally cost $12 million of which 75% has been depreciated. The used equipment can be sold today for $4 million and its tax rate is 40%. What is the equipment’s after-tax salvage value?Problem set 3The equipment cost is $50 000 and it would cost another $10 000 to modify it. Assume that the equipment falls into the MACRS 3-year class. The equipment will be sold after 3 years for $20 000. It would require an increase in net working capital of $2 000 at teh start of the project. This working capital would be recovered at the end of the project. The new project will not have an effect on revenues but it is expected to save the firm $20 000 per year in before-tax operating costs mainly labor. The tax rate is 40%.What is the cash flow at time=0?What are the operating cash flows in Years 1-3?What is the terminal cash flow in Year 3?What is the book value of the asset at the end of Year 2?What is the depreciation expense for Year 2?Assume the cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased?Module 3 discussion Problem set 1 One year ago you bought a stock for $36.48 a share. You recently received a dividend of $1.62 per share and sold the stock today for $40.18 a share. What is the dollar return and percentage return on this investment?One year ago you bought 480 shares of ABC Company for $28.32 a share. You recently received a dividend of $0.75 per share and sold the stock today for $35 a share. What is the dollar return and percentage return on this investment?Problem set 2Over the past five years a stock provided annual returns of 12.6 percent 5.8 percent 7.9 percent -11.2 percent and -2.4 percent. What is the arithmetic average return? What is the variance of these returns? What is the standard deviation of these returns?A company had returns of 5% 10% -15% 20% -12% 22% 8% in the last few years. Compute the arithmetic average return and standard deviation of returns.Refer to Problem 2. If inflation rate is 2.5% and the risk-free rate is 3% solve for the real rate and the risk premium. Note: Use arithmetic average return as nominal rateProblem set 3 Suppose the nominal rate is 15% the real rate is 10.5% what is the inflation rate?If the investors require a 10% real rate of return and the inflation rate is 8% what is the nominal rate?The nominal rate is 15.5% and the inflation rate is 5% what is the real rate?Problem set 4 Assume that your portfolio comprises of Stocks A B and C. Based on the following information calculate the portfolio expected return and portfolio beta:Security Value Return BetaStock A $10 000 10% 1.1Stock B $20 000 5% 0.2Stock C $30 000 15% 2.1Problem set 5 A stock has a beta of 0.90 the expected return on the market is 13% and the risk-free rate is 6%. What must the expected return on this stock be?A stock has an expected return of 17% the risk-free rate is 5.5% and the market risk premium is 8%. What must the beta of this stock be?You own a portfolio that has $1 200 invested in Stock A and $1 900 invested in Stock B. If the expected returns on these stocks are 11% and 16% respectively what is the expected return on the portfolio?Problem set 6 There are 3 stocks in a portfolio: Stock A Stock B and Stock C. The portfolio has a return of 3.3%. You are given below the weight of each stock in the portfolio and rate of return. What is the return of Stock C?Stock Weight Rate of ReturnA 35% -4%B 60% 7%C 5% ?Problem set 7 You are given the information for the following securitiesSecurity Weight BetaDCLK .133 4.03KO .2 0.84INTC .267 1.05KEI .4 0.59What is the portfolio beta?Which security has the highest systematic risk?Which security has the lowest systematic risk? Is the systematic risk of the portfolio more or less than the market?Problem set 8 Assume Risk–free rate = 3% Expected return on the market = 8%. Calculate the expected return on the stock if the beta is00.512Interpret your answersProblem set 9 A $100 000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is 1.80 while the beta of stock B is 0.20. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the portfolio is 0.75?Problem set 10 Suppose you hold a diversified portfolio consisting of $7 500 investment in each of 20 different common stocks. The portfolio’s beta is 1.12. Now suppose you sell one of the stocks with a beta of 1.0 for $7 500 and use the proceeds to buy another stock whose beta is 1.75. Calculate your portfolio’s new beta.You have a $2 million portfolio consisting of a $100 000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100 000 worth of one stock with a beta od 0.90 and using the proceeds to purchase another stock with a beta of 1.40. What will the portfolio’s new beta be after these transactions?Problem set 11You want to create a portfolio equally as risky as the market. Given this information fill in the rest of the following table:Asset Investment BetaStock A 20% 0.8Stock B 25% 1.3Stock C ? 1.5Risk-free Asset ? ?Hint: Some questions to answer before you start solving the above table:What is the beta of the market portfolio? risk-free asset?What should the weights of individual securities in a portfolio sum to?Problem set 12 The Treasury Bill rate is 4% and the expected return on the market portfolio is 12%. What is the risk premium on the market?What is the required return on an investment with beta of 1.5?If the market expects a return of 11.2% from Stock X what is its beta?Problem set 13A stock has a beta of 1.2 and an expected return of 16%. A risk-free asset currently earns 5%.What is the beta of the risk-free asset?What is the expected return on the portfolio that is equally invested in the two assets (i.e. stock and risk-free asset)?If a portfolio of the two assets has a beta of 0.75 what are the portfolio weights?If a portfolio of the two assets has an expected return of 8% what is its beta?If the security prices reflect only past prices and trading volume information then the market is (choose one from below):weak-form efficientsemi-strong form efficientstrong-form efficientWhat is the difference between intrinsic value and market value of the asset?The instrinsic value of an undervalued asset is likely _________ than the asset’s market value.Module 4 discussionProblem set 1 Suppose the company is expected to pay a divided of $2.5 and the required rate of return is 10% and the growth rate is 4%. What is the price of the stock after 5 years? after 10 years? after 12 years?Suppose the company just paid a divided of $2.5 and the required rate of return is 10% and the growth rate is 4%. What is the price of the stock after 5 years? after 10 years? after 12 years?ABC’s stock is currently selling for $60 per share. The firm is expected to pay a dividend of $3.60. If the cost of equity is 9% compute the growth rate.Problem set 2Suppose the company just paid dividend of $1. The dividends are expected to grow at 20% in Year 1 and 15% in Year 2. After that the dividends will grow at a constant rate of 5% forever. If the required rate of return is 10% compute today’s price of the stock.Suppose the company just paid dividend of $1. The dividends are expected to grow at 25% in Year 1 and 20% in Year 2 and 15% in Year 3. After that the dividends will grow at a constant rate of 5% forever. If the required rate of return is 10% compute today’s price of the stock.Suppose the company will not pay any dividends in Years 1 and 2. Suppose that the company pays dividend of $1 in Year 3 and after that the dividends will grow at 20% for the next two years. After that the dividends will grow at a constant rate of 5% forever. If the required rate of return is 10% compute today’s price of the stock.Problem set 3 ABC Industries will pay a dividend of $2 next year on their common stock. The company predicts that the dividend will increase by 5% each year indefinitely. What is the dividend yield if the stock is selling for $50 a share? What is the required rate of return?The dividends are expected to grow at 7% per year in the future. ABC’s common stock sells for $23 per share and its last dividend was $2. What is the cost of equity? What is the dividend yield?Module 5 discussionProblem set 1Determine whether the following is a source or use of fund:A dividend is paidIssue of short-term debtLong-term debt decreased by $1 000 000Next year’s taxes are prepaidWages and salaies are paidAccounts receivable balance is reducedAccounts payable balance is reducedMarketable Securities are purchasedMarketable Securities are liquidatedA bank loan is repaidProblem set 2Determine whether the following will INCREASE DECREASE or have NO EFFECT on the operating cycleAccounts payable goes upAccounts receivable goes downCustomers take longer to pay for the goodsPayments to suppliers are acceleratedInventory takes longer to get soldAccounts Receivables Turnover ratio increases from 5 times to 7 timesAccounts Payable Turnover ratio increases from 5 times to 7 timesInventoryTurnover ratio increases from 5 times to 7 timesProblem set 3ABC Corporation has the following sales collection policy: 25% of the sales are on cash and the remainder on credit. 40% of the credit sales are received in the first month after the sale. 40% of the credit sales are received in the second month after the sale. 18% of the credit sales are received in the third month of after the sale. 2% of the credit sales are bad debts and not received. Suppose the company has the following expected sales: Jan $50 000 Feb $60 000 March $70 000 April $45 000 May $66 000. Determine the cash collections for May.ABC Corporation has the following sales collection policy: 25% of the sales are received in the same month 50% of the sales are received in the first month after the sale. 20% of the sales are received in the second month after the sale. The remainder are received in the third month after the sale. Suppose the company has the following expected sales: Jan $50 000 Feb $60 000 March $70 000 April $45 000 May $66 000. Determine the cash collections for May.Problem set 4The terms of trade are 2/15 net 60. Compute the effective rate of forgoing the cash discount.A company has an average collection period of 20 days and A/R balance of $100 000. Compute the annual credit sales. Assume 365 days.A company has an average collection period of 25 days and annual credit sales of $300 000. Compute the A/R balance. Assume 365 days.Problem set 5The terms of the sale were 1/7 net 21. What is the effective annual rate of interest for the credit period for this sale?ABC Company sells 3 500 units of its product each year at a price per unit of $275. All sales are on credit with terms of 1/7 net 30. The discount is taken by 40 percent of the customers. What is the average collection period? What is the amount of the company’s accounts receivable ?ABC Company has an average collection period of 18 days and annual sales of $694 000. What is the average investment in accounts receivables as shown on the balance sheet?Module 6 discussionProblem set 1 Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00 and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros? What is the cross-rate of euros to Swiss francs?Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross rate of Swiss francs to British pound?A trader observes that in the spot exchange market $1 can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. What is the cross-rate between the yen and the peso that is how many yen would you receive for every peso exchanged?Problem set 2 If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar then the forward rate for the Israeli shekel is selling at a ____ to the spot rate. (should the answer be premium or discount?)Problem set 3 In 1985 a given Japanese imported automobile sold for 1 476 000 yen or $8 200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar what would the car be selling for today in U.S. dollarsProblem set 4 Given the following exchange rates which of the following currencies are selling at a premium? In U.S. $ Per U.S. $Canada (Dollar) 0.8077 1.23816-mos forward 0.8096 1.2352Japan (yen) 0.009963 100.376-mos forward 0.009999 100.01Switzerland (franc) 0.8752 1.14266-mos forward 0.8788 1.1379UK (pound) 1.4729 0.67896-mos forward 1.4741 0.6784Problem set 5Suppose the spot exchange rate for the Canadian dollar is C$1.23 and the six-month forward rate is C$1.27.What is worth more a U.S. dollar or a Canadian dollar?Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?Problem set 6 Suppose the Japanese yen exchange rate is ¥106 = $1 and the British Pound exchange rate is £1 = $1.51.What is the cross-rate in terms of yen per pound?Suppose a dealer quotes a rate of ¥165 = £1. Is there an arbitrage opportunity here? If there is explain how to take advantage of the mispricing?Problem set 7 Suppose the Swiss Franc exchange rate is SF 2.00 = $1.00 and the British Pound exchange rate is £0.60 = $1.00. Suppose a dealer quotes a rate of SF 4.00 = £1. Is there an arbitrage opportunity here? If there is explain how to take advantage of the mispricing?