FIN516 – WEEK 2  HOMEWORK ASSIGNMENT
PROBLEM BASED ON CHAPTER 15 – WACC AND THE HAMADA FORMULA
Bickley Engineering Company has a capital structure of 30% Debt and 70% Equity. Its current Beta is 1.3, and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley?
Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The remaining long term debt will be at 7%. The marginal tax rate will remain the same. What will be Bickley’s new Beta with this new 15/85 capital structure? What is the WACC (Weighted Average Cost of Capital) of Bickely with its 30/70 capital structure? Bickley’s average borrowing rate with this capital structure is 7.5%. What will be Bickley’s WACC with its 15/85 capital structure?
PROBLEM BASED ON CHAPTER 26 – MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS Yancey Industries’ Free Cash Flow for the past 12 months is $2.0 Million, and the future expected growth rate of this FCF is 6.5%. Yancey has no debt in its current capital structure. Its Cost of Equity is 11.5%. Its tax rate is 35%. (Hint use Equations 2616 and 2617 from the textbook.) Calculate the Unlevered Value of Yancey (Vu).
Calculate VL and rsL for the scenario whereby Yancey uses $8.0 Million Debt costing 8%. Using the Unlevered Value from above calculate VL and rsL by using the M&M Model (with taxes) for Yancey using $8.0 Million Debt costing 8%.
...Home Depot Fiscal year end of Jan. 29, 2012
1. What is the name of the company? Home Depot.
What is the industry sector? Home Improvement Retailer.
2. What are the operating risks of the company?
* Uncertainty regarding current economic conditions.
* Competition.
* Timely identifying changes in demand.
* Relationships with suppliers and disruptions in the supply chain.
* Failure of key information technology or process; including customer facing and privacy disruptions and disruptions in the interconnected retail strategy.
* Inflation or deflation and the rise of COGS.
* Changes in the ability to obtain favorable financing.
3. What is the financial risk of the company (the debt to total capitalization ratio)?
Using the Fiscal YE filings 1/29/2012 balance sheet: $10,788 Million (debt…. Long Term Bank Loans, Bonds & Debentures, and their Short Term Portions) / $116,918 Million (equity + debt) = .09x (times) Which is very strong. There is financial risk in HD’s exposure to the market in terms of fluctuations in interest rates, and Interest swap arrangements to manage the fixed/floating debt portfolio.
4. Does the company have any preferred stock? No
5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt, ($10,788) Preferred Stock (if any) (none), and market value of Common Stock issued and outstanding? (# shares outstanding 1.537 billion x $69.05 current...
...FIN516WEEK 1 – HOMEWORK ASSIGNMENT
Problem Based on Chapter 14, Residual Dividends
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012.
1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?
NI Increased by 8%= $15,000 * .08= $16,200,000
Total dividends payout = $3,000,000 * .08 = $3,240,000
2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%?
$3,240,000/$16,200,000 = .20
The 2012 payout ratio is 20%
3. If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividends payout ratio?
Residual Dividends Payout Ratio is: 52%
0.65 * $12,000,000 = $7,800,000
$16,200,000  $7,800,000 = $8,400,000
$8,400,000 / $16,200,000 = 0.52
4. How much additional...
...Fin516  Minicase  John Deere & Co

FIN516Week2  MINI – CASE ASSIGNMENT 
Deere & Company (NYSE:DE) 

A fundamental Analysis into the financial performance of Deer and Company (NYSE :DE ), better known as JOHN DEERE & CO. 
FIN516 – WEEK2 – MINI – CASE ASSIGNMENT
Deere & Company (NYSE:DE)
1. What is the name of the company? What is the industry sector?
Deere & Company also more commonly known as John Deere, along with its subsidiaries, operates in three segments: agriculture and turf segment, construction and forestry segment and financial services segment. The John Deere agriculture and turf segment manufactures and distributes a full line of agricultural and turf equipment and related service parts. John Deere construction, earthmoving, material handling and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, fourwheeldrive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skidsteer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a variety of attachments. The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment
2. What are the operating risks of the...
...Received:  20 of 20 
 Comments:  


2.  Question :  (TCO D) The State of Idaho issued $2,000,000 of seven percent coupon, 20year semiannual payment, taxexempt bonds five years ago. The bonds had five years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be five percent of the face amount. Today 15year, five percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be two percent. What is the net present value of the refunding? Because these are taxexempt bonds, taxes are not relevant.
(a) $278,606
(b) $292,536
(c) $307,163
(d) $322,521
(e) $338,647 

 Student Answer:   (a) $278,606 Cost of refunding: Call Premium = 5% (2mil) = 100,000 Floatation cost = 2% (2mil) = 40,000 Total investment outlay = 140,000 Interest on old bond = 7%/2(2mil) = 70,000 Interest on new bond = 5%/2(2mil) = 50,000 Savings = 20,000 PV of savings, 30 periods at 5%/2 = 418,606 NPV of refunding = PV of savings  cost of refunding = 278,606 
 Instructor Explanation:  Answer is: a
Chapter 20, pp. 810  815
Call premium: 5%
Old rate: 7%
Flotation %: 2%
New rate: 5%
Amount: $2,000,000
Years: 15
Cost of refunding:
Call premium = 5%...
...Mini Case: Google
Christina Santino
FIN516:Advanced Managerial Finance
July 21, 2013
What is the name of the company? What is the industry sector?
Google Inc. is a multibillion dollar company in the informational technology (IT) industry.
Google Inc. is one of the leading computer search engines in the world and is continuing to grow as the
front runner in their industry.
What are the operating risks of the company?
Within business, there will always be operational risks to consider. "Operating risk is the basic
or fundamental potential for failure that is associated with the ongoing function of any type of business
entity" (Tatum, 2003, para. 1). The operating risks for Google Inc. include: internal fraud, destruction of
company property, and quality of goods.
Internal fraud is common in almost all industries and the same is true for the IT industry. Google
Inc. is no exception to this type of operating risk, especially because of how much Google Inc. is worth.
Yahoo Finance displayed the net worth of Google Inc. after the second quarter of 2013 to be $55.80B
(Yahoo Inc., 2013, Financial Highlights, para. 4). With profit so high, there is always a risk that
employees could defraud the company for their own personal benefit.
Another potential operating risk for Google Inc. is destruction of company property. Being in the
IT industry, the equipment used can be very expensive . The amount of...
...will be the payoff of the call?
• Payoffmax=(50s) = max (5540)=15 the Ford owner will gain $15
b. If the stock is trading at $35 in 3 months, what will be the payoff of the call?
• Payoffmax=(35s) = max (3540)=5 the owners will gain $5
c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Payoff Stock Price
15 55
5
Problem 208 on Put Options based on Chapter 20
(Excel file included)
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.
a. If the stock is trading at $8 in 6 months, what will be the payoff of the put?
• Payoffmax=(10s)=max (108) the owner of put option will gains $2
b. If the stock is trading at $23 in 6 months, what will be the payoff of the put?
• Payoffmax=(10s)=max (1023)=13 the owner of put option will loses $13
c. Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.
Cashflow
$10.00
$10.00 stock price
Problem 2011 on Return on Options based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 203. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.
a. Compute the breakeven IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option
9/12...
...540000
P(x) = 54x  540000
(a) (54)(12,000) = 648,000 minus 540,000 = $108,000 (Profit)
(b) (54)(15,000) = 810,000 minus 540,000 = $270,000 (Profit)
(c) (54)(20,000) = 1,080,000 minus 540,000 = $540,000 (Profit)
d. Find the degree of operating leverage for the production and sales levels given in part (c).
Degree of operating level = total contribution divided by (total contribution  fixed costs)
(a) DOL = (54)(12,000) divided by (54 times 12000  540000)
648,000 divided by 108,000 = 6
(b) DOL = (54)(15,000) divided by (54 times 15000  540000)
810,000 divided by 270,000 = 3
(c) DOL = (54)(20,000) divided by (54 times 20,000 – 540,000)
1,080,000 divided by 540,000 =2...
...copies that the publisher expects to sell in year 3 and 4. (If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answers to the nearest whole number.)
Number of copies sold after 3 years
Number of copies sold in the fourth year
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Question 2
Find the present value of $3,500 under each of the following rates and periods.
(If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answer to the nearest penny.)
a. 8.9 percent compounded monthly for five years.
Present value
$
b. 6.6 percent compounded quarterly for eight years.
Present value
$
c. 4.3 percent compounded daily for four years.
Present value
$
d. 5.7 percent compounded continuously for three years.
Present value
$
2949.88
Question 3
Trigen Corp. management will invest cash flows of $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 percent, what is the future value of these investment cash flows six years from today? (Round answer to 2 decimal places, e.g. 15.25.)
Future value
$
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Question 4
You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your software into their...