Multiple Choice
Identify the choice that best completes the statement or answers the question.

1)Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell? |A. |$801.80 | |B. |$814.74 | |C. |$828.81 | |D. |$830.53 | |E. |$847.86 |

2)Brown Enterprises' bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity? |A. |6.87% | |B. |7.03% | |C. |7.21% | |D. |7.45% | |E. |7.61% |

3)Kholdy Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between the bond's YTM and its YTC? |A. |1.48% | |B. |1.54% | |C. |1.68% | |D. |1.82% | |E. |1.91% |

4)A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now? |A. |$933.09 | |B. |$941.86 | |C. |$951.87 | |D. |$965.84 | |E. |$978.40 |

5)Which of the following statements is CORRECT?
|A. |The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in | | |interest rates....

...markets with less competition. Revenue enhancement investment- entering a new market Cost-reduction investment- installing more efficient equipment, Mandatory investment- government regulated, safety material. NPV = PV of inflows – Cost= Net gain in wealth.. If projects are independent, accept if the project NPV > 0. If projects are mutually exclusive, accept projects with the highest positive NPV, those that add the most value. In this example, accept S if mutually exclusive (NPVS > NPVL), and accept both if independent.
[pic] [pic]
[pic] [pic]
Quiz
Internal rate of return, IRR, will increase as the required rate of return of a project is increased? False. If the project’s payback period is greater than or equal to zero, the project should always be accepted? False. When several sign reversals in the cash flow stream occur, the IRR equation can have more that one positive IRR? True. A new forklift under consideration by Home Warehouse requires an initial investment of 100,000 and produces annual cash flows of 50,000, 40,000, and 30,000. Which will not change if the required rate of return is increased from 10 to 12 percent? Internal rate of return. A machine cost 1,000 and has a 3 year life span and salvage value of 100. It will generate after-tax annual cash flow of 600/year, starting next year. If required rate of return is 10%, what is NPV? $570. Which are typical consequences of good capital budgeting decisions?...

...Finance 301
1. The NPV for the truck and the pulley are $2026.75 and $5586.05 respectively. Since these projects are independent, the company can choose either project. They both will give the company a return higher than 12% as well. (Math is on last page)
2. A. NPV for Alt A is $1892.17 while the payback is 2.86 years. NPV for Alt B is 2289.66 while the payback is 4.62 years. (Math on last page)
B. Since these projects are mutually exclusive only one can be chosen. Since NVP is a better way of estimating value and return, it should be used when picking between two projects. Therefore, the Smith Pie Company should go with alternative B. Even though Alt B has a longer payback period than Alt A, it will look better in the company assets longer and have a better return.
3. CAPM is equal to the cost of capital, which provides a usable measure of risk for the investor and their investment. It let’s investors know if they will get the return they deserve prior to making any decisions. Also, the higher the risk the higher a return could be.
4. A. 11% is the required return on the stock.
B. Beta is .9
C. The company’s cost of capital is 9.8 percent.
D. If the risk of the project is similar to the risk of the other assets, then the appropriate return is the cost of capital, which in this case is 9.8%
(Math is on last page)
5. The beta for the portfolio is .5 (Math is on last page)
6. The alpha for this portfolio is 1.79 while the beta is .71. What...

...risk that remains even in a well diversified portfolio –recession for example
Unsystematic risk is the risk of an individual stock that disappears when one diversifies their portfolio
Calculate return on stocks in both dollar amounts and percentages
$ return= dividends + capital gains/losses
Total Percentage return= Total $ Return /$ Initial Investment
CAPM: Expected return= risk free rate of return + Beta (Expected Mkt. Return-Risk free rate of return)
Efficient Market Hypothesis
NPV= The Preferred capital budgeting technique
The sum of the present values of all of a projects cash flows, both inflows and outflows, discounted at a rate consistent with the project’s risk. Also, the preferred method for valuing capital investments
IRR: NPV; Payback period (know the pros and cons of these three capital budgeting techniques)
...

...additional shares at price lower than market value, if potential acquirer purchases controlling stake in company
-Stock option: provides for purchase of share of stock at fixed price, exercise price, no matter actual price (have expiration date)
-Employee Stock Ownership Plan (ESOP): facilitates employees’ ownership of stock
Chapter 12
-Capital Budgeting: process of analyzing potential projects
-NVP Method discounts all cash flows at projects cost of capital, sums cash flows. Project should be accepted if NPV is positive, such project increases shareholder value
-Internal rate of return (IRR): discount rate that forces project’s NPV to equal zero. Project should be accepted if IRR is greater than cost of capital
-If projects are mutually exclusive, NPV should be relied upon
-NVP assumes cash flows will be reinvested at firm’s cost of capital, IRR assumes reinvestment at project’s IRR
-MIRR: involves finding terminal value (TV) of cash inflows, compounding them at cost of capital, determining discount rate that forces present value of TV to equal value of outflows. MIRR assumes reinvestment at cost of capital
-Profitability Index (PI) calculated by dividing present value of cash inflows by initial cost, measures relative profitability
-Payback Period: number of years required to recover project’s cost; 3 flaws to regular method: 1. Ignores cash flows beyond payback period 2. Does not consider time...

...exceeds the after-tax cost of equity.
c. The WACC that should be used in capital budgeting is the firm’s marginal, after-tax cost of capital.
d. Retained earnings that were generated in the past and are reflected on the firm’s balance sheet are generally available to finance the firm’s capital budget during the coming year.
e. The after-tax cost of debt is generally more expensive than the after-tax cost of preferred stock.
WACC and capital components Answer: a MEDIUM
xxxvii. For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?
a. The cost of equity is usually greater than or equal to the cost of debt.
b. The WACC exceeds the cost of equity.
c. The WACC is calculated on a before-tax basis.
d. The interest rate used to calculate the WACC is the average cost of all the debt the company has outstanding and shown on its balance sheet.
e. The cost of retained earnings typically exceeds the cost of new common stock.
IRR (Constant cash flows; 3 years) Answer: b EASY
xxxviii. Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Year: 0 1 2 3
Cash flows: -$1,000 $450 $450 $450
a. 16.20%
b. 16.65%
c. 17.10%
d. 17.55%
e....

...FNCE 404 ExamReview – Fall2012
Prof. Eloisa Perez
Q1. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment applications in many other industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Ghana for 10,000,000 cedis, payable in six months. Micca’s cost of capital is 12%.
Assumptions
Values
Shipment of phosphates from Ghana, Ghanaian cedis
10,000,000
Micca's cost of capital (WACC)
12%
Spot exchange rate, cedis/$
1.90
Six-month forward rate, cedis/$
1.95
Expected spot exchange rate in 6 months, cedis/$
2.00
Options on Ghanaian cedis:
Call Option
Put Option
Strike price, cedis/$
2.00
2.00
Option premium (percent)
2.00%
3.00%
United States
Ghana
Six-month interest rate for borrowing (per annum)
4.00%
8.00%
Six-month interest rate for investing (per annum)
2.00%
6.00%
(a) If the company wants to offset their exposure, what options they have? And which one is the best? Why?
Q2. From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 102 and 106, respectively.
(a) If the 2000 $:¥ exchange rate was $0.007692, what should the exchange rate be in 2003?
(b) In fact, the exchange rate in 2003 was ¥1 = $0.008696....

...International finance
FIN 412
Exam #2
MC: Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:
A. fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating- rate debt obligations for fixed-rate interest payments of the other counter party
B. fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency
X- C. A & B
D. none of the above
MC: In the swap market, which position potentially carries greater risks, broker or dealer?
A. Broker
X- B. Dealer
C. They are the same swaps, therefore the same risks D. Not able to tell with given information
MC: Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. This means…
A. The swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR
B. The swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR
X- C. If the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points
D. none of the above
MC: A swap bank has identified two companies with mirror-image financing needs...