A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? Number of years (N) = 10, future value (FV) = 1000, interest rate (I/YR) = 9 0.074 * 1000 = 74 = PMT or annual payment, I then pressed CPT on my financial calculator to compute the price of the bond and then pressed PV or present value. The fair value of the bond is $897.32.

Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using coupon rate to calculate present value of annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?

Current market value = D1/(Required return – growth rate) = 5.60/(10%-6%) = $140 A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock? Required Return = Dividend/Market Price

A14.(Stock Valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarterly). What is the stock worth? Perpetual Quarterly Preferred Dividend (D) = $1.00

Annual Dividend ($1.00 x 4.00) = $4.00
Annual Percentage Rate (APR) = 12%
Preferred Stock Value (P0) = (D / R)
Preferred Stock Value (P0) =...

...A-3 (Coverage ratio) The firm in the two preceding problems also had $6 million of principal repayments during the latest 12 months. Its marginal tax rate is 40%. Calculate the debt service coverage ratio.
Debt-Service Coverage Ratio = (EBIT + 1/3 Rentals) / (Interest Expense + 1/3 Rentals + Principal Repayments / (1 - T)) = ($30 + $15 / 3) / ($10 + $15 / 3 + $6 / (1 - 0.40)) = 1.40
A-4 (WACC with rebalancing) Nathan’s Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of r
of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of rd = 26%. What is Nathan’s WACC?
WACC = r - T* L rd [(1 + r) / (1 + rd)]
WACC = 0.43 - 0.20 x 0.52 x 0.26 [(1 + 0.43) / (1 + 0.26)] = 0.3993 = 39.93%
A-10 (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend...

...ProblemSets
Chapter 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of Annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
Current market value = D1/(Required return – growth rate)
= 5.60/(10%-6%) = $140
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required Return = Dividend/Market Price
Dividend = $3.38
Market Price = $45.25
Required Return = $3.38 / $45.25
Required Return = 7.47%
A14.(Stock Valuation) Suppose Toyota has nonmaturing...

...The following formula calculates the present values: PV = FV/ (1+r) ^t, where
FV is the cash flow, discount rate r = 11%, t = year.
From there: 1st year = $2.00 x 0.901= PV= $1.80
2nd year = $2.20 x 0.802 = PV= $1.79
3rd year = $35.40 x 0.731 = PV=$25.88
Total PV= $29.47
Thus, the PV of total benefit is $29.47
Chapter 9 # 22: Alternative present values
Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative?
Answer: I found two answers for the same problems. One is bringing the present value to the future and the other is bringing the future value to the present. In each one of them, different solutions were proposed.
A. Present Value to the future
Option 1: $10,000 now with 11% interest.
$10,000 x 11% = $11,100(10,000 + 1,100)
1,100 x 8 yrs = $8,800 + $10,000 = $18,800
$10,000 now with 12% interest.
$10,000 x 12% = $11,200 (10,000 + 1,200)
1,200 x 8 yrs = $ 9,600 + 10,000 = $19,600
Option 2: $2,000 a year for eight years.
$2,000 x 11% = $2,220
$2,220 x 8 Years = $17,760
$2,000 x 12% = $2,240
$2,240 x 8 Years = $17,920
Option 3
$24,000 at the end of eight years.
Choice: Option 3. The rate of return in Options 1 and 2 is less than what is...

...PROBLEMSET # 1
Instructions:
1) Open book, open notes limited to only class materials.
2) Unlimited time.
3) This must be reflective of your individual effort. GMU Honor Code applies.
4) The ProblemSet #1 (only the question solutions portion) is due at the end of the day on September 24th.
5) Show all work, as partial credit will be given for each question’s answer. Organize your work so it is easy to follow. You can use word, power point, excel or combinations of the above.
6) Return the Solutions pages to be graded. Put a copy in the course folder and send me an electronic copy that I will grade and return to you along with the approved solution.
7) The exercise is worth 100 points.
8) GOOD LUCK
Name: ________________________________
1) You are savings for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $21,000 per year per child, payable at the end of each school year. The annual interest rate is 15%. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. (15 points)
How much money must you deposit in an account to fund your children’s education?
2) My spouse and I are each 62 and hope to...

...Problem 8-3.
For each of the following situations, the present value concept should be applied:
1. Your wealthy aunt just established a trust fund for you that will accumulate to a total of $100,000 in 12 years. Interest on the trust fund is compounded annually at an 8% rate. How much is in your trust fund today?
2. On January 1, you will purchase a new car. The automobile dealer will allow you to make increasing annual December 31 payments over the following four years. The amounts of these payments are $4,000; $4,500; $5,000; $6,000. On this same January 1, your mother will lend you just enough money to enable you to meet these payments. Interest rates are expected to be 8% for the next five years. Assuming that you can earn annual compounding interest by depositing the loan from your mother in a bank, what is the minimum amount your mother must loan you to enable you to meet the car payments?
3. In settlement of a claim for your recently wrecked car, your insurance company will pay you either a lump sum today or three annual payments of $3,100 starting one year from now. Interest rates are expected to be 6 percent for the next five years. What is the least amount of money that you should be willing to accept today?
4. What is the present value of $3,000 a year to be received in years 3 through 11, assuming a 12 percent discount rate?
Problem 8-5
How would the following be disclosed on W & H Company’s...

...Content Area TextSet
Standard
The standard is for a 5th grade Social Studies class according to the Georgia Performance Standards.
SS5H6: The student will explain the reasons for America’s involvement in WW II.
a. Describe Germany’s aggression in Europe and Japan’s aggression in Asia.
b. Describe major events in the war in both Europe and the Pacific; include Pearl Harbor, Iwo Jima, D-Day, VE and VJ Days, and the Holocaust.
c. Discuss President Truman’s decision to drop the atomic bombs on Hiroshima and Nagasaki.
d. Identify Roosevelt, Stalin, Churchill, Hirohito, Truman, Mussolini, and Hitler.
e. Describe the effects of rationing and the changing role of women and African-Americans; include “Rosie the Riveter” and the Tuskegee Airmen.
f. Explain the U.S. role in the formation of the United Nations.
Annotated Bibliography
Amy, L. (2006). A Place Where Sunflowers Grow. San Francisco, CA, USA: Children's Book Press.
This book is inspired by her own family’s experiences during World War II. It is about Japanese Americans being placed in internment camps during World War II. A Place Where Sunflowers Grow has an excellent multicultural appeal because it is written from the viewpoint of a child that is ethnically Japanese so it could allow students to view this event from a different perspective. It contains a lot of really attractive illustrations which could appeal to students and help them visualize the story. This book also would...

...
1. EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?
Sales
$1,800.00
Costs
1,400.00
Depreciation
250.00
EBIT
$ 150.00
Interest expense
70.00
EBT
$ 80.00
Taxes (40%)
32.00
Net income
$ 48.00
a.
$81.23
b.
$85.50
c.
$90.00
EBIT $150.00
d.
$94.50
Tax Rate 40%
e.
$99.23
NOPAT=$90.0
2. Tibbs Inc. had the following data for the year ending 12/31/07: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)?
a.
14.91%
NOPAT = $400
b.
15.70%
To OCap=$2500
c.
16.52%
NOPAT
d.
17.39%
TOC = ROIC
$400/$2300=
e.
18.26%
3.
Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by...

...Me1
ProblemSet #2
The US College Enrollment and the “Third Law of Demand”
A theorem proposed by Professors Alchian and Allen in their text, University Economics (1964) has had several rebirths of interest in the literature. The so-called “third law of demand,” or “relative price theorem,” holds that a fixed cost added to a good of varying quality causes the consumer to prefer the category considered of higher quality to the lower.
Recently a number of studies, keeping this theorem in mind have looked into a relationship between the ratio of public to private enrollment and unemployment in cross-sectional as well as in time series data. Part of the full cost of participating in higher education is foregone employment income. In their regression model, these studies have regressed the public/private ENROLLMENT RATIO (as an indicator of relevant demand) against UNEMPLOYMENT RATES (as an indicator of cost) as well as a number of variables designed to account for “other things” which tend to vary at the same time, such as income, financial aid and tuition ratios. Tuition ratio is typically specified as the ratio of the full cost (including forgone employment income) of public higher education (Pa) to private higher education (Pb), where Pa is less than Pb.
In Table 1, below, a cross-sectional model reveals the relationships between relative education demands by public and private university students (as measured by state level...