SAINT LEO UNIVERSITY DISTANCE LEARNING PROGRAM MGT 325 – FINANCE FOR MANAGERS HOMEWORK ASSIGNMENTS INSTRUCTIONS: Please show all work, and feel free to attach additional pages as necessary. Full credit will not be given for providing only an answer, even if the answer is correct. Homework assignments are due as specified in the course schedule. HOMEWORK ASSIGNMENT 1 – Due on the same date as Examination 1. 2-1 Use the attached financial statements for Kohl’s Corporation to perform a complete ratio analysis using income statement and balance sheet data from the latest two years shown. Refer to the ratio summary presented in class. 2-2 Using the information below, recreate the financial statements for Imperial Products, Inc. on the attached worksheet. When completing the statement, you may round to the nearest $1.00; use the values exactly as presented below to prevent rounding errors. Please note this problem is separate from problem 2-1 above and uses none of the same data. Cash – $30,000 Marketable Securities – $120,000 Total Revenues – $12,000,000 Inventory Turnover Ratio – 6 times Fixed Asset Turnover Ratio – 4.8 times Cost of Sales – 62.5% of total revenues Other expense – $500,000 Debt Ratio – .59984326 times Notes Payable – $75,000 Acid Test Ratio – .625 times Return on Assets – 11.005% Times Interest Earned Ratio – 4 times Average Collection Period – 18 days Other Long-Term Debt – $450,000 Basic Earning Power – 20% Return on Equity – 27.5017235% Common Stock $350,000 IMPERIAL PRODUCTS, INCORPORATED CONDENSED BALANCE SHEET Current Assets: Cash Marketable Securities Accounts Receivable Inventories Total Current Assets Plant and Equipment (Net) Total Assets Current Liabilities: Accounts Payable Notes Payable Total Current Liabilities Mortgage Payable Other Long-Term Debt Common Stock Retained Earnings Total Liabilities and Owner’s Equity CONDENSED INCOME STATEMENT Revenues Cost of Sales Gross Margin Selling, General & Administrative Expense Other Expense Income Before Interest and Taxes Interest Expense Federal Income Tax Net Income 5-1 The Mastry Corporation is planning to market the E-Z Slim, a home liposuction kit designed to connect to any canister-style vacuum cleaner. This device is a quantum leap in home medical technology, enabling customers to drop their excess weight right into the household Hoover. Market analysts have determined such a unit would have to sell for $29.95 to successfully compete against Ranco’s market-dominating Lipo-Sukka. First year sales projections are for 525,000 units. Equipment investment would result in annual fixed costs of $2,750,000 with unit variable costs of $22.00 and interest costs of $854,250. a. What is the breakeven point in units and dollars for the E-Z Slim? b. What would be the contribution margin and profit on the E-Z Slim, based on projected sales? c. Given a 15% reduction in operating income, what would be the change in income available to common shareholders? d. If first year sales were 20% lower than projected, what would be the percentage change in operating income and income available to common shareholders? Prove it by using the income statement approach. e. If the firm could make investments that would reduce variable costs by 50%, but would increase fixed costs by 100%, what would be the selling price required to break even at 525,000 units? HINT: Rounding can get you in trouble here… HOMEWORK ASSIGNMENT 2 – Due on the same date as Examination 2. 8-1 Compute the annual effective cost of trade credit financing under the following scenarios: a. 1/15 Net 30 when payment is made per credit terms b. 1/15 Net 30 when payment is tendered 30 days late 8-2 Your firm needs a $150,000 one-year loan. Your assistant has sourced the following loan alternatives: a. Bunko of Amerika offers a simple interest loan at 8.75% interest b. The Last Independent Bank and Trust Company offers a discount interest loan at 6.75% with a 7% compensating balance requirement. Your firm currently has no deposits with this bank. c. SilliCorp has offered a 6% loan with interest computed on the add-on basis. d. ScamNorth Bank offers a simple interest loan at 8% interest, but requires a 5% compensating balance. e. Florida Federated Bank offers a discount interest loan at a 6.60% interest rate, and requires a 5% compensating balance. Your firm maintains a deposit relationship with this bank, maintaining an average balance of $1,875. Which loan alternative would you select, and why? For the selected loan alternative, indicate the amount to borrow and the effective interest rate. 9-1 Find the future values as specified: a. $3,000 at 7.50% interest compounded annually for 10 years b. $50,000 at 6.35% interest compounded semiannually for 20 years c. $7,500 at 5.5% interest compounded quarterly for 5 years d. $10,000 at 9.3% interest compounded monthly for 7 years e. $1,500,000 at 6.30% interest compounded monthly for 0.75 years 9-2 What is the impact on the future value of a sum as the number of compounding periods per annum increases? Use one of the examples in 9-1 above to prove your answer. 9-3 Find the present values as specified a. $6,183.09 to be received in 10 years at an annual discount rate of 7.50% with annual discounting. b. $174,561.76 to be received in 20 years at a 6.35% annual discount rate, assuming semiannual discounting. c. $3,000,000 to be received in 30 years at a 6.60% annual discount rate, assuming monthly discounting. d. $100 to be received in one year at a 4.80% quarterly discount rate, assuming quarterly discounting. 9-4 Do your answers in a. and b. above look familiar? Why or why not? 9-5 What is the impact on the present value of a sum as the number of discounting periods per annum increases? Use one of the examples in 9-3 above to prove your answer. 9-6 If you make a single $4,000 deposit each year into a Roth IRA account paying a fixed 4.75% compounded annually, how much will you have in your account in 35 years? 9-7 You have been offered a 4-5/8% fixed rate 30 year mortgage to purchase a $230,000 home. a. What is the amount of the monthly payment? b. How much of your first payment would be interest? c. After your 24th monthly payment, how much of the $230,000 loan principal would you have repaid? d. What would be the amount of the monthly payment if you refinanced at the same interest rate to reduce the mortgage term to 15 years? How much of your first payment would be interest? e. After your 24th monthly payment, how much of the $230,000 loan principal would you have repaid? f. What have you learned from this problem that could be applied to your business and personal financial management? 9-8 If your opportunity rate of return is 5.25% compounded annually, would you rather receive $10,000 per year for 10 years or $6,000 per year for 20 years? Explain your answer. 9-9 To save for your retirement, you have planned to make a $333.33 contribution to your IRA at the end of each month. If you make these monthly contributions to an account paying 4.80% annual interest, how much would you have in your account in 30 years, assuming monthly compounding of interest? 9-10 Refer to problem 5-10 above. If you make the $333.33 contribution at the beginning of each month, how much more would you have in your account? 9-11 Amortize a 2 year, $600,000 loan with quarterly payments and an annual interest rate of 7.30%. 10-1 What would be the theoretical market price today of a $1,000 debenture with 12 years remaining to maturity, a 9.50% coupon rate, and semi-annual payments if the prevailing rate for bonds of the same type and quality is 6.70%? 10-2 What would be the theoretical market price today of a $1,000 mortgage bond that pays $82.50 annually if the bond has 10 years remaining to maturity, and semi-annual coupon payments if the prevailing rate for bonds of the same type and quality is 12.25%? 10-3 What would be the expected offering price of a zero coupon bond with a $1,000 face value, 13.5% coupon, and 30 years to maturity, assuming semi-annual interest accrual? 10-4 If a share of preferred stock paying an $8.50 annual dividend has a current market price of $48.50, what rate of return does the investment market require? 10-5 The Atlas Corporation just paid a $0.25 annual dividend per share on its common stock. If the firm is expected to pay the same annual dividend into the foreseeable future, what would be the expected stock price given a 12% annual required rate of return? 10-6 Gerhard, Inc. common stock currently sells for $28 per share; the dividend has historically grown at a 4% rate. If the firm just paid a $1.00 annual dividend per share, what rate of return would the market expect to justify a $40 share price? 10-7 Abitibi Amalgamated Resources, Inc. just paid a $0.40 dividend per common share. If the dividend is expected to grow at a 30% annual rate for the next 3 years and at a 10% annual rate for the next 6 years before settling into a 1% growth rate for the foreseeable future, what would be its expected stock price today at a 12% required rate of return? 10-8 Carter Magnetics Corporation just paid a $0.20 annual common stock dividend. Assuming its dividend will grow at 2% annually for the foreseeable future, and given a 10% required rate of return, answer the following questions: a. Using the Gordon Model, compute the expected price today for Carter Magnetics common shares. b. Using the Gordon Model, compute the expected price per share four years from now for Carter Magnetics common stock. Compute the present value of that share price, discounted at the required rate of return. c. For each of the next four years, compute the dividend that a share of Carter Magnetics will earn, and compute the present value of each dividend, discounted at the required rate of return. d. Sum the present value of the share price four years from now and the present value of the dividends to be received over the next four years. How does the resulting sum relate to the expected price today you computed for Carter Magnetics common shares in question a. above? HOMEWORK ASSIGNMENT 3 – Due on the class period BEFORE Examination 3. 11-1 Amalgamated Cryogenics, Inc. has a capital structure consisting of 65% debt and 35% common equity. The debt consists of a private placement with a 12.5% interest rate, and the risk premium for equity is 8%. Using the bond yield + risk premium approach to valuing equity, what would be the firm’s weighted average cost of capital if its marginal tax rate is 40%? 11-2 If the S&P 500 has an 8.5% return, and Hamilton Hydroponics, Inc. stock carries a beta coefficient of 1.8, what would be the firm’s cost of equity under CAPM when the risk free rate is 2%? 11-3 If Hamilton Hydroponics, Inc. stock investors require a 12% return and the stock has a 1.8 beta, what would be the risk free rate if the S&P 500 has a 8.75% return? 11-4 If Hamilton Hydroponics paid a $0.50 annual dividend on its common stock and projects a constant 3% increase in annual dividends into the foreseeable future, what would be the expected cost of its common stock financing per the DCF approach if its current stock price is $5.25 per share? 11-5 Given the following information considering Pitt Enterprises long-term debt, compute the firm’s after-tax weighted average cost of debt if its marginal tax rate is 40%. Assume semi-annual compounding on all bonds. Debt Type Coupon or Cost Years to Maturity Amount in $ Prevailing Rate Debenture 13.50% 15 10,000,000 14.50% Mortgage Bond 8.50% 8 25,000,000 6.45% Subordinated Debenture 16.50% 10 10,000,000 18.25% 12-1 The office manager of Helene’s Fashions is considering the purchase of a new copier/printer to replace the one the firm currently leases. The copier/printer may be purchased for $7,500 and is expected to save $400 per month in lease payments over its 4 year life. a. What is the payback period on the investment? b. Given an 18% hurdle rate, what is the Net Present Value (NPV) of the purchase? c. What is the Internal Rate of Return (IRR) on the purchase? d. What action would you recommend and why? 12-2 The Penniless County Public Works Department is considering the purchase of a new drainage ditch lining technology that will significantly reduce ditch clearing and maintenance. The technology requires an initial outlay of $880,000, and an engineering consultant estimates the schedule of annual savings over the 10 year life of the project as shown in the tables below. Assume a 5.75% hurdle rate for capital projects. a. Compute the payback period in years. b. Compute the Net Present Value and the Internal Rate of Return c. Prepare a recommendation for the Director of Public Works. Your recommendation should assume an unfamiliarity with the principles of capital budgeting. Year Projected Savings 1 $20,000 2 $35,000 3 $40,000 4 $60,000 5 $90,000 Year Projected Savings 6 $125,000 7 $155,000 8 $170,000 9 $135,000 10 $85,000
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