1. Draw a timeline for (1) a $100 lump sum cash flow at the end of year 2, (2) an ordinary annuity of $100 per year for 3 years and (3) an uneven cash flow stream of -$50, $100, $275, and $50 at the end of years 0 through 3.
2. Calculate the following:
3.  Future value of an initial $100 after 3 years assuming annual interest of 10%.
4.  Present value of $100 to be received in 3 years if the discount rate is 10%.

• If a company’s sales are growing at a rate of 20% per year, how long will it take for  the sale to double?
• In order for an investment to double in 3 years, what interest rate must it earn?
• Using a timeline, show examples of an ordinary annuity and an annuity due.
• Calculate the future value of a 3-year ordinary annuity of $100 if the interest rate is 10%.
• Calculate the present value of a 3-year ordinary annuity of $100 if the discount rate is 10%.
• Redo calculations for steps 6 and 7 assuming an annuity is due.
• Calculate the present value of an uneven cash flow stream of $100 at the end of year 1, $300 at the end of year 2, $300 at the end of year 3, -$50 at the end of year 4 assuming a discount rate of 10%.
• Calculate the future value of $100 after 5 years under 12% annual compounding,  semiannual compounding, quarterly compounding, and monthly compounding.
• Calculate the effective rate of interest for a nominal rate of 12% compounded semiannually, quarterly, and monthly.
• Will the effective rate ever equal the nominal rate? Explain your answer.

3. How many years would it take $50 to triple if you invested it in a bank that pays 8.25% per year?

4. You want to buy a new sports car 4 years from now, and you plan to save $4,400 per year,beginning immediately. You will make 4 deposits in an account that pays 5.75% interest. Under these assumptions, how much will you have 3 years from today?

5. What’s the present value of a 5-year ordinary annuity of $2,250 per year plus an additional $3,500 at the end of Year 5 if the interest rate is 6%?

6. What’s the future value of $2,500 after 5 years if the appropriate interest rate is 7.5%, compounded semiannually?

7. An investment promises the following cash flow stream: $1500 at Time 0; $2,750 at the end of Year 1 (or at t = 1); $3,150 at the end of Year 2; and $4,800 at the end of Year 3. At a discount rate of 10.0%, what is the present value of the cash flow stream?

8. Suppose you are buying your first house for $250,000, and are making a $50,000 down payment. You have arranged to finance the remaining amount with a 10-year, monthly payment, amortized mortgage at a 3.4% nominal interest rate. What will your equal monthly payments be?

9. You plan to borrow $30,000 at an 8% annual interest rate. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 4?

10. You just deposited $4,000 in a bank account that pays a 6% nominal interest rate, compounded quarterly. If you also add another $9,000 to the account one year (12 months) from now and another $7,500 to the account two years from now, how much will be in the account three years (12 quarters) from now?

11. Your sister turned 35 today, and she is planning to save $6,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 8.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the beginning of her first retirement year.

12. You anticipate that you will need $2,000,000 when you retire 40 years from now. You plan to make 40 deposits, beginning today, in a bank account that will pay 7% interest, compounded annually. You expect to receive annual raises of 4%, so you will increase the amount you deposit each year by 4%. (That is, your 2nd deposit will be 4% greater than your first, the 3rd will be 4% greater than the 2nd, etc.) How much must your 1st deposit be if you are to meet your goal?

14. Medium Size Retailers, Inc. (MSR) has EBIT of $225,000, interest expense of $30,000, dividend income of $15,000, short term capital gains of $15,000, and long term capital losses of $18,000. What is MSR’s income tax liability?

15. Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,750 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 9.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm’s taxable income, or earnings before taxes (EBT)?

16. Over the years, Janjigian Corporation’s stockholders have provided $19,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm’s earnings. The firm now has 1,500 shares of common stock outstanding, and it sells at a price of $48.00 per share. How much value has Janjigian’s management added to stockholder wealth over the years, i.e., what is Janjigian’s MVA?

18. HHH Inc. reported $14,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 35%. What was HHH’s Economic Value Added (EVA), i.e., how much value did management add to stockholders’ wealth during the year?

19. Wells Water Systems recently reported $8,750 of sales, $4,750 of operating costs other than depreciation, and $1,100 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate?

An investor is considering starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 17.5% return on the invested capital, which means that the firm must have an ROE of 17.5%. How much net income must be expected to warrant starting the business?

23. Helmuth Inc.’s latest net income was $1,250,000, and it had 295,000 shares outstanding. The company wants to pay out 40% of its income as dividends. What dividend per share should it declare?

24. Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $525,000, and its year-end receivables were $70,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.

25. Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and its net income was $8,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $4,950 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

Rick Kish has a $100,000 stock portfolio. $32,000is invested in a stock with a beta of 0.85 and the remainder is invested in a stock with a beta of 1.75. These are the only two investments in his portfolio. What is his portfolio’s beta?

29. ABC Company’s stock has a beta of 1.40, the risk-free rate is3.75%, and the market risk premium is6.50%. What is ABC’s required rate of return using CAPM?

31. Hocking Manufacturing Company has a beta of 0.65, while Levine Industries has a beta of 1.70. The required return on the stock market is 10.00%, and the risk-free rate is 4.25%. What is the difference between Hocking’s and Levine’s required rates of return?

32. Rodriguez Roofing’s stock has a beta of 1.30, its required return is 11.50%, and the risk-free rate is4.00%. What is the required rate of return on the stock market?

35. Garvin Enterprises’ bonds currently sell for $875. They have a 6-year maturity, an annual coupon of $65, and a par value of $1,000. What is their current yield?

36. Sadik Inc.’s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 8 years at $1,135. What is their yield to call (YTC)?

37. Moerdyk Corporation’s bonds have a 20-year maturity, a 6.25% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 8.25%. What is the bond’s intrinsic value?

38. Niendorf Corporation’s 5-year bonds yield 7.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP = 1.50% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf’s bonds?

39. A 20-year, $1,000 par value bond has an 8.5% coupon rate with interest paid semiannually. The bond currently sells for $800. What is the capital gains yield on these bonds?

40. O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 15 years. Their nominal yield to maturity is 9.75%, they pay interest semiannually, and they sell at a price of $900. What is the bond’s nominal (annual) coupon interest rate?

1.      The difference between the present value of an investment?s future cash flows and its initial cost is the

2.      Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

3.      The primary reason that company projects with positive net present values are considered acceptable is that:

4.      Accepting a positive net present value (NPV) project:

5.      The net present value method of capital budgeting analysis does all of the following except:

6.      What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

7.

Year    Project A         Project B

0          –$17,000         –$20,000

1          10,500             11,500

2          7,000               8,000

3          2,600               7,000

a1.  Calculate the payback period for each project

a2.  Which, if either, of these projects should be chosen?

b1.  What is the NPV for each project if the appropriate discount rate is 15 percent?

b2.  Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent?

8.      Flatte Restaurant is considering the purchase of a $9,800 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straightline  method. The machine will produce 1,900 soufflés per year, with each costing $2.30 to make and priced at $5.30. Assume that the discount rate is 11 percent and the tax rate is 35 percent.  What is the NPV of the project?

9.      The Best Manufacturing Company is considering a new investment. Financial projections for the  investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

Prepare your recommendation on Agarwal Cast Company
Caselet 1
Case1: Credit Decision – Agarwal Case
On August 30, 2006, Agarwal Cast Company Inc., applied for a $200,000 loan from the main office of the National bank of New York. The application was forwarded to the bank’s commercial loan department. Gupta, the President and Principal Stockholder of Agarwal cast, applied for the loan in person. He told the loan officer that he had been in business since February 1976, but that he had considerable prior experience in flooring and carpets since he had worked as an individual contractor for the past 20 year. Most of this time, he had worked in Frankfert and Michigan. He finally decided to “work for himself” and he formed the company with Berry Hook, a former co-worker. This information seemed to be consistent with the Dun and Bradstreet report obtained by the bank According to Gupta, the purpose of the loan was to assist him in carrying his receivables until they could be collected. He explained that the flooring business required him to spend considerable cash to purchase materials but his customers would not pay until the job was done. Since he was relatively new in the business, he did not feel that he could compete if he had to require a sizeable deposit or payment in advance. Instead, he could quote for higher profits, if he were willing to wait until completion of the job for payment. To show that his operation was sound, he included a list of customers and projects with his loan application. He also included a list of current receivables.
Gupta told the loan officer that he had monitored his firm’s financial status closely and that he had financial reports prepared every six months. He said that the would send a copy to the bank. In addition, he was willing to file a personal financial statement with the bank.
Question:
1. Prepare your recommendation on Agarwal Cast Company
Caselet 2
This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer of petroleum and rubber-based products used in a variety of commercial applications in the fields of transportation, electronics, and heavy manufacturing. In the northwestern United States, many of the Perluence products are marketed by a wholly-owned subsidiary, Bajaj Electronics Company. Operating from a headquarters and warehouse facility in San Antonio, Strand Electronics has 950 employees and handles a volume of $85 million in sales annually. About $6 million of the sales represents items manufactured by Perluence. Gupta is the credit manager at Bajaj electronics. He supervises five employees who handle credit application and collections on 4,600 accounts. The accounts range in size from $120 to $85,000. The firm sells on varied terms, with 2/10, net 30 mostly. Sales fluctuate seasonally and the


 This section consists of Case lets.
 Answer all the questions.
 Each Case let carries 20 marks.
 Detailed information should form the part of your answer (Word limit 150 to 200 words).

IIBM Institute of Business Management 3
Examination Paper of Financial Management
average collection period tends to run 40 days. Bad-debt losses are less than 0.6 per cent of sales. Gupta is evaluating a credit application from Booth Plastics, Inc., a wholesale supply dealer serving the oil industry. The company was founded in 1977 by Neck A. Booth and has grown steadily since that time. Bajaj Electronics is not selling any products to Booth Plastics and had no previous contact with Neck Booth. Bajaj Electronics purchased goods from Perluence International under the same terms and conditions as Perluence used when it sold to independent customers. Although Bajaj Electronics generally followed Perluence in setting its prices, the subsidiary operated independently and could adjust price levels to meet its own marketing strategies. The Perluence’s cost-accounting department estimated a 24 per cent markup as the average for items sold to Pucca Electronics. Bajaj Electronics, in turn, resold the items to yield a 17 per cent markup. It appeared that these percentages would hold on any sales to Booth Plastics. Bajaj Electronics incurred out-of pocket expenses that were not considered in calculating the 17 per cent markup on its items. For example, the contact with Booth Plastics had been made by James, the salesman who handled the Glaveston area. James would receive a 3 per cent commission on all sales made Booth Plastics, a commission that would be paid whether or not the receivable was collected. James would, of course, be willing to assist in collecting any accounts that he had sold. In addition to the sales commission, the company would incur variable costs as a result of handling the merchandise for the new account. As a general guideline, warehousing and other administrative variable costs would run 3 per cent sales. Gupta Holmstead approached all credit decisions in basically the same manner. First of all, he considered the potential profit from the account. James had estimated first-year sales to Booth Plastics of $65,000. Assuming that Neck Booth took the, 3 per cent discount. Bajaj Electronics would realize a 17 per cent markup on these sales since the average markup was calculated on the basis of the customer taking the discount. If Neck Booth did not take the discount, the markup would be slightly higher, as would the cost of financing the receivable for the additional period of time. In addition to the potential profit from the account, Gupta was concerned about his company’s exposure. He knew that weak customers could become bad debts at any time and therefore, required a vigorous collection effort whenever their accounts were overdue. His department probably spent three times as much money and effort managing a marginal account as compared to a strong account. He also figured that overdue and uncollected funds had to be financed by Bajaj Electronics at a rate of 18 per cent. All in all, slow – paying or marginal accounts were very costly to Bajaj Electronics. With these considerations in mind, Gupta began to review the credit application for Booth Plastics.
Questions:
1. How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit?
2. Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.