FIN 516 Advanced Managerial Finance
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FIN 516 Week 1 Homework
FIN 516 Week 2 Homework
FIN 516 Week 3 Homework
FIN 516 Week 4 Homework
FIN 516 Week 5 Homework
FIN 516 Week 6 Homework
FIN 516 Week 7 Homework
FIN516 WEEK 2 MINI CASE ASSIGNMENT (3 Different Papers)
FIN516 WEEK 2 MINI CASE ASSIGNMENT- Ford Motors
FIN516 WEEK 2 MINI CASE ASSIGNMENT -General Electric
FIN516 WEEK 2 MINI CASE ASSIGNMENT -Microsoft Corporation
FIN 516 Week 4 Quiz
FIN 516 Week 5 IPO Paper
FIN 516 Week 8 Final Exam
FIN 516 Week 1 Homework
Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy
Natsam Corporation has $250 million of excess cash. The firm has no debt and
500 million shares outstanding with a current market price of $15 per share.
Natsam’s board has decided to pay out this cash as a one-time dividend.
Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy
Suppose that all capital gains are taxed at a 25% rate and that the dividend
tax rate is 50%.
Arbuckle Corporation is currently trading for $30 and is about to pay a $6
special dividend.
Problem 17-19 on Dividend Capture Strategy Based on Chapter 17 Payout Policy
Que Corporation pays a regular dividend of $1 per share. Typically, the stock
price drops by $0.80 per share when the stock goes ex-dividend. Suppose the
capital gains tax rate is 20%, but investors pay different tax rates on
dividends.
Absent transactions costs, what is the highest dividend tax rate of an
investor who could gain from trading to capture the dividend?
Problem 23-5 on Preferred Stock Based on Chapter 23 Raising Equity Capital
Three years ago, you founded your own company. You invested $100,000 of your
money and received 5 million shares of Series A preferred stock. Since then,
your company has been through three additional rounds of financing.
FIN 516 WEEK 2 MINI CASE ASSIGNMENT
(This should be posted in Document Sharing)
Select a major industrial or commercial company based in the United States,
and listed on one of the major stock exchanges in the United States. Each
student should select a different company. Avoid selecting an insurance company
or a bank, as the financial ratios for these financial businesses are
different. Write a 7 – 8 page double spaced paper answering and demonstrating
with calculations and financial data the following questions:
1. What is the name of the company? What is the industry sector?
2. What are the operating risks of the company?
3. What is the financial risk of the company (the debt to total capitalization
ratio)?
4. Does the company have any preferred stock?
5. What is the capital structure of the company?: Short term portion of Long
Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common
Stock issued and outstanding?
6. What is the company’s current actual Beta?
7. What would the Beta of this company be if it had no Long Term Debt in its
capital structure? (Apply the Hamada Formula.)
8. What is the company’s current Marginal Tax Rate?
9. What is the Cost of Debt, before and after taxes?
10. What is the Cost of Preferred Stock (if any)?
11. What is the Cost of Equity?
12. What is the cash dividend yield on the Common Stock?
13. What is the Weighted Average Cost of Capital of the company?
14. What is the Price Earnings Multiple of the company?
15. How has the company’s stock been performing in the last 5 years?
16. How would you assess the overall risk structure of the company in terms of
its Operating Risks and Financial Risk (Debt to Capitalization Ratio)?
17. Would you invest in this company? Why? Or Why not?
18. The last page of your paper should be a Bibliography of the sources you
used to prepare this paper.
FIN 516 Week 2 Homework
Problem 14-11 Based on Chapter 14: WACC and Modigiani & Miller Extension
Models With Growth Assumptions
Consider the entrepreneur described in Section 14.1 (and referenced in Tables
14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500.
a. According to MM Proposition I, what is the value of the equity? What are its
cash flows if the economy is strong? What are its cash flows if the economy is
weak?
b. What is the return of the equity in each case? What is its expected return?
c. What is the risk premium of equity in each case? What is the sensitivity of
the levered equity return to systematic risk? How does its sensitivity compare
to that of unlevered equity? How does its risk premium compare to that of
unlevered equity?
d. What is the debt-equity ratio of the firm in this case?
e. What is the firm’s WACC in this case?
Problem 14-18 Based on Chapter 14: WACC and Modigliani & Miller Extension
Models With Growth Assumptions
In mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of
$3.1 billion, and an equity beta of 0.90 (as reported on Yahoo! Finance).
Included in AOL’s assets was $1.5 billion in cash and risk-free securities.
Assume that the risk-free rate of interest is 3% and the market risk premium is
4%.
a. What is AOL’s enterprise value?
b. What is the beta of AOL’s business assets?
c. What is AOL’s WACC?
Problem 15-15 Based on Chapter 15: Debt and Taxes
Acme Storage has a market capitalization of $100 million and debt outstanding
of $40 million. Acme plans to maintain this same debt-equity ratio in the
future. The firm pays an interest rate of 7.5% on its debt and has a corporate
tax rate of 35%.
a. If Acme’s free cash flow is expected to be $7 million next year and is
expected to grow at a rate of 3% per year, what is Acme’s WACC?
b. What is the value of Acme’s interest tax shield?
FIN 516 Week 3 Homework
Problem 20-6 on Call Options Based on Chapter 20
(Excel file included)
You own a call option on Intuit stock with a strike price of $40. The option
will expire in exactly 3 months’ time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the
call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the
call?
c) Draw a payoff diagram showing the value of the call at expiration as a
function of the stock price at expiration.
Problem 20-8 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?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the
put?
c) Draw a payoff diagram showing the value of the put at expiration as a
function of the stock price at expiration.
Problem 20-11 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring
any interest you might earn over the remaining few days’ life of the options,
consider the following.
a) Compute the break-even IBM stock price for each option (i.e., the stock
price at which your total profit from buying and then exercising the option
would be 0).
b) Which call option is most likely to have a return of −100%?
c) If IBM’s stock price is $216 on the expiration day, which option will have
the highest return?
Problem 21-12 on Option Valuation Using the Black Scholes Model Based on
Chapter 21
Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc.
The call has a strike price of $100 and expires in 90 days. The current price
of Up stock is $120, and the stock has a standard deviation of 40% per year.
The risk-free interest rate is 6.18% per year.
a) Using the Black-Scholes formula, compute the price of the call.
b) Use put-call parity to compute the price of the put with the same strike and
expiration date.
Problem 30-14 on Swaps Based on Chapter 30
Your firm needs to raise $100 million in funds. You can borrow short-term at a
spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds
at a spread of 2.50% over 10-year treasuries, which currently yield 7.60%.
Current 10-year interest rate swaps are quoted at LIBOR versus the 8% fixed
rate.
Management believes that the firm is currently underrated and that its credit
rating is likely to improve in the next year or two. Nevertheless, the managers
are not comfortable with the interest rate risk associated with using
short-term debt.
Problem 30-6 on Futures Contract Based on Chapter 30
(Excel file included)
Your utility company will need to buy 100,000 barrels of oil in 10 days, and it
is worried about fuel costs. Suppose you go long 100 oil futures contracts,
each for 1,000 barrels of oil, at the current futures price of $60 per barrel.
Suppose futures prices change each day as follows.
FIN 516 Week 4 Homework
Problem 23-3 on Implied Price of Funding Based on Chapter 23
Starware Software was founded last year to develop software for gaming
applications. Initially, the founder invested $800,000 and received 8 million shares
of stock. Starware now needs to raise a second round of capital, and it has
identified an interested venture capitalist. This venture capitalist will
invest $1 million and wants to own 20% of the company after the investment is
completed.
a) How many shares must the venture capitalist receive to end up with 20% of
the company? What is the implied price per share of this funding round?
b) What will the value of the whole firm be after this investment (the
post-money valuation)?
Problem 23-4 on IRR of Venture Capital Based on Chapter 23
(Excel file included)
Suppose venture capital firm GSB partners raised $100 million of committed
capital. Each year over the 10-year life of the fund, 2% of this committed
capital will be used to pay GSB’s management fee.
As is typical in the venture capital industry, GSB will only invest $80 million
(committed capital less lifetime management fees). At the end of 10 years, the
investments made by the fund are worth $400 million. GSB also charges 20%
carried interest on the profits of the fund (net of management fees).
a) Assuming the $80 million in invested capital is invested immediately and all
proceeds were received at the end of 10 years, what is the IRR of the
investments GSB partners made? That is, compute IRR ignoring all management
fees.
b) Of course, as an investor or limited partner, you are more interested in
your own IRR (that is, the IRR including all fees paid). Assuming that
investors gave GSB partners the full $100 million up front, what is the IRR for
GSB’s limited partners (that is, the IRR net of all fees paid)?
Problem 23-13 on IPO Based on Chapter 23
Your firm has 10 million shares outstanding, and you are about to issue 5
million new shares in an IPO. The IPO price has been set at $20 per share, and
the underwriting spread is 7%. The IPO is a big success with investors, and the
share price rises to $50 on the first day of trading.
a) How much did your firm raise from the IPO?
b) What is the market value of the firm after the IPO?
c) Assume that the post-IPO value of your firm is its fair market value.
Suppose your firm could have issued shares directly to investors at their fair
market values in a perfect market with no underwriting spread and no
underpricing. What would the share price have been in this case, if you raise
the same amount as in part a)?
d) Comparing part b) and part c), what is the total cost to the firm’s original
investors due to market imperfections from the IPO?
FIN 516 Week 5 IPO Paper
IPO Analysis of Gevo Inc.
Advanced Managerial Finance
FIN 516 Week 5 Homework
Problem 25-6 on Purchase Versus Lease Based on Chapter 25
Craxton Engineering will either purchase or lease a new $756,000 fabricator. If
purchased, the fabricator will be depreciated on a straight-line basis over 7
years. Craxton can lease the fabricator for $130,000 per year for 7 years.
Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the
end of the 7 years.)
a) What are the free cash flow consequences of buying the fabricator if the
lease is a true tax lease?
b) What are the free cash flow consequences of leasing the fabricator if the
lease is a true tax lease?
c) What are the incremental free cash flows of leasing versus buying?
Problem 25-7 on Purchase Versus Lease Based on Chapter 25
Riverton Mining plans to purchase or lease $220,000 worth of excavation
equipment. If purchased, the equipment will be depreciated on a straight-line
basis over 5 years, after which it will be worthless. If leased, the annual
lease payments will be $55,000 per year for 5 years.
Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease
qualifies as a true tax lease.
a) If Riverton purchases the equipment, what is the amount of the
lease-equivalent loan?
b) Is Riverton better off leasing the equipment or financing the purchase using
the lease equivalent loan?
c) What is the effective after-tax lease borrowing rate? How does this compare
to Riverton’s actual after-tax borrowing rate?
FIN 516 Week 6 Homework
Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and
Acquisitions
(Excel file included)
Your company has earnings per share of $4. It has 1 million shares outstanding,
each of which has a price of $40. You are thinking of buying TargetCo, which
has earnings per share of $2, 1 million shares outstanding, and a price per
share of $25. You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction.
a) If you pay no premium to buy TargetCo, what will your earnings per share be
after the merger?
b) Suppose you offer an exchange ratio such that, at current preannouncement
share prices for both firms, the offer represents a 20% premium to buy
TargetCo. What will your earnings per share be after the merger?
c) What explains the change in earnings per share in part a)? Are your
shareholders any better or worse off?
d) What will your price-earnings ratio be after the merger (if you pay no
premium)? How does this compare to your P/E ratio before the merger? How does
this compare to TargetCo’s premerger P/E ratio?
Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress,
Managerial Incentives, and Information
(Excel file included)
As in Problem 1, Gladstone Corporation is about to launch a new product.
Depending on the success of the new product, Gladstone may have one of four
values next year: $150 million, $135 million, $95 million, or $80 million.
These outcomes are all equally likely, and this risk is diversifiable. Suppose
the risk-free interest rate is 5% and that, in the event of default, 25% of the
value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other
market imperfections, such as taxes.)
a) What is the initial value of Gladstone’s equity without leverage?
Now suppose Gladstone has zero-coupon debt with a $100 million face value due
next year.
b) What is the initial value of Gladstone’s debt?
c) What is the yield-to-maturity of the debt? What is its expected return?
d) What is the initial value of Gladstone’s equity? What is Gladstone’s total
value with leverage?
Suppose Gladstone has 10 million shares outstanding and no debt at the start of
the year.
e) If Gladstone does not issue debt, what is its share price?
f) If Gladstone issues debt of $100 million due next year and uses the proceeds
to repurchase shares, what will its share price be? Why does your answer differ
from that in part e)?
Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress,
Managerial Incentives, and Information
Kohwe Corporation plans to issue equity to raise $50 million to finance a new
investment. After making the investment, Kohwe expects to earn free cash flows
of $10 million each year. Kohwe currently has 5 million shares outstanding, and
it has no other assets or opportunities.
Suppose the appropriate discount rate for Kohwe’s future free cash flows is 8%,
and the only capital market imperfections are corporate taxes and financial
distress costs.
a) What is the NPV of Kohwe’s investment?
b) What is Kohwe’s share price today?
Suppose Kohwe borrows the $50 million instead. The firm will pay interest only
on this loan each year, and it will maintain an outstanding balance of $50
million on the loan. Suppose that Kohwe’s corporate tax rate is 40%, and
expected free cash flows are still $10 million each year.
c) What is Kohwe’s share price today if the investment is financed with debt?
Now suppose that with leverage, Kohwe’s expected free cash flows will decline
to $9 million per year due to reduced sales and other financial distress costs.
Assume that the appropriate discount rate for Kohwe’s future free cash flows is
still 8%.
e) What is Kohwe’s share price today given the financial distress costs of
leverage?
FIN 516 Week 7 Homework
Problem 31-1 on Exchange Rates Based on Chapter 31 International
Corporate Finance
(Excel file included)
You are a U.S. investor who is trying to calculate the present value of a €5
million cash inflow that will occur 1 year in the future. The spot exchange
rate is S = $1.25/€ and the forward rate is F1 = $1.215/€. You estimate that
the appropriate dollar discount rate for this cash flow is 4% and the
appropriate euro discount rate is 7%.
a) What is the present value of the €5 million cash inflow computed by first
discounting the euro and then converting it into dollars?
b) What is the present value of the €5 million cash inflow computed by first
converting the cash flow into dollars and then discounting?
c) What can you conclude about whether these markets are internationally
integrated, based on your answers to parts a) and b)?
Problem 31-2 on Currency Appreciation Based on Chapter 31 International
Corporate Finance
(Excel file included)
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale
in Cyprus and is expecting a C£4 million cash inflow in 1 year. The current
spot rate is S = $1.80/C£ and the 1-year forward rate is F1 = $1.8857/C£.
a) What is the present value of Mia Caruso’s C£4 million inflow computed by
first discounting the cash flow at the appropriate Cypriot pound discount rate
of 5%, and then converting the result into dollars?
b) What is the present value of Mia Caruso’s C£4 million inflow computed by
first converting the cash flow into dollars, and then discounting at the
appropriate dollar discount rate of 10%?
c) What can you conclude about whether these markets are internationally
integrated, based on your answers to parts a) and b)?
Problem 31-7 on Eurobonds Versus Domestic Bonds Based on Chapter 31
International Corporate Finance
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%.
The firm faces a tax rate of 30% on all income, no matter where it is earned.
Managers in the firm need to know its yen cost of debt because they are
considering launching a new bond issue in Tokyo to raise money for a new
investment there.
The risk-free interest rates on dollars and yen are r$ = 5% and r¥ = 1%,
respectively. Coval Consulting is willing to assume that capital markets are
internationally integrated and that its free cash flows are uncorrelated with
the yen-dollar spot rate.
What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by
finding the after-tax cost of debt in dollars and then find the yen
equivalent.)
Problem 31-12 on Credit and Exchange Rate Risk Based on Chapter 31
International Corporate Finance
Suppose the interest on Russian government bonds is 7.5%, and the current
exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5
rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what
is the implied credit spread for Russian government bonds?
Problem 30-9 on Forward Market Hedge Based on Chapter 30 Risk Management
(Excel file included)
You are a broker for frozen seafood products for Choyce Products. You just
signed a deal with a Belgian distributor. Under the terms of the contract, in 1
year, you will deliver 4000 kg of frozen king crab for 100,000 euros. Your cost
for obtaining the king crab is $110,000. All cash flows occur in exactly 1
year.
FIN 516 Week 8 Final Exam
Question 1.1. (TCO B) Which of the following statements concerning
the MM extension with growth is not correct?
(a) The tax shields should be discounted at the unlevered cost of equity.
(b) The value of a growing tax shield is greater than the value of a constant
tax shield.
(c) For a given D/S, the levered cost of equity is greater than the levered
cost of equity under MM’s original (with tax) assumptions.
(d) For a given D/S, the WACC is greater than the WACC under MM’s original
(with tax) assumptions.
(e) The total value of the firm is independent of the amount of debt it uses.
Question 2.2. (TCO D) Which of the following statements is most
correct?
(a) In a private placement, securities are sold to private (individual)
investors rather than to institutions.
(b) Private placements occur most frequently with stocks, but bonds can also be
sold in a private placement.
(c) Private placements are convenient for issuers, but the convenience is
offset by higher flotation costs.
(d) The SEC requires that all private placements be handled by a registered
investment banker.
(e) Private placements can generally bring in funds faster than is the case
with public offerings. (Points : 20)
Question 3.3. (TCO E) Buster’s Beverages is negotiating a lease on a
new piece of equipment that would cost $100,000 if purchased. The equipment
falls into the MACRS 3-year class, and it would be used for 3 years and then
sold, because the firm plans to move to a new facility at that time. The
estimated value of the equipment after 3 years is $30,000. If the borrow and
purchase option is used, the cash flows would be the following: (Year 1)
-2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these cash
outflows would be at the beginning of the respective years. Alternatively, the
firm could lease the equipment for 3 years, with annual lease payments of
$29,000 per year, payable at the beginning of each year. The firm is in the 20%
tax bracket. If it borrows and purchases, it could obtain a 3-year simple
interest loan, to purchase the equipment at a before-tax interest rate of 10%.
If there is a positive net advantage to leasing, the firm will lease the
equipment. Otherwise, it will buy it. What is the NAL?
(a) $5,736
(b) $6,023
(c) $6,324
(d) $6,640
(e) $6,972 (Points : 20)
Question 4.4. (TCO I) Suppose hockey skates sell in Canada for 105
Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing
power parity (PPP) holds, what is the price of hockey skates in the United
States?
(a) $14.79
(b) $63.00
(c) $74.55
(d) $85.88
(e) $147.88 (Points : 20)
