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