FIN 669 Problems Assignment

FIN 669 Problems Assignment

Subject: Business    / Finance
Question
Problem 27-4 Quarterly working capital levels for your firm for the next year are included in the following
table. What are the permanent working capital needs of your company? What are the tempo
needs?
Quarter
(000)
Cash
Accounts receivable
Inventory
Accounts payable 1 2
$100
200
200
100 3
$100
100
500
100 $100
100
900
100 Quarter
(000)
Net working capital
Permanent working capital
Temporary working capital 1 2 3 Requirements
1. In cell D14, by using cell references, calculate the net working capital for year 1 (1 p
Copy cell D14, and paste it onto cells E14:G14 (1 pt.). 2. To calculate the permanent working capital, you need to find the minimum net workin
capital by using the function MIN. In cell D15, by using the function MIN and cell
references, calculate the permanent working capital (1 pt.). 3. In cell D16, by using relative and absolute cell references, calculate the temporary
working capital needs for year 1 (1 pt.). Copy cell D16, and paste it onto cells E16:G
(1 pt.). included in the following
any? What are the temporary 4
$100
600
50
100 4 ng capital for year 1 (1 pt.). the minimum net working
function MIN and cell lculate the temporary
paste it onto cells E16:G16 Problem 27-6 The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to d
Alternative A: Forgo the discount on its trade credit agreement that offers terms o
Alternative B: Borrow the money from Bank A, which has offered to lend the firm
(no-interest) compensating balance of 5% of the face value of the l
Hand-to-Mouth must borrow even more than the $10,000.
Alternative C: Borrow the money from Bank B, which has offered to lend the firm
origination fee.
Which alternative is the cheapest source of financing for Hand-to-Mouth?
Principal
Term of loan $10,000
30 Alternative A: Forego trade discount
Credit Terms
2.00%
Additional days
Interest rate per period
Annual rate
Alternative B: Borrow from Bank A
APR
12.00%
Compensating balance
5.00%
Fee
$100.00
Total borrowed
Interest paid
Interest & fee paid
Periodic rate
Annual rate Alternative C: Borrow from Bank B
APR
15.00%
Compensating balance
0.00%
Origination fee
1.00%
Fee Total borrowed
Interest paid
Interest & fee paid
Periodic rate
Annual rate
Cheapest loan cost
This is: Requirements
1. In cell D16, by using cell references, calculate the additional days of credit (1 pt.).
2. In cell D17, by using cell references, calculate the implicit interest rate charged for the ad
3. In cell D18, by using cell references, calculate the annual cost of payables (1 pt.).
4. In cell D25, by using cell references, calculate the total amount to borrow (1 pt.).
5. In cell D26, by using cell references, calculate the interest paid (1 pt.).
6. In cell D27, by using cell references, calculate the interest & fee paid (1 pt.).
7. In cell D28, by using cell references, calculate the periodic rate by dividing the interest &
8. In cell D29, by using cell references, calculate the annual rate (1 pt.).
9. In cell D37, by using cell references, calculate the fee to be paid (1 pt.).
10. In cell D38, by using cell references, calculate the total amount to borrow (1 pt.).
11. In cell D39, by using cell references, calculate the interest paid (1 pt.).
12. In cell D40, by using cell references, calculate the interest & fee paid (1 pt.).
13. In cell D41, by using cell references, calculate the periodic rate (1 pt.).
14. In cell D42, by using cell references, calculate the annual rate (1 pt.).
15. You will find the cheapest loan cost by using the function MIN. In cell D44, by using the
the cheapest loan cost (1 pt.).
16. In cell D45, identify the cheapest alternative by typing Alternative A, Alternative B or he next 30 days. It is trying to decide which of three alternatives to use:
it agreement that offers terms of 2/10, net 30. hich has offered to lend the firm $10,000 for 30 days at an APR of 12%. The bank will require a
of 5% of the face value of the loan and will charge a $100 loan origination fee, which means
more than the $10,000.
hich has offered to lend the firm $10,000 for 30 days at an APR of 15%. The loan has a 1% loan Hand-to-Mouth? 10 net 30 onal days of credit (1 pt.).
it interest rate charged for the additional days of credit (1 pt.).
cost of payables (1 pt.).
mount to borrow (1 pt.).
t paid (1 pt.).
t & fee paid (1 pt.).
ic rate by dividing the interest & fee paid (1 pt.).
rate (1 pt.).
be paid (1 pt.).
mount to borrow (1 pt.).
t paid (1 pt.).
t & fee paid (1 pt.).
ic rate (1 pt.).
rate (1 pt.).
n MIN. In cell D44, by using the function MIN and cell references, find lternative A, Alternative B or Alternative C (1 pt.). k will require a
which means n has a 1% loan Problem 28-9 Your company has earnings per share of $4. It has 1 million shares outstanding, each of w
price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1
shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing ne
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 b. If you pay a 20% premium to buy TargetCo, what will your earnings per share be
merger?
c. What explains the change in earnings per share in part (a)? Are your shareholders
worse off?
d.
What will your price-earnings ratio be after the merger (if you pay no premium)? H
this compare to your P/E ratio before the merger? How does this compare to Targe
merger P/E ratio?
Your Company:
Earnings per share
Shares outstanding
Price per share $4.00
1,000,000
$40.00 Target:
Earnings per share
Shares outstanding
Price per share $2.00
1,000,000
$25.00 Total consolidated earnings
a. If you pay no premium to buy TargetCo, what will your earnings per share be after
Value of target company
Shares of acquirer issued
Total shares outstanding
New EPS
b. If you pay a 20% premium to buy TargetCo, what will your earnings per share be
merger? Premium 20% Purchase price
Value of target company
Shares of acquirer issued
Total shares outstanding
New EPS
c. What explains the change in earnings per share in part (a)? Are your shareholders
worse off?
Focusing on EPS alone cannot tell you whether they’re better or worse off.
d. What will your price-earnings ratio be after the merger (if you pay no premium)? H
this compare to your P/E ratio before the merger? How does this compare to Targe
merger P/E ratio?
Acquirer’s P/E ratio before
Acquirer’s P/E ratio after
Target’s P/E ratio before Requirements
To calculate the acquirer’s new EPS, you need to calculate the total consolidated earning
1. of shares outstanding after the merger. Use cell references in all of the following requir In cell D20, calculate the total consolidated earnings by adding both companies’ earnings
2. In cell D24, calculate the total value of the target company. (1 point.)
3. In cell D25, calculate the shares that the acquirer needs to issue. (1 point.)
4. In cell D26, calculate the total number of shares outstanding after the merger. (1 point.)
In cell D27, by using cell references, calculate the new EPS. by dividing the total consoli
5. total number of shares outstanding after the merger. (1 point.) 6. In cell D33, calculate the new price per share of the target company if a premium is paid.
7. In cell D34, calculate the new total value of the target company. (1 point.)
8. In cell D35, calculate the shares that the acquirer needs to issue. (1 point.)
9. In cell D36, calculate the total number of shares outstanding after the merger. (1 point.)
In cell D37, by using cell references, calculate the new EPS by dividing the total consolid
10. total number of shares outstanding after the merger. (1 point.) 11. In cell D45, by using cell references, calculate the acquirer’s P/E ratio before the merger.
12. In cell D46, calculate the acquirer’s P/E ratio after the merger. (1 point.)
13. In cell D47, calculate the target company’s P/E ratio before the merger. (1 point.) outstanding, each of which has a
ngs per share of $2, 1 million
argetCo by issuing new shares. ings per share be after the merger? earnings per share be after the Are your shareholders any better or ou pay no premium)? How does
this compare to TargetCo’s pre- ings per share be after the merger? earnings per share be after the Are your shareholders any better or etter or worse off. ou pay no premium)? How does
this compare to TargetCo’s pre- consolidated earnings and the total number
the following requirements. h companies’ earnings. (1 point.) he merger. (1 point.)
iding the total consolidated earnings by the y if a premium is paid. (1 point.) he merger. (1 point.)
ding the total consolidated earnings by the tio before the merger. (1 point.) ger. (1 point.) Problem 30-6 Your utility company will need to buy 100,000 barrels of oil in ten days time, and it is wo
you go long 100 oil futures contracts, each for 1000 barrels of oil, at the current futures p
futures prices change each day as follows:
63 62 $ Future Price ($/bbl)
61 $60.75 $60.50
60 $60.00
$59.50 $59.75 $59.50 59 58 $58.00 $57.75 $57.50
57 0 1 2 3 4 5 6 7 8 9 Day a. What is the mark-to-market profit or loss (in dollars) that you will have on each da
b. What is your total profit or loss after ten days? Have you been protected against a
c. What is the largest cumulative loss you will experience over the ten-day period? In
problem?
Position (long contracts)
Contract (barrels)
Current price 100
1,000
$60.00 a. What is the mark-to-market profit or loss (in dollars) that you will have on each da Day
0
1
2
3
4
5
6 Price
($)
60.00
59.50
57.50
57.75
58.00
59.50
60.50 Gain/Loss
($) 7
8
9
10 60.75
59.75
61.75
62.50 b. What is your total profit or loss after ten days? Have you been protected against a
Total
Protected? c. What is the largest cumulative loss you will experience over the ten-day period? In
problem? Day
0
1
2
3
4
5
6
7
8
9
10 Gain/Loss
($) Cumulative
($) Largest cumulative loss
This loss would be a problem if you had to liquidate that day.” Requirements
1. In cell F31, by using cell references, calculate the profit or loss for day 1.
Hint: Use absolute cell reference on cells E22 and E23 in order to get cell F31 ready to b
Copy and paste cell F31 onto cells F32:F40. (2 points.)
2. In cell E44, calculate the total profit or loss by using the function SUM. (1 point.)
To see whether you have been protected against a rise in oil prices, you need to assess wh
3. by using the function IF. In cell E45, input the function IF to compare whether the total profit (or loss) is greater t
greater than zero, otherwise show NO. (1 point.)
4. To calculate the largest daily cumulative loss, you need to calculate the daily cumulative
In cell F52, calculate the cumulative gain or loss for day 1 by making a cell reference to
E52. (1 point.) In cell F53, calculate the cumulative gain or loss for day 2 by adding the profit or loss fo
5. loss for day 1. Copy and paste cell F53 onto cells F54:F61. (2 points.)
6. To find the largest daily cumulative loss, in cell E63, use the function MIN. (1 point.) en days time, and it is worried about fuel costs. Suppose
il, at the current futures price of $60 per barrel. Suppose $62.50
$61.75 $60.75 $60.50 $59.75 6 7 8 9 10 you will have on each date?
been protected against a rise in oil prices? ver the ten-day period? In what case might this be a you will have on each date? been protected against a rise in oil prices? ver the ten-day period? In what case might this be a for day 1.
to get cell F31 ready to be copied onto cell F32 to F40. n SUM. (1 point.)
es, you need to assess whether you experienced a total profit or loss profit (or loss) is greater than 0, and show YES if total profit is late the daily cumulative gain or loss.
aking a cell reference to the profit or loss for day 1, cell dding the profit or loss for day 2, and the cumulative gain or
points.) nction MIN. (1 point.) Problem 31-8 Manzetti Foods, a U.S. food processing and distribution company, is considering an inve
in the euro area. You are in Manzetti’s corporate finance department and are responsible
deciding whether to undertake the project. The expected free cash flows, in euros, are
uncorrelated to the spot exchange rate and are shown here: Year
0
1
2
3
4 Free Cash Flow
(EUR million)
-25
12
14
15
15 The new project has similar dollar risk to Manzetti’s other projects. The company knows
overall dollar WACC is 9.5%, so it feels comfortable using this WACC for the project. Th
free interest rate on dollars is 4.5% and the risk-free interest rate on euros is 7%.
a. Manzetti is willing to assume that capital markets in the United States and the euro
are internationally integrated. What is the company’s euro WACC?
b. What is the present value of the project in euros?
Risk-free rate on USD
Risk-free rate on EUR Year
0
1
2
3
4
US WACC 4.50%
7.00% Free Cash Flow
(EUR million)
(25.00)
12.00
14.00
15.00
15.00
9.50% a. Manzetti is willing to assume that capital markets in the United States and the euro
are internationally integrated. What is the company’s euro WACC? Euro WACC
b. What is the present value of the project in euros?
Project value (million EUR)
Undertake project? Requirements
1. In cell E33, calculate the euro WACC. To calculate the euro WACC use the following fo
WACC_EUR = (1 + WACC_USD) * (1 + r_EUR)/(1 + r_USD) – 1. (1 point.) 2. To calculate the project value, you will use the function NPV. In cell E37, input the func
3. To decide on the attractiveness of the project, you need to assess the value of the project
In cell E38, if the project value, cell E37, is larger than 0; show Yes; otherwise display N any, is considering an investment
rtment and are responsible for
cash flows, in euros, are jects. The company knows that its
s WACC for the project. The riskate on euros is 7%. e United States and the euro area
uro WACC? e United States and the euro area
uro WACC? WACC use the following formula:
SD) – 1. (1 point.) In cell E37, input the function NPV. (1 point.)
ess the value of the project by using the function IF.
w Yes; otherwise display No. (1 point.) Problem 24-12 coupon payment date. It has a price of $99. What is the bond’s yield to maturity and yield
call?
Coupon rate
Payment frequency
Time until first call date (years)
Term of bond (years)
Call price
Current price 5.00%
Semi-annually
2
3
$100.00
$99.00 Coupon payment
Yield to call
Yield to maturity Requirements
1. In cell D13, by using cell references, calculate the semi-annual coupon payment (1
To calculate the yield to call of the bond, use the function RATE. In cell
2. To calculate the yield to maturity of the bond, use the function RATE. In cell
function RATE and cell references, calculate the yield to call of the bond
3. using the function RATE and cell references, calculate the yield to maturity of the
pt.). o maturity and yield to coupon payment (1 pt.).
E. In cell D14, by using the
RATE.
In cell
D15, by
f the bond
(1 pt.).
d to maturity of the bond (1 Problem 23-12 Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale
equipment and clothing for recreational activities such as camping, skiing, and hiking. So
your company has gone through three funding rounds:
Round
Series A
Series B
Series C Date
Feb. 2009
Aug. 2010
Sept. 2011 Investor
You
Angels
Venture Capital Currently, it is 2012 and you need to raise additional capital to expand your business. You
decided to take your firm public through an IPO. You would like to issue an additional 6
million new shares through this IPO. Assuming that your firm successfully completes its
you forecast that 2012 net income will be $7.5 million.
a. Your investment banker advises you that the prices of other recent IPOs have been
that the P/E ratios, based on 2012 forecasted earnings, average 20.0. Assuming tha
IPO is set at a price that implies a similar multiple, what will your IPO price per sh
b. What percentage of the firm will you own after the IPO?
New shares
2012 net income forecast
Forward P/E 6,500,000
$7,500,000
20.00 a. Your investment banker advises you that the prices of other recent IPOs have been
that the P/E ratios, based on 2012 forecasted earnings, average 20.0. Assuming tha
IPO is set at a price that implies a similar multiple, what will your IPO price per sh
New shares outstanding
Earnings per share
New price with comparable P/E
b. What percentage of the firm will you own after the IPO?
Percentage you own post IPO Requirements
1. In cell E21, by using cell references, calculate the number of new shares outstandi
pt.).
2.
In cell E22, by using cell references, calculate the forecasted earnings per share (1
3. In cell E23, by using cell references, calculate the share price for the IPO (1 pt.).
4. In cell E27, by using cell references, calculate the percentage of the firm that you
after the IPO (1 pt.). c., a retailer specializing in the sale of
h as camping, skiing, and hiking. So far,
:
Shares
Share Price ($)
500,000
1.00
1,000,000
2.00
2,000,000
3.50 capital to expand your business. You have
would like to issue an additional 6.5
your firm successfully completes its IPO,
n. ices of other recent IPOs have been set such
rnings, average 20.0. Assuming that your
ple, what will your IPO price per share be?
the IPO? ices of other recent IPOs have been set such
rnings, average 20.0. Assuming that your
ple, what will your IPO price per share be? the IPO? he number of new shares outstanding (1 he forecasted earnings per share (1 pt.). he share price for the IPO (1 pt.). he percentage of the firm that you own Problem 26-4
The Greek Connection had sales of $32 million in 2009, and a cost of goods sold of $20
balance sheet for the firm appears below:
THE GREEK CONNECTION
Balance Sheet
As of December 31, 2009
(000)
Assets
Cash
Accounts receivable
Inventory
Total current assets $2,000
3,950
1,300
$7,250 Net plant, property
and equipment
Total Assets $8,500
$15,750 a. Calculate The Greek Connection’s net working capital in 2009.
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
c. The industry average days sales outstanding ratio is 30 days. What would the cash
Greek Connection have been in 2009 had it matched the industry average days sal
Sales (000)
Cost of Goods Sold (000) $32,000
$20,000 a. Calculate The Greek Connection’s net working capital in 2009.
Net working capital (000)
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
Accounts receivable days
Inventory days
Accounts payable days Cash conversion cycle (days) c. The industry average days sales outstanding ratio is 30 days. What would the cash
Greek Connection have been in 2009 had it matched the industry average days sal
Industry accounts receivable days 30 Cash conversion cycle (days) Requirements
1. In cell D31, by using cell references, calculate the company’s net working capital
2. To calculate the cash conversion cycle, you need to calculate accounts receivable d
days, and accounts payable days.
In cell D35, by using cell references, calculate the accounts receivable days(1 pt.)
3. In cell D36, by using cell references, calculate the inventory days (1 pt.).
4. In cell D37, by using cell references, calculate the accounts payable days (1 pt.).
5. In cell D38, by using cell references, calculate the cash conversion cycle (1 pt.).
6. In cell D44, by using cell references, calculate the cash conversion cycle based on
accounts receivable days (1 pt.). nd a cost of goods sold of $20 million. A simplified CONNECTION
e Sheet
ber 31, 2009
0)
Liabilities and Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term debt
Total liabilities
Common equity
Total liabilities and equity $1,500
1,000
1,220
$3,720
$3,000
$6,720
9,030
$15,750 ital in 2009.
Connection in 2009.
s 30 days. What would the cash conversion cycle for The
d the industry average days sales outstanding?
Days in a year ital in 2009. Connection in 2009. 365 s 30 days. What would the cash conversion cycle for The
d the industry average days sales outstanding? company’s net working capital (1 pt.).
calculate accounts receivable days, inventory accounts receivable days(1 pt.).
nventory days (1 pt.).
accounts payable days (1 pt.).
cash conversion cycle (1 pt.). cash conversion cycle based on the industry