...Co. are selling for $976, have a face value of $1,000, and have a yield to maturity of 8.079 percent. How many years will it be until these bonds mature? A. 2.50 years b. 3.15 years c. 5.00 years d. 7.85 years e. 10.00 years N = ? = 5/2=2.5; I=8.079;PV=-976;PMT=70/2=35;FV=1000 BLOOMS TAXONOMY QUESTION TYPE: APPLICATION LEARNING OBJECTIVE NUMBER: 2 LEVEL OF DIFFICULTY: BASIC Ross - Chapter 006 #83 SECTION: 6.1 TOPIC: TIME TO MATURITY TYPE: PROBLEMS 2. You own two bonds. Both bonds pay annual interest, have 8 percent coupons, $1,000 face values, and currently have 8 percent yields to maturity. Bond 1 has 9 years to maturity and Bond 2 has 6 years to maturity. If the market rate of interest rises unexpectedly to 9 percent, Bond _____ will be the most volatile with a price decrease of _____ percent. a. 1; 7.26 B. 1; 6.00 c. 1; 4.49 d. 2; 1.61 e. 2; 3.57 Both bonds have a starting price of $1,000 since their coupon rates are equal to their yields to maturity. All else equal, with longer maturity bond will have the most interest rate risk (Bond 1). Price after interest rate change for Bond 1: N=9;I=9;PV=?=940.05;PMT=80;FV=1000. Percent change in price = (940.05 1000)/1000 = -.05995 = -6% BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS LEARNING OBJECTIVE NUMBER: 2 LEVEL OF DIFFICULTY: INTERMEDIATE Ross - Chapter 006 #98 SECTION: 6.1 TOPIC: INTEREST RATE RISK TYPE: PROBLEMS 3. The 6.5 percent, $1,000 face value bonds of The Theta Co. are currently selling...
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...I. Background Best Buy (“BBY”) sells consumer electronics such as computers, computer software, video games, music, DVDs, Blu-ray discs, mobile phones, digital camera, car stereos and video cameras, as well as home appliances (washing machines, dryers, and refrigerators). Salespersons are hired on a non-commissioned basis. Each store also includes a department for audio/visual equipment for automobiles, offering on-site installation services, as well as the Geek Squad "precinct" for computer repair and warranty service and accidental service plans. As of February 27, 2011, there are 1,069 BBY stores, 74 BBY Mobile stand-alone stores, 35 Pacific Sales showrooms, eight Magnolia Audio Video stores and six Geek Squad stand-alone stores in the U.S. BBY also operated 887 Carphone Warehouse and 1,566 The Phone House Stores in Europe, 64 Canada BBY stores, 144 Future Shop stores in Canada, 158 Five Star stores in China, six BBY China stores, five BBY Mexico stores and one BBY Turkey store. (Best Buy). BBY stores in the US average approximately 39,000 retail square feet, and offer products in six revenue categories: consumer electronics (39% of FY 10 (Feb.) revenues), home office (34%), entertainment soft- ware (16%), appliances (4%), services (6%), and other (1%). BBY's largest category, consumer electronics, includes products such as televisions, digital cameras and accessories, digital camcorders and accessories, e-readers, DVD players, MP3 players and accessories, musical...
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...Net Present Value and Internal Rate of Return Individual Case Study: BMW 335i versus Infiniti G37 Sport Coupe Wayne Powers TMAN 625: Economic and Financial Analysis Dr. John Markevicz April 04, 2010 Table of Contents Abstract…………………………………………………………………………………..3 Introduction……………………………………………………………………………...4 Case Study Analysis……………………………………………………………………..5 Financial Analysis on the Future Value of the BMW 335i…………………….....5 Financial Analysis on the Future Value of the Infiniti G37 Sport Coupe………...6 Conclusion……………………………………………………………………………......7 References……………………………………………………………………………......9 Table 1: The Value of the BMW 335i from 2010 to 2013…………………………......5 Table 2: The Value of the Infiniti G37 Sport Coupe from 2010 to 2013……………..6 Abstract This report gives details of the financial decision making used when purchasing one of the following two types of cars: a BMW 335i and an Infinity G37 Sport Coupe. The financial decision making was based on which of the vehicles would have the better future value. The purpose of selecting one of the vehicles was to preserve the capital used in buying the car in a way that it would not depreciate after three years. Using two important financial analysis tools, it is interesting to discover that each car presents a different future valuation. The decision to purchase the BMW 335i was made based on the results from the mathematical calculation of Net Present Value (NPV) and Internal Rate of Return (IRR)...
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...Capital Recommendation Paper Alandra Shamblee ACC 543 June 13, 2011 Sean Damico Guillermo Furniture is a furniture manufacture located in Sonora, Mexico. Guillermo Furniture was thriving until the late 1990s, when the economy just took off. With new housing, competitors moved in with more technologically advanced equipment than Guillermo. Guillermo’s furniture created by hand; was one of a kind. The competitors that moved in used computer controlled laser lathe to produce exact cuts in each piece of wood. The competitors could create furniture faster and, much more cost-effective than Guillermo’s method. Guillermo is at a standstill, they need to decide which direction to take their company in. Does Guillermo continue doing business as they have been for many years or do they upgrade their system so they can compete and succeed in the current market. Guillermo has many options they need to consider before making their decision. The reason that so many customers purchased from Guillermo is that their furniture is made by hand. Guillermo needs to think about what affect automating the furniture making will have on their loyal customers who love the handmade designs. Guillermo’s Options The company is considering three different options; continue business as usual with minimal changes, invest in high-tech equipment and begin creating new...
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...1. Explain how Versatel’s strategy deviates from discovery-driven planning (McGrath and MacMillan, 1995). The discovery-driven planning suggested by McGrath & MacMillan (1995) is a practical tool for entrepreneurs to test and redesign their business models. Since the article beliefs that ventures build on implicit assumptions turn out to be faulty and have a massive losses, discovery-driven planning suggests do research in order to turn assumptions into knowledge. The process, in which the unknown is envisioned, is captured in four documents; (1) reverse income statement that makes the ambitions explicit, (2) pro firma operations specs that lays out the activities needed to run the venture, (3) key assumption checklist that tracks all of the assumptions, and (4) a milestone planning, for monitoring the progress of the venture. (McGratch & MacMillen, 1995). There are limited number of similarities between the discovery-driven planning and the strategy of Versatel as Gary Mesch and Marc van der Heijden did not state and test any assumptions to see if their venture would be sustainable or even profitable. None of the four documents discussed above were taken into consideration when creating Verstales’s strategy. The two men ‘just’ decided “to capitalize on the opportunity created by the liberalization of the European telecommunications market” in February 1995 (Case: Versatel). Even though, it is not incorporated in the four documents, I belief assumption implies the only...
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...X2((12 + X1( X3((13 + + X2( X1((21 + X22 ( (22 + X2( X3((23 + + X3( X1((31 + X3( X2((32 + X32 ( (32 where: X1 , X2 och X3 is respective stocks amount of the total value of the portfolio. (12 , (22 and (32 is respective stocks variance (12 = (21 is the covariance between stock 1 and stock 2 (13 = (31 is the covariance协方差 between stock 1 and stock 3 (23 = (32 is the covariance between stock 2 and stock 3 CAPM: E(rj) = rf + (j ( [E(rm) -rf] where: E(rj) is the expected return of stock j E(rm) is the expected return of the market portfolio rf is the risk-free interest rate (j is the beta-value of stock j (j = Cov (rj,rm)/var(rm) = (jm ( [pic] Stock j:s contribution to the risk of the portfolio (j = [pic] MODIGLIANI & MILLER M&M Prop I. Without corporate taxes: VL = VU M&M Prop II. Without corporate taxes: rS = rU + (rU - rB) ( [pic] M&M Prop I. With corporate taxes: VL = VU + TC (B M&M Prop II. With corporate taxes: rS = rU + (rU - rB) ( [pic] ((1-TC) rWACC = [pic]rB ((1-TC) + [pic]( rS VL = [pic] where: VU = Value of the all equity financed firm (Unlevered firm) VL = Value of the Levered firm B = Value of the debt (bond value) S = Value of the equity (Stock value) TC = Corporate tax rate) rU = Required rate of return of an unlevered firm rS = Required rate of return of the Stocks rB = The cost of Bonds rWACC = Weighted Average Cost of Capital EBIT = Earnings before...
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...the following values for a lump sum assuming annual compounding: a) The future value of $500 invested at 8 percent for one year: FVN = FV1= PV × (1 +I)N = $500 x (1 + 0.08) = $500 x 1.08 = $540 b) The future value of $500 invested at 8 percent for five years: FVN = FV5= PV × (1 +I)N = $500 x (1 + 0.08)5 = $500 x (1.08)5 = $734.66 c) The present value of $500 to be received in one year when the opportunity cost rate is 8 percent (discounting): PV = FVN = $5001 = $500 = $462.96 (1 + I)N (1 + 0.08)1 (1.08)1 d) The present value of $500 to be received in five years when the opportunity cost rate is 8 percent: PV = FVN = $5005 = $500 5 = $340.29 (1 + I)N (1 + 0.08)5 (1.08)5 Problem 9.2 Repeat problem 9.1 above, but assume the following compounding conditions: Semiannual compounding, N= 2 x 4 = 8 % and I = 8 / 2 = 4% per semiannual period. Therefore here are the solutions: a) The future value of $500 invested at 8 percent for one year: FVN = FV1= PV × (1 +I)N = $500 x (1 + 0.04)2 = $500 x (1.04)2 = $540.80 b) The future value of $500 invested at 8 percent for five years: FVN = FV5= PV × (1 +I)N = $500 x (1 + 0.04)10 = $500 x (1.04)10 = $740.12 c) The present value of $500 to be received in one year when the opportunity cost rate is 8 percent (discounting): PV = FVN = $5001 = $500 = $462.28 (1 + I)N (1 + 0.04)2 (1.04)2 d) The present value of $500 to be...
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... |School of Business | | |QRB/501 Version 2 | | |Quantitative Reasoning for Business | Copyright © 2010, 2008 by University of Phoenix. All rights reserved. Course Description This course applies quantitative reasoning skills to business problems. Students learn to analyze data using a variety of analytical tools and techniques. Other topics include formulas, visual representation of quantities, time value of money, and measures of uncertainty. Policies Faculty and students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents: • University policies: You must be logged into the student website to view this document. • Instructor policies: This document is posted in the Course Materials forum. University policies are subject to change. Be sure to read the policies at the beginning of each class. Policies may be slightly different depending on the modality in which you attend class. If you have recently changed modalities, read the policies governing your current class modality. Course Materials Lial, M., Hestwood, D., Hornsby, J., & McGinnis, T...
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...features satisfy ambiguity, timing of benefits, quality of benefits these three requirements. There are two arguments in favor of wealth maximization approach: 1. Exactness: The wealth maximization criterion is based on the concept of cash flows generated by the decision rather than accounting profit which is used in profit maximization approach. Measuring benefits in terms of cash flows avoiding the ambiguity associated with accounting profit. 2. The Timing of Benefits and Quality of Benefits: Wealth maximization approach considers both the quality and quantity of benefits. It also incorporates the time value of money as we can see that the value of esteem of cash flows is calculated by discounting its element back to the present at a capitalization that reflects both time and risk. A large capitalization rate is the result of higher risk and longer time period. Thus an esteem of cash flows that is quite certain might be...
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...balance after the third payment? PV = 125,000 N = 5 I = 10% Pmt =$32,974.68 The balance after the third payment will be $57,228.79 FV = - 3. Suppose you have borrowed $170,000 to buy a new home. You plan to make monthly payments over a 30-year period. The bank has offered you an APR of 4.05%. a. What is the monthly payment of this loan? PV = 170,000 N = 30 x 12 = 360 I = 4.05/12 = .3375% Pmt = $816.51 FV = - b. What is the total amount of interest you will pay the bank over the life of the loan? $123,945.04 4. What is the effective rate of interest on a CD that has a nominal rate of 7.25 percent with interest compounded monthly? EAR = (1+.0725/12)^12 – 1 = 7.5% 5. What is the future value of $4,950 placed in a saving account for six years if the account pays 3%, compounded quarterly? PV = 4,950 N = 6 x 4 = 24 I =3/4 = .75% Pmt = - FV = $5,922.24 6. Your firm, Vandelay Industries, has just leased a $32,000 BMW for you. The lease requires seven beginning of the year payments that will fully amortize the cost of the car. How much are the payments if the applied interest rate is 6.5%? PV = 32,000 N = 7 I = 6.5% Pmt = $5,478.50 FV = - 7. You want to purchase a boat that costs $36,500. You want to finance as much of the purchase as possible with a 6-year bank loan at 8.5%...
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...considered the price of money, therefore, it is also subject to distortions due to inflation. The nominal interest rate, which refers to the price before adjustment to inflation, is the one visible to the consumer (i.e., the interest tagged in a loan contract, credit card statement, etc). Nominal interest is composed by the real interest rate plus inflation, among other factors. A simple formula for the nominal interest is: i = r + π Where i is the nominal interest, r is the real interest and π is inflation. This formula attempts to measure the value of the interest in units of stable purchasing power. However, if this statement was true, it would imply at least two misconceptions. First, that all interest rates within an area that shares the same inflation (i.e. the same country) should be the same. Second, that the lender knows the inflation for the period of time that he/she is going to lend the money. One reason behind the difference between the interest that yields a Treasury bond and the interest that yields a Mortgage loan is the risk that the lender takes from lending money to an economic agent. In this particular case, the US government is more likely to pay than a private citizen. Therefore, the interest rate charged to a private citizen is larger than the rate charged to the US government. To take into account the information asymmetry aforementioned, both the value of inflation and the real price of money is changed to their expected values resulting in the following...
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...Coast Fashions, Inc a large business of men’s and women’s apparel decided to dispose of one of their segments; Mercury Athletic. John Liedtke, head of the business development for Active Gear, Inc saw it has a possible opportunity for them to acquire it. The footwear industry is very competitive, with low growth and stable profit margins. AGI is very profitable but it is smaller than its competitors, which is becoming a disadvantage. Therefore, Liedtke believes that if they takeover Mercury will double AGI’s revenue, increase it’s leverage with contract manufactures and expand its presence with key retailers and distributions. Liedtke is evaluating the company in order to find out whether the future benefits justify or surpass the present value of the investment in Mercury. Analysis: In order for Liedtke to get a broader picture on the acquisition of Mercury, he needs to compare and analyze a list of financial data from 2006 to 2011; projected balance sheet accounts, operating results and free cash flows, and cost of capital calculations. This data will enable him to identify the strengths and weaknesses of this acquisition. First lets look a summary of the operations of both AGI and Mercury Athletics’ actual operations based on the last year given 2006 before AGI plans of acquiring Mercury. | |Active Gear, Inc |Mercury Athletic | |Revenues ...
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...concept of time value of money, cash flows of the future are estimated then discounted to their present value, There are four discounted cash flow techniques which are; Net present value technique(N.P.V), Internal rate of return technique(I.R.R), Discounted payback technique and The profitability index technique (P.I) and every one of those techniques has its own purpose(Alfred, et al, 1971) DCF Advantages|DCF Disadvantages| · Theoretically, it’s the most rational method of valuation.· It depends on future estimations rather than historical results.· It focuses on cash flow generation and less affected by accounting practices.· It allows for the different business components to be valued separately or to value the whole business.· Ease of use· Convenient for both equity shareholders and debt holders.|· Accuracy of valuation highly depends on the quality of the assumption; any wrong inputs will result in wrong outputs, "Garbage in, Garbage out".· Any slight changes in inputs can cause large changes in the outputs.· Depends on the ability of user to predict future cash flows accurately or not.| (www.macabacus.com, valuation, 5/4/2013) The Discounted cash flow method is better than compounding cash flow because discounting cash flows gives us the Present value of the money, and the present value of money is more useful in finance. Net Present Value (N.P.V) : The Net Present Value Method Depends on comparing the money value in the present with same money's future value, and taking...
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...CIMSPA Case-Study Corporate Finance - SS 2010/11 Group 41 18-04-2010 Filipa Reis nº 9485 Manuel Abegão nº 8952 David Bianchi nº 513 Ângela Fénix nº 9421 José Benjamim nº 10369 Índice Introdução ................................................................................................................................... 3 Question 1 ................................................................................................................................... 3 Operational Cash-Flows ………………………………………………………………………………………………6 Free Cash-Flows ………………………………………………………………………………………………………… 7 Net Present Value ……………………………………………………………………………………………………… 7 Internal Rate of Return ………………………………………………………………………………………………. 7 Profitability Index……………………………………………………………………………………………………… 8 Question 2 ……………………………………………………………………………………………………………………………… 8 Question 3 ……………………………………………………………………………………………………………………………… 9 Sensitivity Analysis I …………………………………………………………………………………………………… 9 NPV Break-even …………………………………………………………………………………………………………10 Sensitivity Analysis II ………………………………………………………………………………………………… 10 2 This case study is based on a company called CIMSPA, a Portuguese-based cement group, involved in manufacturing and marketing cement. This company is currently operating in South America and Africa and it’s considering a new project in Angola to exploit the opportunities of this market. The object of our study is going to be the viability of this project in terms of NPV, IRR, and Profitability...
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...increased 24.1% and 10.1%, respectively. However, EPS slightly decreased 2.7% from 2011 to 2012 due to decline in net revenue. Multiplying the firm’s EPS, 3.92 with the industry average P/E ratio, 19.82 , we calculate that there is a growth in P/E multiples from 2011 to 2012, and the increased rate is 13.1%. It indicates that PepsiCo Inc. might have a higher firm’s share value. However, the actual market price in 2012 was $74.16, and it did not reach to the estimated share value $77.69. Table 9 Cash Dividends from 2010 to 2013 of PepsiCo Inc. Depending on PepsiCo’s performance over the last three years, we assumed that it had a constant growth rate from 2010 to 2012. Through the three-year cash dividends (table 9 ), we calculated the growth rate of PepsiCo Inc. to be 4.07%, and by using RF=1.30%, rm=17.39%, β=0.36 ，we obtained that the expected rate of return in 2012 was 7.09%. According to the data from 10-K of PepsiCo Inc. and the formula, we reached the estimated share value was $74.99, which almost equals to its actual market value...
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