...CHAPTER 16 2. Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of Baruk’s assets is $81 million, and the firm has no other liabilities. Assume perfect capital markets. a. Suppose Baruk has 10 million shares outstanding. What is Baruk’s current share price? Assets – debt / shares 81-36/10 = 4.5 $4.50 per share b. How many new shares must Baruk issue to raise the capital needed to pay its debt obligation? Debt / share price 36/4.5 = 8 million shares c. After repaying the debt, what will Baruk’s share price be? Share price would still be the same $4.50 7. You have received two job offers. Firm A offers to pay you $85,000 per year for two years. Firm B offers to pay you $90,000 for two years. Both jobs are equivalent. Suppose that firm A’s contract is certain, but that firm B has a 50% chance of going bankrupt at the end of the year. In that event, it will cancel your contract and pay you the lowest amount possible for you to not quit. If you did quit, you expect you could find a new job paying $85,000 per year, but you would be unemployed for 3 months while you search for it. a. Say you took the job at firm B, what is the least firm B can pay you next year in order to match what you would earn if you quit? You can earn $85,000 per year, however you would be unemployed for 3 months, so in reality, you would only work for 9 months and make $63.75 thousand. b. Given your answer to part (b), and assuming your cost...
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...invoices dated on November 25 under each of the following credit terms: a. net 30 date of invoice b. net 30 EOM c. net 45 date of invoice d. net 60 EOM P16–5 Borrow or pay cash for an asset Bob and Carol Gibbs are set to move into their first apartment. They visited Furniture R’Us, looking for a dining room table and buffet. Dining room sets are typically one of the more expensive home furnishing items, and the store offers financing arrangements to customers. Bob and Carol have the cash to pay for the furniture, but it would definitely deplete their savings, so they want to look at all their options. The dining room set costs $3,000 and Furniture R’Us offers a financing plan that would allow them to either (1) put 10% down and finance the balance at 4% annual interest over 24 months or (2) receive an immediate $200 cash rebate, thereby paying only $2,800 cash to buy the furniture. Bob and Carol currently earn 5.2% annual interest on their savings. a. Calculate the cash down payment for the loan. b. Calculate the monthly payment on the available loan. (Hint: Treat the current loan as an annuity and solve for the monthly payment.) c. Calculate the initial cash outlay under the cash purchase option. d. Assuming that they can earn a simple interest rate of 5.2% on savings, what will Bob and Carol give up (opportunity cost) over the 2 years if they pay cash? e. What is the cost of the cash alternative at the end of 2 years? f. Should Bob and Carol choose the...
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...Solutions to Assigned Problems Chapter One 2. Example One: An individual opens a savings account at a local commercial bank with a $200 deposit. The bank loans out the $200 with other funds from other savings accounts to a local business man who is expanding his business. The local business man pays back the loan overtime with interest and the bank credits the savings account with interest. The individual withdraws money from the savings account to buy a new bike. Example Two: An individual deposits his monthly paycheck in a checking account. The bank accumulates the funds from many checking accounts and loans money to an individual buying a house. The new homeowner makes monthly mortgage payments to the bank. The bank uses the mortgage payments to cover the checks written by the person with the checking account. Example Three: An individual buys a municipal bond for an airport improvement project. The individual usually buys a municipal from a bond dealer, an investment banker marketing the bond, and the funds from the sale of the bond are delivered to the city minus a fee from the investment banker. The city uses the funds to build new facilities at the airport, for example a new parking lot. Once finished the fees received from parking are used to payback the buyer of the bond with interest. 7. The goal of the financial manager is to maximize the current share price or equity value of the firm. This goal encompasses many good business practices such as a...
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...TA-Session 1 Triangular Arbitrage in real life: | BID | ASK | USD/GBP | 1,5322 | 1,5431 | USD/EUR | 1,2647 | 1,2649 | | | | GBP/USD | 0,6480 | 0,6527 | EUR/USD | 0,7906 | 0,7907 | a) Converting EUR into GBP: EUR1000 x USD1,2647/EUR = USD1264,7 USD1264,7 x GBP0,6480/USD = GBP819,5256 Reverse, convert back into EUR: GBP 819,5256 x USD1,5322/GBP * 0,7906 EUR/USD = 992,78 Percentage loss = 0.722% b) S(GBP/EUR)BID =S(USD/EUR)BID x S(GBP/USD)BID = 1,2647 x 0,6480 = 0,8195 S(GBP/EUR)ASK =S(GBP/USD)ASK x S(USD/EUR)ASK = 0,6527 x 1,2649 = 0,8256 S(EUR/GBP)BID = 1/S(GBP/EUR)ASK = 1/0,8256 = 1,2112 S(EUR/GBP)ASK = 1/S(EUR/GBP)ASK = 1/0,8195 = 1,2203 Ratio: S(GBP/EUR)BID- S(GBPEUR)ASKS(GBPEUR)ASK= 0,8195-0,82560,8256=-0,00739 c) We would ask for the quotes of EUR/GBP from another bank. d) EUR/GBPBID = 1,3612 EUR/GBPASK = 1,3698 Yes, there is an arbitrage opportunity. We can buy USD, sell USD and buy GBP, sell GBP and buy EUR. EUR1000000*USD1.2647/EUR*1/USD1.5431/GBP*EUR1.3612/GBP = EUR1115617.68 Arbitrage profit = EUR115617.68 e) implied bid < bank’s ask ; bank’s bid < implied ask The Forward Market Effective interest rates: i(CHF) = 0,08 x180360 = 0,04 i(EUR) = 0,10 x180360 = 0,05 Investing in EUR deposits: EUR10 000 000 x (1+i(EUR)) = EUR10 000 000 x (1 + 0,05) = EUR10 500 000 Investing in covered CHF deposits: 1S(EURCHF)x (1+iCHF x F(EURCHF)) EUR100000001,1960x 1+0,04 x 1,2024=EUR10 455 652,17 The payoff...
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...Managerial Finance Important Exercises and Problems for the Final Prepared by Lody Previous Final Exam Qs BMMF Final Exam 2010 Part 1 : answer the first two questions then choose 2 only Q1 - the same as question (13-10) & (13-8) - [15 mark] Q2 - he gave us some equations and asks us to find : [10 marks] (a) the sales using 3 formulas , i think first we used Current Ration to find Total Liability , then Quick Ratio to find Inventories then Inventory turnover to get the sales (b) the DSO first we must find the Receivables = Total assets - (cash & short-term investments + inventories) then find the DSO = Receivables / sales / 365 Q3- [7.5 marks] (a) define LRP (b) similar question to 1-4 Q4- [7.5 marks] the same question as 6-1 Q5- [7.5 marks] the same question as ST-1 from chapter 10 Part 2 : answer only 2 questions Q1- what are the key features bond ? and Discuss The relationship between Coupon interest and Market interest? Q2- - What are the differences between Systematic risk and Unsystematic risk ? - Define Standard Diviation - Q3- what is the difference between Independent & Mutualy Exclusive projects , give example of each Contents Interest Rate calculation6 Problem 1-1 (Expected Rate of Interest) page 426 Another clear answer: (1-1)7 Problem (1-2) page 42, Default Risk...
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...Running Head: Comprehensive Problem Comprehensive Problem Saundra Brown, Charlene Caldwell, Ludonna Flanningan, Shana Mount MMPBL/503 Professor Brian Friedel November 30, 2009 Comprehensive Problem The basic financial statements – balance sheet, income statement, and cash flow statement – all provide managers will valuable information. But there are a number of other types of analysis that can give the financial manager insights so he can better manager the business and improve the organization’s profitability. This paper will present a 7 step program with answers and recommendations along with discussion on trends, ratios, and stock performance. Sun Microsystems is a leading supplier of computer related product, including servers, workstations, storage devices, and network switches. Sun Microsystems are used for commercial and technical applications in various industries like telecommunications, financial services, manufacturing, government, education and research, retail, health care, digital media and entertainment (Sun Microsystems, 2009). Sun Microsystems operates in the United States, Europe, Middle East, Africa, Asia Pacific, Canada and Latin America (Sun Microsystems, 2009). Mr. Scott G. McNealy, President and CEO of Sun Microsystems, acknowledges in a letter to the stockholders a 2001 annual report on the condition of the company and the...
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...The Financial Environment: Questions & Problems Questions 2.1, 2.2, 2.3, 2.6, 2.8; Problems: 2.1, 2.5 2.1 The three primary forms of businesses are: Proprietorship, Partnership, and Corporation. Benefits: Proprietorship: Easy to create form a legal perspective, inexpensive to create, subject to few governmental regulations Partnership: Low cost and easy to form, income is taxed as personal and not corporate. Corporation: Corporations have unlimited life, easy to transfer ownership, owners have limited liability. Disadvantages of proprietorship and partnership: Selling interest is difficult, owners have unlimited liability, the life of the business is limited to the life of the owners, restricted to small business status. Disadvantages of Corporations: Double taxation, time consuming and costly to set-up the corporation and file periodic reports. 2.2 Differences: Investor owned vs. not for profit: Investor owned: Individulas become owners when they purchase shares of common stock, shares can be either publicly held or privately held, stockholders have the right of control, a claim to residula earnings, and a claim on liquidation proceeds. Not-for-profit corporations: are tax exempt, run exclusively for the public - profits are not used for private gain, no single body...
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...Financial Condition Analysis Chapter 17 ANSWERS TO END-OF-CHAPTER QUESTIONS 17.1 a. Financial statement analysis, which focuses on the data contained in a business’s financial statements, is designed to assess the financial condition of the business. Operating indicator analysis, which focuses on operating (as opposed to financial) variables, attempts to identify the underlying operating parameters that contributed to the assessed financial condition. b. Of course, it is extremely important to understand a business’s financial condition, because any future plans must be supported financially. However, it is equally important, especially for managers, to understand what operational actions are required to ensure that the business maintains the financial condition needed to accomplish its mission. 17.2 Analyses that examine historical data provide managers and investors with an appreciation of the business’s current condition, which is important. However, the future is more important than the past, and the most important use of a historical analysis is as a springboard for preparing for the future. When plans are being made, pro forma (forecasted) financial statements are prepared and analyzed, so that managers can gain insights regarding the impact of alternative strategies on the business’s financial and operating condition. 17.3 The inventory turnover ratio indicates how well a business is utilizing its inventories. It tells managers how many dollars of sales...
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...Managerial Financial 3-1: Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year. Answer: Days Sales Outstanding = Receivables / Average Sales per day or Receivables / (Annual Sales/365) DSO 20 = Receivables / 20000 Receivables = DSO x Average daily sales = 20 x $20,000 Receivables = $400,000 3-2: Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Answer: Equity Multiplier (EM) = 2.5 Equity Ratio = 1/ EM Equity Ratio = 1/2.5 = 0.40 Debt Ratio + Equity Ratio = 1 Debt Ratio = 1 - Equity Ratio = 1 - 0.40 = 0.60 or 60% 3-3: Winston Washers’s stock price is $75 per share. Winston has $10 billion in total as- sets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock outstanding. What is Winston’s market/book ratio? Answer: Book value per share = Common equity/shares outstanding ($6,000,000,000/800,000,000) = $7.5 Market/book ratio = market price per share/book value per share ($75/$7.5) = 10 3-4: A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio? Answer: Price/Cash flow ratio = Price per share (PPS) / Cash flow per share 8...
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...When all individuals in an organization are able to understand the mission of the organization then they will be able to appreciate the need to work together as a team. Working more effectively as a team often had a direct payoff in quality efforts. If top management can effectively determine the strategic direction necessary to accomplish the goals of the organization and put in place the network necessary to disseminate the information and help drive the process, then quality improvements can begin (Eraut, 1994). There is a need to adopt quality as a business strategy whereby workers would enjoy the working environment and be proud of the resulting products or services. Part of achieving this result is encouraging and managing the participation of these workers in their day-to-day jobs. This is also in contrast to a prevailing notion that quality efforts and business decisions can be separate and unique. For example, a change in direction should be accompanied with a change in focus on quality efforts. Implementing a quality program in any organization does not mean the result will be lower productivity and higher costs. This belief stems from the mistaken notion that management will try to inspect in quality rather than improve systems or processes (Delener, 1999). In setting up a CI program for the company to maintain product quality Hank should explain the need for quality products to all those involved in manufacturing and production. He needs to explain the importance of...
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...supply department consisted of the supply manager, a buyer and two clerks. Multiple problems led up to the main problem in this case, one of those is the fact the engineering and production departments would contact the expediter in ordering instead of going through the requisitioner. This in turn caused faulty paperwork on items leaving the stockroom and the books would start to get out of order. Another problem was that there isn’t enough communication between departments and this has led to drop in efficiency. Everyone claims they did their job correctly but there isn’t a paper trail to prove it. Assumptions: The supply manager had no technical training on the job which is highly technical in nature, it was assumed that he had a fair grasp of the engineering terminology used in the field and so she could handle the department. She definitely was dealing with as little as she understood and so the expeditor took over the procurement process bypassing the important part of the process. The expediter who was formerly one of the technicians in the production shop and had some technical training in the army but had no background in strategic procurement processes was often contacted on ordering problems, he was not following the requisition procedures. Defining the issue: The main issue and statement of problem here is the expediter performing several daunting roles for which he is not properly...
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...1. Wilson's Meats has computed its fixed costs to be $.60 for every pound of meat it sells given an average daily sales level of 500 pounds. It charges $3.89 per pound of top-grade ground beef. The variable cost per pound is $2.99. What is the contribution margin per pound of ground beef sold? A. $0.30 B. $0.60 C. $0.90 D. $2.99 E. $3.89 Contribution margin = $3.89 - $2.99 = $.90 2. A project has an accounting break-even point of 2,000 units. The fixed costs are $4,200 and the depreciation expense is $400. The projected variable cost per unit is $23.10. What is the projected sales price? A. $20.80 B. $21.00 C. $21.20 D. $25.40 E. $25.60 Accounting break-even Q = 2,000 = ($4,200 + $400) (P - $23.10); P = $25.40 3. The Mini-Max Company has the following cost information on its new prospective project. Calculate the present value break-even point. Initial investment: $700 Fixed costs are $200 per year Variable costs: $3 per unit Depreciation: $140 per year Price: $8 per unit Discount rate: 12% Project life: 3 years Tax rate: 34% A. 68 units per year B. 75 units per year C. 84 units per year D. 114 units per year E. None of the above EAC = $700/A.12,3 = $700/2.4018 = $291.45 or N=3 I/Y=12 PV=700 CPT PMT=291.45 PV BEP = [EAC + FC(1 - Tc) - Dep(Tc)]/(CM(1 - Tc)) = [$291.45 + $200(.66) - $140(.34)]/5(.66) = 113.89 units = 114...
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...Chapter 11 Managing Bond Portfolios 1. Duration can be thought of as a weighted average of the ‘maturities’ of the cash flows paid to holders of the perpetuity, where the weight for each cash flow is equal to the present value of that cash flow divided by the total present value of all cash flows. For cash flows in the distant future, present value approaches zero (i.e., the weight becomes very small) so that these distant cash flows have little impact, and eventually, virtually no impact on the weighted average. 2. A low coupon, long maturity bond will have the highest duration and will, therefore, produce the largest price change when interest rates change. 3. An intermarket spread swap should work. The trade would be to long the corporate bonds and short the treasuries. A relative gain will be realized when the rate spreads return to normal. 4. Change in Price = – (Modified Duration Change in YTM) Price = -Macaulay's Duration1+ YTM Change in YTM Price Given the current bond price is $1,050, yield to maturity is 6%, and the increase in YTM and new price, we can calculate D: $1,025 – $1,050 = – Macaulay's Duration1+ 0.06 0.0025 $1,050 D = 10.0952 5. d. None of the above. 6. The increase will be larger than the decrease in price. 7. While it is true that short-term rates are more volatile than long-term rates, the longer duration of the longer-term bonds makes their rates of return more volatile. The higher duration...
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...an organization is thinking of implementing a New It Initiative they must ensure that they are well organized and fully understand the length and time a project may take. According to Cook “ Project failure occurs when a project is significantly over budget, takes must longer than estimated timeline, or has to be terminated because of so many problems have occurred that proceeding is no longer judged to be viable.” With Memorial Health System failed implementation of a CPOE system they had many problems including an over budgeted project, Lack of belief in project, Insufficient leadership support, Failure to respect uncertainty, Failure to anticipate short-term disruptions, and initiative undernourishment. In this paper we will discuss all six of these problems along with give possible solutions to each of them. Failure to respect uncertainty: When the system was finally implemented it was had a lot of bugs in the system. They implemented the system at all of facilities. Because of this as well as a few other issues such as lack of training the system was taken offline and they continued with the old system. The solution to this problem would have been to implement the system in one location instead of the entire hospital. This place can be used as the test facility in which you can do two things. One you can work all the bugs out and the other would be to use it as a training facility where you can send employees to get training on a system that is up and running. This will...
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...SUMMARY Recently there is something wrong with the performance of our company and I think what we should do is to upgrade the office furnitures. Because more and more of our employees claimed about the poor working condition. We can reduce the surgery fee and the sick days from the employees after the upgrade. Therefore, we can increase our productivities a lot. THE PROBLEM 1 Increase health problem- More of our employees are having health problems because of the uncomfortable furnitures. 2 Sick days increase-Because of their health problem, employees asked for the extra vacation day. 3 Surgery fee increased- Three employees had to have carpal tunnel surgery, and another had back surgery 4 Insurance fee increase- The insurance carrier was threatening to raise its premiums. 4 Productivities reduce- The day-to-day productivity of the office reduced THE REASON The problem came up from last year. If we don’t care about the problem, it will cost us a lot. For example , we already have three employees need to do carpal tunnel surgery . Cost of surgery and rehabilitation is in the range of $5,000 to $10,000 (data from :http://www.mycarpaltunnel.com/surgery-release-carpal-tunnel.shtml).And we have one employee need to have back surgery. According to the data from www.ehow.com. This procedure costs an average of $12,000to$15,000. So far the maximum cost is approximately $45000. And if we ignore that, the number of employees who need surgery would double in the next...
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