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FIN 516 Week 1 Homework

For more classes visit www.snaptutorial.com 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 payout this cash as a onetime dividend. a.What is the ex-dividend price of a share in a perfect capital market? 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. a.Absent any other trading frictions or news, what will its share price be just after the dividend is paid? 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 1 Homework

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FIN 516 Week 2 Homework

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PROBLEM 14-11 BASED ON CHAPTER 14: WACC AND MODIGLIANI & 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? 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? 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%. 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 debtequity 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? ********************************************************


FIN 516 Week 2 Mini Case Assignment Coach Inc

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FIN 516 Week 3 Homework

For more classes visit www.snaptutorial.com Problem 20-6 on Call Options based on Chapter 20 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 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? 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). 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. Using the Black-Scholes formula, compute the price of the call Problem 30-14 on Swaps based on Chapter 30 Your firm needs to raise $100 million in funds. You can borrow shortterm at a spread of 1% over LIBOR. Alternatively, you can issue 10year, 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. a.Suggest a strategy for borrowing the $100 million. What is your effective borrowing rate?


Problem 30-6 on Futures Contract based on Chapter 30 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 3 HomeWork

For more classes visit www.snaptutorial.com 1. (TCO B) In which of the following situations may taxpayers file as married filing jointly? (Becker CPA Review Course) 2. (TCO F) A business bad debt is deductible for tax purposes as a(n): 3. (TCO I) Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A? (Becker CPA Review Course) 4. (TCO A) Which of the following does not constitute tax evasion? 5. (TCO C) Which of the following items is not subject to federal income tax? 6. (TCO B) Sam owes Bob $8,000. Bob cancels (forgives) the debt. The cancellation is not a gift, and Sam is neither insolvent nor bankrupt. Which of the following statements is correct concerning the impact of this transaction?


7. (TCO I) David, a cash basis taxpayer, owns two rental properties. Based on the following information, compute the amount that he must include in his 2012 gross rental income. Property #1, security deposit on one-year lease received 2/1/12 All of deposit returned at lease end: $1,000 Property #1, payment received 2/1/12 for last month of lease(1/13): $900 Property #1, rental income received in 2012 2/12-12/12: $8,000 Property #2, rental income received in 2012 1/12-12/12: $9,600 Property #2, security deposit received 1/1/12 to be used for last month's rent: $800 Property #2, rent 1/13 received 12/28/12: $800 8. (TCO F) Section 197's intangible assets, such as patents and trademarks, are amortized for tax purposes over: 9. (TCO E) Explain the assignment of income doctrine (AID) and the fruit of the tree doctrine. What role does the AID play in our federal income tax system, and what could be done to avoid or reduce income taxes if the AID did not exist? 10. (TCO G) Answer the following questions concerning tax laws. a. What roles do the U.S. Constitution and U.S. Congress play in creating the tax law? b. What does the common body of tax law (CBOTL) consist of? Briefly explain how a tax bill becomes a tax law. c. What role does the Internal Revenue Service play in interpreting, and providing guidance on, the tax law? What types of tax law guidance are published by the IRS?

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FIN 516 Week 4 Homework


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FIN 516 Week 4 Homework

For more classes visit www.snaptutorial.com 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? Problem 23-4 on IRR of Venture Capital based on Chapter 23


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)? ********************************************************

FIN 516 Week 5 Homework

For more classes visit www.snaptutorial.com 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? 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. ********************************************************

FIN 516 Week 5 HomeWork

For more classes visit www.snaptutorial.com 1. (TCO E) For federal tax purposes, royalty income not derived in the ordinary course of a business is classified as: 2. (TCO F) When comparing corporate and individual taxation, the following statements are true, except:


3. (TCO H) Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows(Becker CPA Review Course):  $500 interest on federal income tax refund.  $600 interest on state income tax refund.  $800 interest on federal government obligations.  $1,000 interest on state government obligations. What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax return? 4. (TCO B) A contribution made to the following donee is not deductible 5. (TCO A) The following taxes were paid by Tim: Real estate taxes on his home: $1,000 State income taxes: $900 State gasoline tax (personal use of automobile): $150 In itemizing his deductions, what is the amount that Tim may claim as a deduction for taxes? 6. (TCO F) Hoover, Inc. had gross receipts from operations of $230,000, operating and other expenses of $310,000, and dividends received from a 45 percent-owned domestic corporation of $120,000. Hoover's tax position for the year is: 7. (TCO G) Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?(Becker CPA Review Course) 8. (TCO G) Bob, who is single, has $90,000 of salary, $25,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $90,000. Of the $30,000 loss, how much is deductible? 9. (TCO F) Jen owns a sole proprietorship, and Steve is the sole shareholder of a C (regular) corporation. Each business sustained a


$14,000 operating loss and a $3,000 capital loss for the year. Evaluate how these losses will affect the taxable income of the two owners? 10. (TCO G) Briefly (1) define and (2) discuss the purpose and impact of each of the following: a. net operating loss b. at-risk rules c. tax shelter

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FIN 516 Week 5 IPO Paper

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FIN 516 Week 5 Mandatory Problems

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Mandatory Problem 5-1 Smith Trucking Company (STC is evaluating a potential lease for a truck with a 4 year life that costs $40,000 and falls into the MACRS 3 year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck’s 4 year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If STC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. STC’s tax rate is 40%. Should the firm lease or buy? (Note: MACRS rates for years 1 – 4 are 0.33, 0.45, 0.15, and 0.07). a.$849 b.$896 c.$945 d.$997 e.$1,047 Heavy use of off-balance sheet lease financing will tend to a.Make a company appear more risky than it actually is because its stated debt ration will be increased. b.Make a company appear less risky than it actually is because its stated debt ratio will appear lower. c.Affect a company’s cash flow but not its degree of risk. d.Have no affect on either cash flows or risk because the cash flows are already reflected in the income statement. e.Affect the lessee’s cash lows but only due to tax affects. ********************************************************


FIN 516 Week 6 Homework

For more classes visit www.snaptutorial.com Problem 28-9 on Acquisition Analysis based on Chapter 28 Mergers and Acquisitions 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. Problem 16-8 on Managerial Decision based on Chapter 16 Financial Distress, Managerial Incentives, and Information 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.) 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? ********************************************************

FIN 516 Week 7 Homework

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FIN 516 Week 7 Homework

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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%. 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 one-year forward rate is F1 = $1.8857/C£. a. What is the present value of Mia Caruso’s C£4 million inflow computed by first discounting the cash flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars? Problem 31-7 on Eurobonds versus Domestic Bonds based on Chapter 31 International Corporate Finance The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there. The risk-free interest rates on dollars and yen are r$ = 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 & 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. a. Plot your profits in 1 year from the contract as a function of the exchange rate in 1 year for exchange rates from $0.75/â‚Ź to $1.50/â‚Ź. Label this line Unhedged Profits. ********************************************************

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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...

FIN 516 Enthusiastic Study / snaptutorial.com  

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...

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