UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN

College of Business

D E P A R T M E N T O F F I N A N C E

Finance 321 – Advanced Corporate Finance – Spring 2007

Assignment 1 (20 points)

Lectures 1-5

Due February 8, 2007

Problem sets are due at the beginning of class on the due date. Late assignments, which will automatically incur a 50% grade penalty, will be accepted only if the assignments have not been discussed in class or already graded. Students are allowed to collaborate with each other on any problem set, but the use of any unauthorized resource, including instructor and solution manuals, is prohibited. You are free to use any material included in the class textbook, including Appendix B – Answers to Quizzes.

(2 points)

1. List the two primary advantages of a corporation as a form of business organization.

(6 points)

2. Use the attached information from www.mhhe.com/edumarketinsight on PepsiCo Inc. (PEP) to calculate the following ratios either at the end of September 2006 or for the Last Twelve Months (LTM) ending September 2006:

A. Debt ratio

B. Times-Interest-Earned

C. Current ratio

D. Sales-to-Assets ratio

E. Return on equity

F. Market-to-book ratio (the closing price at the end of Sept. 2006 was $65.26/share)

(2 points)

3. Calculate the present value of a stream of income that starts at $10,000 a year payable at the end of the year and increases by 2% each year for 20 years, and then remains level thereafter in perpetuity, if the discount rate is 7%.


(2 points)

4. How much would an investment of $10,000 grow to in 25 years if it were invested in an account paying 7.5% interest rate if the interest rate were compounded:

A. Annually

B. Continuously

(6 points)

5. Obtain the necessary information from Yahoo! Finance (http://finance.yahoo.com/) to calculate the PVGO as a % of the closing stock price on December 29, 2006, for the following companies. (The stock symbols are listed in parentheses.) Calculate the EPS1 as the average of estimated (or actual earnings) for 2006 and estimated earnings for 2007. Calculate the growth rate as the product of the plowback ratio times ROE. Show all your calculations on your worksheets, but only list your answers on the answer sheet.

A. Apple Inc. (AAPL)

B. Google (GOOG)

C. Donnelly (RRD)

D. Target (TGT)

E. PG&E (PCG)

F. Duke Energy (DUK)

(2 points)

6. Refer to the mini-case listed on page 82 of the text about Reeby Sports. Perform the calculations indicated in the two questions and be prepared to discuss this case in class on February 8. Include your calculations on your worksheets. On the answer key, list your best estimate of the value of the stock.


Fin 321 - Assignment 1 Answer Sheet Name_________________________

(This sheet is for your answers only. Attach it to the front of your worksheets, graphs and any more detailed explanations that cannot fit here.)

1.

2. A. B.

C. D.

E. F.

3.

4. A. B.

5. A. B.

C. D.

E. F.

6.