FIN526 EMBA Final Exam, spring 2017
Upload a Word, Excel, or pdf document that shows all your work with step-by-step explanations. Make sure your final answer is clearly identified. Point values are given in parentheses.
1.A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. What is the price of this bond if the yield to maturity is 10.15%? (15 points)
(Note that in this case we have annual coupon payments, not semi-annual)
2.Martin’s Yachts will annual dividends of $1.40, $1.75, and $2.00 a share over the next three years (i.e., year 1, year 2, year 3, respectively). Afterwards (i.e., beginning in year 4), the company plans topay an annual dividend of $2.10 per share indefinitely. You estimate the required return on this stock to be 12%. Based on the dividend discount model, what is the maximum amount you should bewilling to pay to buy one share today? (15 points)
3.The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding. (15 points)
4.What actions can a firm take to increase its sustainable growth rate? (15 points)
5.Jack’s Construction Co. (JCC) has 80,000 bonds outstanding that are currently selling at par (face) value. Bonds with similar characteristics are currently yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is currently yielding 4% and the market risk premium is 8%. What is Jack’s weighted average cost of capital? The corporate tax rate is 35%. (20 points)
6.Refer to question #5 above. JCC is actually comprised of three divisions: a high risk division (A), a low risk division (B), and an average risk division (C). Suppose the company used the cost of capital you got in part (a) above to evaluate projects in Division A. Explain exactly what is wrong with this policy and whatkinds of errors it might cause. (15 points)
(Your answer to this question is not dependent on whether or not your answer to question #5 is correct)
7.You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3 year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment in equipment of $165,000 which is depreciated straight-line to zero over the 3 year project life. The actual market value of the equipment at the end of year 3 is estimated to be $35,000. Initial (t=0) net working capital (NWC) investment is $80,000 and NWC will maintain a level equal to 20% of the next year’ssales each year thereafter. The tax rate is 35% and the required return on the project is 10%. What is the NPV of this project? (25 points)