Reference no: EM131712501

Part -1:

1. What is the main formula that determines a firm's value? How do cash flows affect the value?

2. With respect to a balance sheet with categories Assets, Liabilities, and Equity, construct a simple mathematical equation that links the three. How is the Income Statement different from the Statement of Cash Flows? Which one is the most important for discerning the company's true operating story and then forecasting its future prospects?

3. Discuss in a sentence the relevance of historic and competitive benchmarking with respect to financial ratios (i.e., advantages and challenges for each). What, if anything, is revealed in the analysis? What makes benchmarking difficult?

4. Why is discounting used when describing PV and compounding used when depicting FV?Would you prefer your savings account to have more frequent or less frequent compounding and why? Why are effective rates of return used in finance?

5. What causes a bond to trade at a discount from its issuance price? What causes a bond to trade at a premium to its issuance price?

6. a) What is the future value of a 20-year ordinary annuity of $50 if the interest rate is 8%?
b) What is the present value of the annuity?
c) What are the future and present values if the annuity were an annuity due?
d) If I plan to buy a $200,000 house with a 30-year mortgage at 9%, what is my monthly payment?
e) How much principal would I pay in the first month of the mortgage?

Use the following financial information for Ridley Inc. to complete Problems 7 - 9

Assets	2016	2015
Cash	$ 21,000	$ 20,000
Short-Term Invest.	3,759	3,240
Accounts Receivable	52,500	48,000
Inventories	84,000	56,000
Total Current Assets	$ 161,259	$ 127,240
Net Fixed Assets	$ 218,400	$ 200,000
Total Assets	$ 379,659	$ 327,240
Liabilities And Equity	2016	2015
Accounts Payable	$ 33,600	$ 32,000
Notes Payable	19,929	6,480
Accruals	12,600	12,000
Total Current Liabilities	$ 66,129	$ 50,480
Long-Term Debt	67,662	58,320
Total Liabilities Common Stock	133,791 183,793	108,800 178,440
Retained Earnings	62,074	40,000
Total Equity	$ 245,868	$ 218,440
Total Liabilities & Equity	$ 379,659	$ 327,240

Income Statement
2016		2015
Sales	$ 420,000		$ 400,000
COGS except depr.	300,000		298,000
Depreciation	19,660		18,000
Other Expenses	27,600		22,000
EBIT	$ 72,740		$ 62,000
Interest Expense	5,740		4,460
EBT	$ 67,000		$ 57,540
Taxes (40%)	26,800		23,016
Net Income	$ 40,200		$ 34,524
Other Data	2016		2015
Stock Price	$ 90.00			$ 96.00
Shares Outstanding	4,052,000		4,000,000
Tax Rate	40%		40%
Lease Payments	$ 20,000		$ 20,000
Statement of Cash Flows	2016
Operating Activities
Net Income	40,200
Adjustments:
Noncash Adjustments:
Depreciation & Amortization	19,660
Changes in Working Capital:
Change in Accounts Receivable        Change in Inventories   Change in Accounts payable	(4,500) (28,000) 1,600
Change in Accruals	600
Net Cash Provided (Used) by Operating	29,560
Investing Activities
Cash used to acquire fixed assets	(38,060) (gross)
Change in short-term investments	(519)
Net Cash Provided (Used) By Investing	(38,579)
Financing Activities
Change in Notes Payable	13,449
Change in Long-Term Debt	9,342
Change in Common Stock	5,353
Payment of Cash Dividends	(18,125)
Net Cash Provided (Used) by Financing	10,019
Summary
Net Change in Cash	1,000
Cash at Beginning of Year	20,000
Cash at End of Year	21,000

7. a) What can you conclude from the statement of cash flows?
b) What is RidleyInc's NOPAT?
c) What is RidleyInc'sOperating Capital in 2016 and 2015?
d) What is RidleyInc's FCF in 2016?
e) What are RidleyInc's "net uses" of its FCF?

8. a) Calculate the current and quick ratios for Ridley in 2015 and 2016. What do these ratios imply regarding the company's liquidity? Would your answer change if you know the industry average current ratio is 2.1 and quick ratio is 1.2?
b) Calculate the total asset turnover, DSO, and inventory turnover ratios for 2015 and 2016. Without even comparing to industry averages, what do these ratios tell us about Ridley's asset management? Do I want these ratios to increase or decrease over time?
c) What is Ridley's ROE? Use the Dupont formula to decompose the ROE into three ratios.

9. a) What is the value of a 20-year, 12% semiannual coupon bond with a par value of $1000 if its required rate of return is 8%?
b) What is the yield to maturity on an 8-year, 8% semiannual coupon bond selling for $900? What is the yield to maturity if the same 8-year, 8% semiannual coupon bond is selling for $1200?
c) Draw a "normal" yield curve and explain the difference between a normal and an abnormal yield curve.

Part -2:

1. What is the difference between a short call and a short put option, what are the investor's expectations of the movement of the stock, how about the seller who is short the options, what do they expect? Of the five inputs discussed, what are three important inputs in the Black-Scholes option pricing model? For each of the three that you have chosen, what happens to the call option premium, all else being equal, when that variable increases?

2. Discuss the nature of the numerators and denominators in the dividend discount model and the free cash flow valuation model. What makes these approaches similar; what makes these different?

3. Discus the three pairs of elements of the weighted average cost of capital formula. What does the WACC denote? (For example, what does WACC = 9.7% mean?) Which WACC element is calculated "after tax" and Why?

4. What asset pricing model does the WACC use to compute cost of equity? In this model, what are the market risk premium and beta? Using this model that you described, what would be the cost of equity if the Beta is 0?

5. Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Stock Amount Beta
A $1,075,000 1.20
B 675,000 0.50
C 750,000 1.40
D 500,000 0.75
$3,000,000

6. Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns?
Economic
Conditions Prob. Return
Strong 30% 32.0%
Normal 40% 10.0%
Weak 30% - 16.0%

7. The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

8. To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You have obtained the following information.
(1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00.
(2) The company's tax rate is 40%.
(3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20.
(4) The target capital structure consists of 35% debt and 65% common equity.
The firm uses the CAPM to estimate the cost of common stock. What is its WACC?

9. Westwood Painting Co. is considering a project that has the following cash flow and WACC data. Find the project's
a) NPV
b) IRR
c) Modified IRR
d) Discounted Payback Period

WACC: 12.25%

Year 0 1 2 3 4
Cash flows -$850 $300 $320 $340 $360

10. Carolina Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. Which project should Carolina Company choose?

WACC: 7.75%

Year 0 1 2 3 4
CFS -$1,050 $675 $650
CFL -$1,050 $360 $360 $360 $360