HW #2 (answers)
6 Pages

HW #2 (answers)

Course Number: FIN 645, Fall 2010

College/University: Kentucky

Word Count: 1152

Rating:

Document Preview

Name: ______________________________________________ Class Time: ________________________________________ FIN 445 Homework #2 The goal of this assignment is to prepare you for the exam. This assignment is due on Monday, March 8. Please make a copy of your answers, as I will post the answers to the homework for your use as a study aid. Finally, for those of you using calculators, I do not require that you write...

Unformatted Document Excerpt
Coursehero >> Kentucky >> Kentucky >> FIN 645

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

______________________________________________ Name: Class Time: ________________________________________ FIN 445 Homework #2 The goal of this assignment is to prepare you for the exam. This assignment is due on Monday, March 8. Please make a copy of your answers, as I will post the answers to the homework for your use as a study aid. Finally, for those of you using calculators, I do not require that you write anything down on the paper. If you want to exclusively use the calculator and only write down the answer, that is your right. However, no partial credit will be given for a wrong answer. This policy will apply to the exam as well. If I can not clearly read your work, I will assume it is wrong. There are no stupid questions, just stupid people that ask questions. -unknown 1. You have just landed a job as a financial analyst at a convenient store. On your first day, your boss walks into your cube and asks you to evaluate two mutually exclusive projects: one is a new hot dog warmer and the other is nacho cheese station. Thoroughly disgusted and questioning your decision to take this job, you begin work immediately. Your boss provided you with the following information: The required rate of return is 10.75 percent for the hot dog warmer and 12 percent for the nacho cheese station. The convenient store has a 2 year payback cutoff on all capital expenditures. Year 0 1 2 3 Hot Dog Warmer -36,000 21,600 18,200 22,100 Nacho Cheese Station -69,900 52,600 46,100 0 Not knowing which metric your boss wants you to use to evaluate the project, you solve for two. What is the payback period for each of the 2 projects? Hot Dogs: 36,000 21,600 = 14,400 18,200 = The firm has a payback of 2 years Nachos: 69,900 52,600 = 17,300 46,100 = The firm has a payback of 2 years What is the NPV of the Hot Dog Warmer? Hot Dogs: -36,000 + 21,600/(1.1075) + 18,200/(1.1075)^2 + 22,100/(1.1075)^3 = 14,610.69 What is the NPV of the Nacho Cheese Station? Nachos: -69,900 + 52,600 /(1.12)+ 46,100/(1.12)^2 = 13,814.92 Given that these are mutually exclusive projects, which would you recommend to your boss and why? Recommend the Hot Dog Warmer given that it has a higher NPV than the Nacho Cheese Station. Note: even those both of these projects meet the firms required payback period, payback period does not provide the ability to rank projects. 2. Your boss liked your effort on the smaller cap ex project, so he enlists your help on a larger project: expanding the store to allow for more hot dog warmers and nacho cheese stations. The project will require $350,000 for new fixed assets all due at the beginning of the project, Net working capital is expected to increase by $75,000 to start the expansion, although at the end of the project you expect that to revert to previous levels. The project has a 7-year life. The fixed assets will be depreciated using 5 year MACRS (see the formula sheet). At the end of the project, the fixed assets can be sold for 30 percent of their original cost. The convenient store currently generates sales of $1,000,000 and costs of $800,000. The expansion is expected to generate additional sales of $600,000 and costs of $400,000. The tax rate is 35 percent and the required rate of return is 12 percent. What are the projects cash outflows at T = zero? -425,000 -- See the Excel sheet What is the projects EBIT for the first year of the project? 130,000 -- See the Excel sheet List all of the cash flows in year 7 of the project? OCF = 130,000 Fixed Assets = 68,250 Change in NWC -75,000 Calculate = the NPV of the expansion project. Should you take it? NPV = 323,504 -- See the Excel sheet 3. Your brew pub has been a success by any measure. As such, you have had every brewery salesmen in the U.S. come by to pitch you on the latest brewing equipment. The last salesman made an intriguing pitch. His firms newest line of equipment produces a more flavorful beer and runs solely on solar power. Given your interest in green technologies you listen to his pitch. If you spend the $1,500,000 to buy the equipment, he promises you will increase your sales by 25% (not only because the beer tastes better, but also because consumers are interested in knowing the beer was made using solar power). Given the use of solar energy, he promises you will lower you variable costs by 10%. The equipment has a useful life of 5 years and will be depreciated using 3 year MACRS. You currently generate sales of $1,500,000 and incur variable costs of $1,200,000. Your fixed costs are $200,000. There will be no effect on your Net Working Capital or fixed costs, and the value of the equipment in 5 years will be zero. Your tax rate is 40%. Your required rate of return is 12%. Based on an NPV analysis, should you buy the equipment? Note: If you want any extra credit, I strongly recommend clearly showing me your work for the cash flow, depreciation, etc. NPV = 53,283 -- See the excel sheet 4. Brewpub continued. After consulting your CFO about the proposed solar brewing equipment from above, he recommends that you finance the $1,500,000 equipment purchase by using a combination of debt and equity. Realizing that you will use the WACC instead of the 12% required rate from above, he informs you that your firms equity beta is 1.4, the risk-free rate is 4%, and the expected return of the market is 11%. The yield to maturity on any new bond offering would be 7% and you expect to use 40% debt and 60% equity to finance the project. Tax rate is 40%. Solve for the WACC of this project. Re = .04 + 1.4(.11-.04) = 13.8% Rd = 7% (given above) WACC = .6*13.8 + .4*7*(1-.4) = 9.96% Using the WACC from above, calculate the NPV using the information from Q3. NPV = 126,696 Simply plug this into the discount rate of the NPV formula from Q3 in the Excel sheet 5. After you purchase the brewing equipment, it takes another 3 months to get the new equipment installed and tested. Once you have everything up and running, you make a press release to Wall Street announcing your new solar-powered equipment. Upon the announcement, your stock immediately rises to reflect the positive NPV project. The rise is exactly proportional to per share gain in NPV. Further, the exact price rise is maintained well into the future. How does this scenario relate to market efficiency? Does it violate some form of efficiency? Is it consistent with some form of efficiency? This is consistent with Weak and Semi-Strong efficiency, but violates Strong-Form Efficiency Assume your firms overall WACC is 12%. Your analyst pitches the following 3 possible projects to you. Which do you choose and why? Project A B C Required Rate 12% 8% 20% IRR 13% 10% 21% D 16% 15% Because the projects are not mutually exclusive, I would take projects A, B, and C because each of them had an IRR higher than the PROJECTS required rates of return. I do not use the firms WACC if these projects were of different risk than the firm (e.g. B, C, and D). If the projects were mutually exclusive, I couldnt use IRR to rank projects, I would need to use NPV.

Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

Kentucky - FIN - 645
F ormula Sheet:FV = PV(1 + r) t PV = FV / (1 + r) t Perpetuity: PV = C / rOrdinary Annuities:A nnuities Due:Continuous compounding: EAR = er 1S tock Price =.or more generally:Year 1 2 3 4 5 6 7 8MACRS Depreciation Table 3-Year 5-Year 7-Year 33.33%
Kentucky - FIN - 645
1. What is IPO Underpricing? Underpricing occurs during the IPO process when the issuing firms stock price rises much higher in the secondary market than it was priced in the primary market. 2. Explain the issuing firms view of IPO underpricing. This is a
Kentucky - FIN - 645
Chapter13Corporate Financing Decisions and Efficient Capital MarketsMcGrawHill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Understand the importance of capital market efficiency Be able to defin
Kentucky - FIN - 645
C hapte 14 rCapital Structure: Basic ConceptsMcGrawHill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Understand the effect of financial leverage (i.e., capital structure) on firm earnings Underst
Kentucky - FIN - 645
C hapte 15 rCapital Structure: Limits to the Use of DebtMcGrawHill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Define the costs associated with bankruptcy Understand the theories that address th
Kentucky - FIN - 645
C hapte 16 rDividends and Other PayoutsMcGrawHill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and SkillsUnderstand dividend types and how they are paid Understand the issues surrounding dividend policy deci
Kentucky - FIN - 645
Chapter 15 Raising CapitalMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Understand the venture capital market and its role in financing new businesses Understand how securities are sold
Kentucky - ACC - 603
Case 10-8 AB&C Company The engagement team is in the process of planning the audit of AB&C Companys (AB&C) financial statements as of, and for the year ended, December 31, 2006. AB&C sponsors a defined benefit pension plan that it accounts for under ASC 7
Kentucky - ACC - 603
Case 03-05 Trademark, Inc. Part 1Accounting Issues This case study is the first of a two-part Earnings Management Case. The purpose of Part 1 is to provide you with background information relating to Trademark, Inc. and raise several accounting and auditi
Kentucky - ACC - 603
TRADEMARK, INC. June 30, 1999 Enter Effective Marginal Tax Rate: 35% Taxable? Yes/No KNOWN MISSTATEMENTS Underaccrued postretirement benefit cost Accounts payable errors Overaccrued interest expense O/S of prepaid insurance U/S of accrued legal expense O/
Kentucky - ACC - 603
TRADEMARK, INC. June 30, 1999 Enter Effective Marginal Tax Rate: 35% Taxable? Yes/No KNOWN MISSTATEMENTS Underaccrued postretirement benefit cost Accounts payable errors Overaccrued interest expense O/S of prepaid insurance U/S of accrued legal expense O/
Kentucky - ACC - 603
Case 08-7 Data Trappers, Inc. Data Trappers, Inc. (DTI) is an SEC registrant headquartered in Seattle, Washington. DTI delivers security solutions to assist companies in monitoring their systems, managing information security risk and maintaining robust i
Kentucky - ACC - 603
Audits of Governmental Audits Entities EntitiesACC 603Kinney Poynter, NASACT Kpoynter@nasact.org February 25, 20101Session OverviewGovernment Auditing Standards a.k.a., Generally Accepted Government Auditing Standards (GAGAS) or Yellow Book GAAS vs.
Kentucky - ACC - 603
Auditing Standard No. 5 and theSECs Interpretive Guidance Click to edit Master subtitle styleADVISORYSeptember 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG I
Kentucky - ACC - 603
AUDIT EVIDENCEDefinition Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Accounting records Other information Cumulative in natureAccounting records Includes records of ini
Kentucky - ACC - 603
Audit Risk and MaterialityAudit wrap-up Click to edit Master subtitle style1/21/11Communication of Misstatements toMust accumulate all know and likely misstatements identified other than trivial Communicate to appropriate levels of management Distingu
Kentucky - ACC - 603
AuditingAccounting EstimatesSAS57ManagementsResponsibilityIdentifysituations Identifyrelevantfactors Accumulatedata Developassumptions Determineestimatedamount DetermineestimateisinaccordancewithGAAPInternalControlforEstimatesMGMTcommunicationofneedf
Kentucky - ACC - 603
Auditing Estimates: A Task Analysis and Propositions for Improving Auditor PerformanceEmily E. Griffith University of Georgia esemrau@uga.eduJacqueline S. Hammersley University of Georgia jhammers@uga.eduKathryn Kadous Emory University kkadous@bus.emor
Kentucky - ACC - 603
Chapter 10Finance and Investment Cycle Click to edit Master subtitle style Credit has done a thousand times more to enrich mankind than all the goldmines in the world. It has exalted labor, stimulated manufacture and pushed commerce over every sea. -Dani
Kentucky - ACC - 603
Chapter 12Reports on Audited Financial StatementsThe television industry doesnt like to see the complexity of the world. It prefers simple reporting, with simple ideas: this is white, thats black; this is good, thats bad. Filmmaker Krisztof KieslowskiM
Kentucky - ACC - 603
CONFIRMATIONSSAS67;PRACTICEALERT031Confirmationsusedfor Accountsreceivable Notesreceivable Inventory Consignedmerchandise Constructionand productioncontracts Actualandcontingent liabilities Investmentsecurities Marketvalues Accountspayable Notespaya
Kentucky - ACC - 603
MaterialitySAB 99PurposeExclusive reliance on quantitative benchmarks to assess materiality is inappropriate Misstatements are not immaterial simply because they fall beneath a numerical thresholdDefinitionThe omission or misstatement of an item in a
Kentucky - ACC - 603
PerformingAuditProceduresin ResponsetoAssessedRisksand EvaluatingtheAuditEvidenceClick to edit Master subtitle styleResponsesn nnMay perform only substantive procedures. Should design and perform substantive procedures for all relevant assertions for
Kentucky - ACC - 603
Quantifyingfinancial statementmisstatementsSAB 108Effectsofprioryearerrors Quantify effects on each financial statement Related disclosures Prior year misstatements should be considered Rollover vs. iron curtain approachRolloverapproachQuantifies mi
Kentucky - ACC - 603
Module AOther Public Accounting ServicesTheres no business like show business, but there are several businesses like accounting. David LettermanMcGrawHill/IrwinCopyright2008byTheMcGrawHillCompanies,Inc.Allrightsreserved.MODA-2Module Objectives1. 2.
Kentucky - ACC - 603
Module BProfessional EthicsTo educate a person in mind and not in morals is to educate a menace to society. - Theodore Roosevelt Always do right-this will gratify some and astonish the rest. - Mark TwainMcGrawHill/Irwin Copyright2008byTheMcGrawHillComp
Kentucky - ACC - 603
Module CLegal LiabilityWhen men are pure, laws are useless; when men are corrupt, laws are broken. Benjamin Disreali, Former British Prime MinisterMcGrawHill/IrwinCopyright2008byTheMcGrawHillCompanies,Inc.Allrightsreserved.MODC-2Module Objectives1.
Kentucky - ACC - 603
Module DInternal, Governmental, and Fraud AuditsI predict that audit committees will look increasingly to internal audit departments to be their eyes and ears across the corporation. - Jacqueline K. Wagner, general auditor GM and past Chairman of the II
Kentucky - ACC - 603
Module EOverview of SamplingThere are three kinds of lies: lies, damned lies, and statistics. Benjamin DisraeliMcGrawHill/IrwinCopyright2008byTheMcGrawHillCompanies,Inc.Allrightsreserved.MODE-2Learning Objectives1. Understand the basic principles o
Kentucky - ACC - 603
Module FAttribute SamplingThere are five kinds of lies: lies, damned lies, statistics, politicians quoting statistics, and novelists quoting politicians on statistics. Stephen K. TaggMcGrawHill/IrwinCopyright2008byTheMcGrawHillCompanies,Inc.Allrightsr
Kentucky - ACC - 603
Module GVariables SamplingUSA Today has come out with a new survey-apparently three out of every four people make up 75% of the population. David LettermanMcGrawHill/Irwin Copyright2008byTheMcGrawHillCompanies,Inc.Allrightsreserved.MODG-2Learning Obj
Kentucky - ACC - 603
AICPA Plain English Guide to Independence July 1, 2009TABLE OF CONTENTS NOTICE TO READERS PREFACE Purpose of this guide Conventions and key terms used INTRODUCTION What is independence? What should I do if no specific guidance exists on my particular ind
Kentucky - ACC - 603
PlanningandSupervisionSAS108(AU311)Introduction 1stStandardofFieldwork:Theauditormust adequatelyplantheworkandmustproperly superviseanyassistants. Involvesdevelopinganoverallstrategy Plantheauditsoitisresponsivetotheassessment ofRMMAppointmentoftheIn
Kentucky - ACC - 603
Recent Audit developmentsClick to edit Master subtitle style1/21/11PCAOBsupervisory approach and market challenges1/21/11Supervisory approachCompared to regulatory or oversight approach Focus on enterprise-wide risk management Identify areas for imp
Kentucky - ACC - 603
Accounting 603-Attest Function Spring 2011 Robert J. Ramsay, CPA, Ph.D. 355M Gatton College Office Hours: By appointment Office Phone: 257-3702 Home Phone 268-7718 e-mail: rjrams2@uky.eduA critical examination of contemporary professional attestation the
Kentucky - ACC - 603
UnderstandingtheEntityandIts EnvironmentandAssessingthe RisksofMaterialMisstatementPurposesofUnderstandingEstablishes a frame of reference Establishing materiality Considering appropriateness of accounting principles Identifying areas of special aud
Kentucky - ACC - 603
Case 10-6 Care For Kids Inc. You are the senior manager or audit engagement partner on Care For Kids Inc., a not-for-profit organization that has a December 31 year-end. While performing year-end substantive procedures, the engagement team identified an e
Kentucky - ACC - 301
Inventories: Inventories: Additional Valuation IssuesProfessor Dennis Chambers Ch ACC 301Chapter 9 Objectives ObjectivesExplain and apply the lower of cost or market rule Ex Identify Identify when inventories are valued at net realizable value Explain
Kentucky - ACC - 301
Welcome to ACC 301 Intermediate Accounting IIntroduction Introduction and Orientation OrientationACC 301 Intermediate Accounting I Prof. Dennis Chambers My name is Professor Dennis Chambers Email: dennis.chambers@uky.edu Facebook: Office Hours: Tuesda
Kentucky - ACC - 301
Chapter #1 NameTake-Home Quiz Section/TimeInstructions: The questions in this quiz are very similar to the types of questions you will see on the midterm and final exams. Circle the choice that best answers the question. Turn in your quiz at the beginni
Kentucky - ACC - 301
Chapter 1 Objectives Fi Financial Accounting and Accounting Standards Accounting StandardsProfessor Dennis Chambers ACC 301 3011. 2. 3. 4. 5. 6. 7. 8. 9.Identify the major financial statements and other means of financial reporting. Explain how account
Kentucky - ACC - 301
Chapter #2 NameTake-Home Quiz Section/TimeInstructions: The questions in this quiz are very similar to the types of questions you will see on the midterm and final exams. Circle the choice that best answers the question. Turn in your quiz at the beginni
Kentucky - ACC - 301
Chapter 2 Objectives Objectives1. 2.Conceptual FrameworkProfessor Dennis Chambers ACC 301 3013. 4.5. 6. 7. 8.Describe the usefulness of a conceptual framework th Describe the FASBs efforts to construct a conceptual framework Understand the objective
Kentucky - ACC - 301
CHAPTER 3The Accounting Information System SOLUTIONS TO EXERCISESEXERCISE 3-1 (1520 minutes) Apr. 2 Cash . Equipment . Beverly Crusher, Capital. 2 3 No entrynot a transaction. Supplies. Accounts Payable . 7 Rent Expense . Cash. 11 Accounts Receivable. S
Kentucky - ACC - 301
Chapter # 3In-Class ExercisesSolution to Exercise #1(a) Journal Entries: 1/1 Asset Asset 1/2 Asset Asset 1/3 Asset Liability 1/4 Expense Liability 1/4 Expense Asset Revenue Asset 1/5 Expense Asset Revenue Asset 1/9 Asset Liability 1/11 Asset Asset 1/11
Kentucky - ACC - 301
Chapter # 3In-Class ExercisesExercise #1Ajax Company Simplified Balance Sheet As of December 31, 2006 19,945 Liabilities Stockholders Equity Total Assets $19,945 Liabilities & Stockholders EquityAssets6,985 12,960 $19,945The following transactions o
Kentucky - ACC - 301
Chapter #3 Name Section/TimeTake-Home QuizInstructions: The questions in this quiz are very similar to the types of questions you will see on the midterm and final exams. Circle the choice that best answers the question. Turn in your quiz at the beginni
Kentucky - ACC - 301
Chapter 3 Objectives Review of the Accounting ProcessProfessor Dennis Chambers ACC 3011. 2. 3. 4. 5. 6. 7.Understand basic accounting terminology. Explain double entry rules. Identify steps in the accounting cycle. Record transactions in journals, post
Kentucky - ACC - 301
CHAPTER 4Income Statement and Related Information SOLUTIONS TO EXERCISESEXERCISE 4-1 (1820 minutes) Computation of net income Change in assets: Change in liabilities: Change in stockholders equity: Change in stockholders equity accounted for as follows:
Kentucky - ACC - 301
Chapter # 4In-Class ExercisesSolutions Question #1 Multi-step formatAjax Company Income Statement For the year ending December 31, 2006 Sales Revenue: Sales Sales discounts Sales returns Net sales revenue Cost of Goods Sold: Merchandise inventory, Janu
Kentucky - ACC - 301
Chapter # 4In-Class ExercisesExercise #1Ajax Company has the following income-related information for 2006:Description Rent revenue Sales returns Interest revenue Loss on sale of investments Dividend revenue Freight and transportation-in Sales discoun
Kentucky - ACC - 301
Chapter #4 NameTake-Home Quiz Section/TimeInstructions: The questions in this quiz are very similar to the types of questions you will see on the midterm and final exams. Circle the choice that best answers the question. Turn in your quiz at the beginni
Kentucky - ACC - 301
Chapter 4 Objectives Income StatementProfessor Dennis Chambers Dennis Chambers ACC 301Identify the uses and limitations of an income statement Prepare a single-step income statement Prepare a multi-step income statement Explain how irregular items are r
Kentucky - ACC - 301
Chapter # 5In-Class ExercisesSolutionsAjax Company Balance Sheet December 31, 2006 Assets Current assets Cash Marketable securities-at fair value Accounts receivable Less allowance for doubtful accounts Inventories, at lower of average cost or market P
Kentucky - ACC - 301
CHAPTER 5Balance Sheet and Statement of Cash Flows SOLUTIONS TO EXERCISESEXERCISE 5-3 (1520 minutes) 1. 2. 3. 4. 5 6. 7. 8. 9. a. b. f. a. f. h. i. d. a. 10. 11. 12. 13. 14. 15. 16. 17. 18. f. a. f. a. or e. (preferably a.) c. and N. f. X. f. c.5-1EXE
Kentucky - ACC - 301
Chapter # 5In-Class ExercisesAjax Inc. Cash Flow Statement For the year ended December 31, 2008 Cash Flows from Operating Activities Net Income Adjustments to reconcile NI to Cash Depreciation expense Gain on sale of equipment Increase in accounts recei
Kentucky - ACC - 301
Chapter # 5In-Class ExercisesExercise #1Ajax Company has decided to expand their operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion. Note that the bookkeeper has made a few
Kentucky - ACC - 301
Chapter #5 NameTake-Home Quiz Section/TimeInstructions: The questions in this quiz are very similar to the types of questions you will see on the midterm and final exams. Circle the choice that best answers the question. Turn in your quiz at the beginni
Kentucky - ACC - 301
Chapter 5 Objectives ObjectivesBalance Sheet Statement Balance Sheet & Statement of Cash Flows of Cash FlowsProfessor Dennis Chambers Dennis Chambers ACC 301Identify the uses and limitations of the balance sheet Identify the major classifications of th
Kentucky - ACC - 301
CHAPTER 6Accounting and the Time Value of Money SOLUTIONS TO EXERCISESEXERCISE 6-1 (510 minutes) (a) Rate of Interest 9% 3% 5% 9% 5% 3% (b) Number of Periods 9 20 30 25 30 281. a. b. c. 2. a. b. c.EXERCISE 6-3 (1015 minutes) (a) (b) (c) (d) $7,000 X 1
Kentucky - ACC - 301
Chapter # 6In-Class ExercisesExercise #1 (Future value of a single sum)Present Value $ $ $ $ 10,000 8,500 6,000 2,000 11% Interest Rate 6% 12% Number of Periods 15 35 2 $ $ 6,615 10,621.78 Future ValueExercise #2 (Present value of a single sum)Presen