NCC 556 Midterm Done

NCC 556 Midterm Done - 1(15 points You have your eyes on a...

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Unformatted text preview: 1. (15 points) You have your eyes on a new pick-up truck. The price is $20,000. The dealer is offering a choice of'“special” deals: (A) $5,000 down payment with zero percent financing on the remaining $15,000 and monthly payments over 5 years; (13) $2,000 down with 0.4 percent interest per menth-for 48 months on the remaining $18,000 balance. You are a bit stressed financially and have a substantial credit card debt that costs Mgr month, a condition that you do not expect will change for several years -- so if you have some extra money, you will pay off some credit card debt; if’you need some extra money, you borrow on your credit card. Which offer do you prefer assuming payments are made at the end of' each month? it; go / Option A: Monthly Payment = Show Work Here: .6 000 clown _ 101%? : éo me Fwfilrfieqfi (l fir Ediflt" rue-n01“) moo : 2:0 (00 Present cost to you of truck under Option A = Show Work Here: rm W over: H “WW—Pligflail “, . w New, may) HEW/(7,339.0 We” ”‘1de .l5\/ :{S'OQO ....—-5 [9V :1: /5’6]&’L{, S‘O ffiboo /, Option B: 'Monthly Payment = Mia. 9 0 Show Work Here: QOGO 010M - ( # (I; 0 W? o.‘{% interest flaw/ma I t : LN” mo HOOD ”‘ X. 3?. X '2' 4:2, 90 Present cost of'truck to you under Option B a W ‘X ./ Show Work Here: ' ‘ . \ ‘ ) N395, Iz/J‘X) Plated-{23.30 / F V : 13000 b ' J, W 54122; 8 W. ‘70 1M 0 0 /1 Which option do on prefer and why? (Short sentence will suffice) I fpf‘E‘fi” O/alLW-fi r4 beau/{IE 6L0 W Z24) Peirce-«f AMAUU {’th9. (S' if)? Wick/Q COS; accept/thy ’IQJ 7'1h".€ Va 1‘16} 9’84 +00%:le 7%916 cS‘ Lafitte, (firifnnt: Pajflkenf «jar/{3'3 qO/o on Mj MOM/Vila wake-mt? Wm In“? F43 O‘F‘IC cvfidl‘i’ Card clef/ft 2 (20 points) Mindful of the losses of about 25% per year in the stock market during 2001 and 2002, smart investors are wary ofputting all their money into common stock investments and are looking for creative ways of participating in the gains that would be associated with a rise in the stock market while not suffering a loss of principal should the market decline. Salomon Smith Barney has a solution: a “risk-free” closed-end mutual fund“ Minimum investment is $100,000“ As stated in the Offering ' Memorandum, “we guarantee you will not lose money” The plan specifies that a fraction of'the initial $100,000 investment will be used to purchase zero coupon Treasury bonds (Strips) that mature at the chosen horizon, with the remaining balance invested in a stock index mutual fund (managed, of course, by SSB) This question is designed to explore the characteristics of such an investment strategy a) Suppose an investor had a-horizon of’20 years and 20-year Strips were Currently priced to provide a yield to maturity of 5 percent How much of’an initial investment of'$100,000 would have to be used to purchase strips so that the strips would be worth $100,000 in 20 years? ‘fTM ., W1 4+ which Mai/so, 5% rz :' 6”, WT i9...§€f’s.m WNW {:v .1“: iocooo} A) ’v 0'10, ww- m5“ _,, W: 437nm? t/(lI/gtiil in mm $57)“? =20 QiaEiLr‘ip D “I” \L_ K 7", ..... b) Suppose the rest ofthe initial $100,000 was invested in common stocks. What would be the expected value of the stock portion of the investment after 20 years 7 if'stocks were expected to earn an average compound rate of'return of‘9 percent per year (dividends and capital gains) and all dividends are reinveste "(no interim withdrawals)? W iOOk" 37(9 o°’gc}() : Xéi) 3 ii 0 M 033i ('1': ??o min-Sszctifl/ah ’3'“ —> Expgoieci Value (liter 20 W = (622$;ng ’0‘?) ' /‘“"”WW ‘3‘“3 ‘/ : Sgt; Jal Lac 7 ‘\ e) What is the total expected ending wealth position from the $100,000‘i'fivestmentwa/ and the corresponding expected rate ofreturn over the horizon period? w 5100000 + Sawyer”; = 49“?an = 'Fb : iooooc (Mr) W Solve: r“: 0 075’ {rag/”‘1 “ M/ d) What would be the overall annual rate of'return on the portfolio if the stdclé/\‘ _ portion earned 9% per year? ' / i! r t’ e) In 20 words or less, Why is this not a “risk-free” investment? MW A w?) (r (S i9 W or dentin; M new W W‘ ,V p [44‘2”th V1312 {Ln Hat S'i'D-LiC fyeri'i‘ulib (Compomt'd' may mfg/Mi“) "’1 3 (15 points) A non-tax—paying research institute located at a famous Ivy League university recently made the local-news. It seems that several decades earlier (before people knew better), some low-level radioactive waste from experimental animal cancer treatments was buried in an area behind the university’s veterinary test facility. While the waste poses no immediate human or environmental threat, the university has to face the question of’what to do about the contaminated soil. There are two obvious alternatives: (a) remove it or (‘0) leave it be. Itis estimated that the cost of immediate removal (remove the contaminated soil and ship it to a “permanent” govermnent-operated site) would be _$_L million, the sum ofthe costs of'removal and shipping as well as a one-time payment to the government to take responsibility for the material in perpetuity The cost of isolating the local burial site and installing a ' monitoring system is an immediate $200,000 and the estimated annual cost of care and corrective action when needed over time is estimated to be $20,000 at the end of the first year, with annual cost thereafter escalating at 3 percent per year in perpetuityfiv/ Ifthe time value ofmoney for the universityuisn5.5 percent, whichglternatixe.should_ it chose? Why? /’ffyia;l,t choose (L) [Demure [if Pygrt-ri’C/ort if 1'er 7%“ ’é/M ) I @ War/«4i? Casi; r: 7?{I 8 Q “m ._....--._._ -,-_-_,,.-..-......---_-, MM @ Cost =7 900000 + LOW ,1— 52000002331 + . :. 2.001200 + MD. (M 'o 05:)2’ Dllfjr'ow-th Maw : F # DEVtCH'jD : Dull w” : Q0000 ll \5 i“ 2 1: ch 005342-03 R. *9 - X X. 4. (15 points) ' if ( Schwan7s Food Company is considering either buying or leasing new trucks to replace / some ofits aging fleet used for home delivery service. The trucks are used intensively .é“ and have an economic life of'8 year's. GMC Leasing is willing to lease the trucks to Q Q aiSchwan’s for $15,000 per year, with the first payment at the time the trucks are delivered (btjim/tl t , 3 _ \ 7x \ _ _ . C p or‘ equipment (20%, 32%, 19.2%, 11.52%, 11.52% and 576% in years 1 through 6, - m t, , respectively). If the appropriate time value ofmoney (discount rate to be applied to \\§ £1 (0 after—tax cash flOWS) iiMand Sch_wan’s incometax rate is 40%, should Schwan’s lease / . or buy the trucks? [Recall that lease expenses and depr'eciatiginjueigpenses are tart“ hj mt ljl’flrr prurchased, each truck would cost $100,000 and would be depreciated as five year Ptjw‘QV‘i‘) 3e dedECtilzimand_a§§mn§.nasalrageEadie.atillEEEiEfI-ifiggfiizii‘i'1 WWW 8‘3 I YEA—“W3; - 3 L—l 5’ G - 1,9119%: 0 l ‘1. .3. U1 5’ G 400000 201.». 39!: ms Wt- H-“K 9.70:. W _,I__.._.,W_--,p-.__.._.,.._--_+—w——1~—~«+w \__/.-_.-..._Hf.(Aw—«5—-_%-.-._--...--2- 1,300,, (g 1; (it: Mr. I: k 1% dglfire’c egfpnjes IOY‘O l’Ed’cd {7'0" {ha-X \-—__FM--~A—-~mw..i..... __\/,,._..y.mm—-—-v-—-"""”'“'m"/ gala if “my" CM?“ Vinnie), Iflfltg enemies leed'ed ‘FNM ‘i'ux 8k. an. 1m 4.9m: WM 2 30% 3am Is 90% 5.1,, “2M" ' - 5. (20points) 51¢ etc etc (at we lot Bug; , 4,05» Lilac}? Gum?- _'_5’____ + l&.?m+1é£?{f;?.q 71107); Lease + _(.';.. .61... +1r + .5 3 not} (ta-2) cm) ,, t '- am = (0 than) am? (be?) + a. 30‘“? ' ([107)" 7— 30,(gol< .___..__—~—-— ' 33' 2" k (Whalinthflamd ’ 'IQL‘fj {4% her ck? be can; 9 H" deified nn'm 41pm (minim/101 +Ln0 rMnS'i; .. W...._..-........m»—v—---—~- at, ,, ”1;"; nettinjé“, / 5,. (20 points) B&H Enterprises operates a successful landscaping business in an affluent community near Chicago B&H was approached by Bob Jones, the owner of a tree— trimming/removal business called Skylight Inc, who wishes to retire Skylight is run out of Iones’ home and Jones leases or rents all the equipment (two cherry-picker trucks, chain-saws, two dump truck, two shredders, and three pick-up trucks) needed to keep two crews working. Annual after—tax income is projected to be $130,000., Revenues ' $600,000 Labor (2 supervisors and 6 workers) 280,000 Equipment Rental/Leases 85,000 Advertising 15,000 Other Cash Expenses (fuel, office supplies) 20,000 Operating Income 200,000 Income Tax (35%) , 70,000 Net Income $130,000 (a) Suppose that Skylight had an exclusive perpetual license from the local government to operate its tree-trimming business and that no other firm (including B&H) could infringe on its business. What is the maximum amount B&H should be willing to pay Jones for Skylight if the cost of capital for such a business is 1?0% [Assume no growth 1n net income over time ] o 4 1,54,, 4 Over hum”, / W/OOVI—I'iLa‘qt' mi iatrme #13“; anmanig (/5131; Jew-1104 (qr Jummj i /o Mfume ) W+ l30iL 11* :7, % : i::i§_ .— {BOOK/(jmuid Pot} MGfXMnij_ 70‘! BOOOODSI (We-l) 0' 0|) :35? (b) Suppose no license necessary to enter the tree- -trimming business and 3&H believes it could take over Skylight’ 3 business within two years, starting from zero (“from scratch”), with aggressive marketing and discount pricing: Year 1 Year 2 Year 3 Revenues $200,000 $400,000 $600,000 Labor (1 crew 9 2 crews) 140,000 240,000 280,000 Equipment Rental/Leases 50,000 70,000 85,000 Advertising & Promotional Expense 30,000 25,000 15,000 _ Other Cash Expenses (fuel, office supplies) 10,000 15,000 20,000 Operating Income $(30,000) $ 50,000 $200,000 B&H’ s taxable income is expected to exceed $200, 000 per year from existing operations and it pays income taxes at a W1 35%. What will the net incomes be for B&H over each of the next three years if it starts the business from scratch? - Year 1 Year 2 Year 3 Operating Income $(30,000) $50,000 $200,000 aiflfisoo) fjg/goo/W / Income Taxes Net Income (0) Assuming B&H could execute the “from scratch” business plan outlined in (b), what is the maxinnmlarnount that B&H should pay Jones at time zero to take :3ear3 t be ”with ,1» [,9 4,4; #1300 000 slimmest 3 yea/«v, 1+ is at least hole? fl/e't total worth +0443 I5: 2"? fl“ highest“ 4) fig+ . \ as; 241 47 50 mam at Line at H awe: F 303145;; g3 > R—JFJM l IOOkU +0073?) it? 6, (15 points) There are five TRUE or FALSE statements below, For each statement, circle either TRUE or FALSE In the space at the bottomof the page, explain all the FALSE statements. No explanations, no credit! There is no need to explain TRUE statements, stock repurchase rather than a cash dividend, its post- (a) TRUE FALSE a company makes a distribution to its shareholders using . distribution share price will be lower. P (b) TRUE @ALSE) In a company does a 2vfor-1 stock split, its post-split price 7 fivr per share will be double its 'efiglitavahre. V) = 37% i“? W0") 3): {90? 7M; —> 632% Q 0'71?) tiff? 5’5“}! 3 w (0)2TDRUEz" FALSE ) Suppose Iwanted to provide $100,000 per year for 4 years _ {3 for my just—born grandchild’s college education, A single _ - ; mic. Luck {oolx rook / premium of’approximately $100,000 purchased from an i '/ insurance company would provide for a 4 year annuity ‘ ' / starting on his/her 18th birthday if'the annuity was premised on the insurance company investing the premium to earn ‘7' 38% until payout, never end, \ Mr ’ ., 456?} I (d. FALSE I am having a very good time and I wish this exam would "N . (e) TRUE PALS ' ,} In doing an investment (capital budgeting) analysis for a / profitable, tax-paying company, annual depreciation expenses associated with the purchase of'plant or equipment at the beginning of the project are a positive cash flow component of the after-tax cash flows in the years during with the project is operating mr’ca Explanations of‘Palse Statements Below @ Stock repurchase (that: number a‘F J‘WF‘EF ouflhmdii’j lower/Warm . ' . f , Jfoi in .- ,. £57352 fwffideWWmwwwj but Monti/l or 53¢}? 3%! ‘ gram price flaw“ m ' w 'r - 9 er repurchase J‘i'bck. [legjeng COMP“? wor‘lfln 4:117 JG E lot/ofol‘ho” S )0 K9130 ._.#;,,glfls fix “i , vemmn cons to Al .. @ POE-5,7415% 'fflte pp.» flier/‘6 will be halfi [is firith-i value / f—Iu—nu ,. K @@ V014 would 9% “Warn/t (OOk— 99558510 .3 44'160/ accordi'j i“ Cfile»|'a/i’ll)n$'. @19th .7 Aria-0:3“ OiQFYECifl‘ifibl/‘i “(Pens-f; [9" he a “H/IQ (i'ltifitt 010' aenprafi‘hfi high?» ATCF"; flitti- . 1% its iax'siareioiihj e-Fped‘fl “ft is r' prurient, to hurt moi dept/retain?!- {Heli— I! 0x non'tdi'ia {Dr/Fare air-1+; wine will net to O I (”bimt'k‘ific’" h‘X-'de+e’"““”+‘°" PWPOSQSI ”HM locale {ate/x) in ole/taming ATM:...
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