E2 - FIN 301 Winter 2011 NAME 5 TE 5 OLU ’ Calculator...

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Unformatted text preview: FIN 301 Winter 2011 NAME 5 TE 5 OLU ’ Calculator Mode 1. Stock Valuation and Compensation (20 points) Using the dividend valuation model, calculate the price you would pay for each of the following stocks if you require a [email protected]’% return. Today is January 1, 2000. a) (5 points) Blarney, Inc. is expected to pay an annual dividend of $0.56 forever. 4‘ 0.549 a. = “Na b) (5 points) Patrick’s Potatoes Co. just paid a $1.00 annual dividend and announced that it intends to increase that dividend by 3.5% forever. 5LOO>¢LOBS [0(0- .O5g : 4* Lyn—lo c) (10 points) Bridget O’Doyle was just awarded 100 stock options which vest ratably over the next 4 years. The current market price is $23.75 and is expected to increase 10% per year. Bridget plans to exercise her options in a cashless exercise at the end of the 4 years. How much pre-tax cash does she expect to receive when she exercises her options? Q0 o x a 25.15 X Mo”) .— (loo x mans) 2. Bond Valuation (10 points) ‘ a) (4 points) Lucky Leprechaun issued 8%, semi-annual,10 year bonds today when the market required rate of return is 5.6%. How much did Sean pay to purchase got“ Lucky’s bonds? PV:\,\8\\88 XlO “\MESJB b) (4 points) Irish Whiskey, Inc. issued 6%, lO—year, semi-annual bonds 18 months ago. Today. Irish announced that it will call the bonds in 3 years at 105. The market reacted to this announcement by increasing the required rate of return on the bonds to 12%. What is the market price of a bond immediately following the market’s reaction to the announcement? Pm”i= I" 30 nub L;b $33113 FV}@\oSo c) (2 points) You just calculated the market value of a bond Whose coupon rate is less than the required rate of return. What is the 2-second audit you can perform on your calculation? & C?“ < req/ '~$ mk+ 9}; ‘ilqce, IS Market Vaduz > Race Vaduz/Mow 3. Portfolios (15 points) A.) (8 points) You’ve observed the following returns on Shaking r' Shamrock’s stock over the past five years: 5%, 8%, 12%, 9%, 6%. G a.) What was the arithmetic average return on Shamrock’s stock over this five-year period? {6 + 9,411+? +9) /5 [email protected] b.) What was the geometric average return on Shamrock’s stock over the five-year period? ‘15 LLOS X LOSX L‘leOq X\.O(o) : 7&1‘7, c. ) What was the variance of Shamrock’s returns over this period? (5 8) 2‘—+($ 8)2‘+C11~8)1+(C\ SY’ +Uo’8) S’l ~"LSo d.) What was the standard deviation of Shamrock’s returns over this period? \l ’15 = )QJLt < B.) (7 points) a.) Chance-taking Chauncey wishes to have a portfolio that is 80% stocks and 20% bonds. Chauncey will rebalance the portfolio every three years. If Chauncey creates sue a rtfolio worth $100,000 on Day 1 and stocks increase in value 10% per year and s increase 4% per year, how much stock must Chauncey sell or buy at the end of Year 3 to rebalance the portfolio? K») 0 hi L l k(eaoirB below 66 9607 Box/1 Rebel once 5‘5"“ ”80,000 “Mi 9 1010380 00 ’éfg/ “mama; Q3298”) 3— a 22 Mm \ x-z: *1 257195.910 «132613.13 $100,000 «4 23 (111.2 6’ gamma 4. CAPM (15 points) You are considering investments with the following characteristics: CURRENT ASSET BETA DIVIDEND RETURN HISTORY 2010 2009 2008 Scones, Inc. 2.13 0 32% 17% 2% Lamb Stew, Inc. 0.97 0.60 6% 4.5% 8% Short term Treasury Notes approx. 0 0.25% 0.45% 1.32% S&P500 approx. 1 5% 4% . 4.5% a.) (5 points) What is the expected return on Scones, Inc. according to the CAPM? 016+ 21% (s-.153= \o.3fl°L b.) (5 points) If you build a portfolio that is 20% Scones, Inc., 50% Lamb Stew, Inc, 20% a fund matching the S&P 500 and 10% Short term Treasury notes, what are the Beta and Expected Return (based on the CAPM) of the portfolio? {5le x 2\3)+(5.91}+(1:\D+(10:0) X 0‘45 oHfi ‘ c. ) (5 points) Your investment advisor reports that they created a portfolio for you with a Beta of 0 fl 5 and that you earned 3%. Did your advisor do a good job for you? Why or why not? / 015+ o.'\S([email protected] 0.25): 3.8\ 5. Capital Budgeting (25 points) Irish Guard Services is considering two projects. Project Green Cat would provide security guards dressed like cats. Project Painted Dog would provide guard dogs painted in Irish colors as building security. The following expected future cash flows are for Project Green Cat. Cash PV FV Date Year 1 . OUWKWV 0 155mm ~453000 . ‘83,;3 01/01/01 m '0: “Ll-Z 02:41.2 L\ . 01/01/02 2 30 000 7. 3,919.82. 01/01/03 3 87 000 Lol.°\ 14-88 l09|32~80 01/01/04 4 50,000 3! 015.60 . 90.0w 0 o o 2215;001:330“ m'%8,25h28 gaom a.) (3 points) Calculate Green Cat’s Payback Period. If Painted Dog’s Payback Period 3“ ”023.) is 3 years, which project would you select? ' ' 352 —\55,000 > '\\5,[email protected] Q g"! 000 \ 7_‘ 0 0 0 , / D0 _.—-—--——-—""—-—-_—' A v; _ “(3)000 -20000 50,000 3 3 O, O [email protected] ., \\ 5, O 0 O b.) (3 points) Calculate Green Cat’s Discounted Payback Period using a discount rate of 12%. If Painted Dog’s Discounted Payback Period is 4.25 year ' 'e wouldyouselect. 7 - ‘10)3059‘3‘} @ fit? I L485 i .- \557000 0 M15— ‘Qj‘qlq - 58)H%90\€2 i Dog I W; 3 j, 1 ‘1 9190 g 23 “3‘8?" '- 2L9,1DLDC\V\\/L\8/23L2,8 120,30933 c.) (3 points) Calculate Green Cat’s Net Present Value using a discount rate of 12%. If Painted Dog’s Net Present Value is $4,000, which project would you select? d.) (3 points) Calculate Green Cat’s Profitability Index using a discount rate of 12%. If Painted Dog’s Profitability Index is 1.05, which project would you select? t'lto,SLo2.zo {53000 ._ lJL.‘ (:czl Jfl/ e.) (3 points) Calculate Green Cat’s IRR. If Painted Dog’s IRR1s ‘li/o, which project ‘ would you select? PV=£SS,000 2 Fv= 3H up"; 8‘! H” 3 0/0 “’5 Ca‘l Solv? b' H ‘\b rate f 12%. If Palnted f.) (3 points) Calculate Green Cat’ 5 MIRR using a discount Dog’s MIRR is £64, which project would you select. \’\ > g.) (3 points) Your supervisor tells you to use the Payback Period to select the project. What are the limitations of this technique? WmWWW Waifig WWW h.) (1 point) All things considered, which project would select? Why? NPV [Lo/Q20 ’Ca‘l‘ 6. Operating Cash Flows (15 points) Murphy’ 8 Pub 1s planning to sell green beer for St, Patrick’s Day. On a normal Thursday night they sell 1,000 mugs of beer for $2. 00. A mug of beer costs Murphy’s $0.35. They expect to sell 200 mugs of green beer for $2.50 per mug. The green beer also costs Murphy’s $0.35 per mug. They expect 75 of the green beers to replace 75 mugs of regular beer that otherwise would have been sold. a.) How much operating cash flow will be gained from the sale of 200 mugs of green beer? 200x<62.§o~§o.35) = 7 H300 b.) How much operating cash flow will be lost by cannibalization of the brown beer by sales of the green beer? "IS >< C” 2.0 0— $0.35) 35931. c.) What is the marginal, net operating cash flow from the green beer on St. Patrick’s Day? BONUS (2 points) How should all financial investments be evaluated? ...
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