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Unformatted text preview: FIN 301 Winter 2011
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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 pretax 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%, semiannual,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, semiannual 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 $33113 FV}@\oSo c) (2 points) You just calculated the market value of a bond Whose coupon rate is
less than the required rate of return. What is the 2second audit you can perform on your calculation? &
C?“ < req/ '~$ 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 ﬁveyear
period?
{6 + 9,411+? +9) /5 [email protected] b.) What was the geometric average return on Shamrock’s stock over the ﬁveyear
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.) Chancetaking 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 \ xz: *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: “LlZ 02:41.2 L\
. 01/01/02 2 30 000 7. 3,919.82.
01/01/03 3 87 000 Lol.°\ 1488 l0932~80
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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 Spring '11
 Bean
 Finance

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