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

This preview shows pages 1–8. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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? ...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern