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1. FIN 534 FinancialManagement – FIN534 Homework
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FIN 534 Week 2 Homework Set1
Directions: Answer the following questions on a separate document. Explain how
you reached the answer or show your work if a mathematical calculation is needed,
or both. Submit your assignment using the assignment link in the courseshell. This
homework assignment is worth 100 points.
Use the following information for Questions 1 through 8: Assume that you recently
graduated and have just reported to work as an investment advisor at the one of the
firms on Wall Street. You have been presented and asked to review the following
Income Statement and Balance Sheets of one of the firm’s clients. Your boss has
developed the following set of questions you must answer.
1. What is the free cash flow for 2013?
2. SupposeCongress changed the tax laws so that Berndt’s depreciation expenses
doubled. No changes in operations occurred. What would happen to reported profit
and to net cash flow?
3. Calculate the 2013 current and quick ratios based on the projected balance sheet
and income statement data. What can you say about the company’s liquidity
position in 2013?
4. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed
assets turnover, and total assets turnover.
5. Calculate the 2013 debt ratio, liabilities-to-assets ratio, times-interest-earned,
and EBITDA coverage ratios. What can you conclude from these ratios?
6. Calculate the 2013 profit margin, basic earning power (BEP), return on assets
(ROA), and return on equity (ROE). What can you say about these ratios?
7. Calculate the 2013 price / earnings ratio, price / cashflow ratio, and market /
bookratio.
8. Use the extended DuPont equation to provide a summary and overview of
company’s financial condition as projected for 2013. What are the firm’s major
strengths and weaknesses?

2. FIN 534 Week 4 Homework Set 2
Assume that you are nearing graduation and have applied for a job with a local
bank. The bank’s evaluation process requires you to take an examination that
covers several financial analysis techniques. The first section of the test asks you to
address these discounted cash flow analysis problems:
1. What is the present value of the following uneven cash flow stream −$50, $100,
$75, and $50 at the end of Years 0 through 3? The appropriate interest rate is 10%,
compounded annually.
2. We sometimes need to find out how long it will take a sum of money (or
something else, such as earnings, population, or prices) to grow to some specified
amount. For example, if a company’s sales are growing at a rate of 20% per year,
how long will it take sales to double?
3. Will the future value be larger or smaller if we compound an initial amount
more often than annually—for example, every 6 months, or semiannually—
holding the stated interest rate constant? Why?
4. What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%,
compounded semiannually? Compounded quarterly? Compounded monthly?
Compounded daily?
5. Supposethat on January 1 you deposit $100 in an account that pays a nominal
(or quoted) interest rate of 11.33463%, with interest added (compounded)daily.
How much will you have in your accounton October1, or 9 months later?
Use the following information for Questions 6 and 7:
A firm issues a 10-year, $1,000 par value bond with a 10% annual couponand a
required rate of return is 10%.
6. What would be the value of the bond described above if, just after it had been
issued, the expected inflation rate rose by 3 percentage points, causing investors to
require a 13% return? Would we now have a discount or a premium bond?
7. What would happen to the bond’s value if inflation fell and rd declined to 7%?
Would we now have a premium or a discount bond?
8. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value
bond that sells for $887.00? That sells for $1,134.20? What does a bond selling at a
discount or at a premium tell you about the relationship between rd and the bond’s
couponrate?
9. What are the total return, the current yield, and the capital gains yield for the
discount bond in Question #8 at $887.00? At $1,134.20? (Assume the bond is held
to maturity and the company does not default on the bond.)
FIN 534 Week 6 Homework Set 3

3. Use the following information for questions 1 through 8: The GoodmanIndustries’
and Landry Incorporated’s stockprices and dividends, along with the Market
Index, are shown below. Stockprices are reported for December 31 of each year,
and dividends reflect those paid during the year. The market data are adjusted to
include dividends.
1. Use the data given to calculate annual returns for Goodman, Landry, and the
Market Index, and then calculate average annual returns for the two stocks and the
index. (Hint: Remember, returns are calculated by subtracting the beginning price
from the ending price to get the capital gain or loss, adding the dividend to the
capital gain or loss, and then dividing the result by the beginning price. Assume
that dividends are already included in the index. Also, you cannot calculate the rate
of return for 2008 because you do not have 2007 data.)
2. Calculate the standard deviations of the returns for Goodman, Landry, and the
Market Index. (Hint: Use the sample standard deviation formula given in the
chapter, which correspondsto the STDEV function in Excel.)
3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with
stockreturn on the vertical axis (y-axis) and market return on the horizontal axis
(x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your
graph?
4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the
market risk premium is 5%. What is the required return on the market using the
SML equation?
5. If you formed a portfolio that consisted of 50% Goodmanstockand 50% Landry
stock, what would be its beta and its required return?
6. What dividends do you expect for GoodmanIndustries stockover the next 3
years if you expect you expect the dividend to grow at the rate of 5% per year for
the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.
7. Assume that Goodman Industries’ stock, currently trading at $27.05, has a
required return of 13%. You will use this required return rate to discount
dividends. Find the present value of the dividend stream; that is, calculate the PV
of D1, D2, and D3, and then sum these PVs.
8. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what
is the most you should pay for it?
Use the following information for Question 9:
Supposenow that the GoodmanIndustries (1) trades at a current stockprice of $30
with a (2) strike price of $35. Given the following additional information: (3) time
to expiration is 4 months, (4) annualized riskfree rate is 5%, and (5) variance of
stockreturn is 0.25.
9. What is the price for a call option using the Black-Scholes Model?

4. FIN 534 Week 8 Homework Set 4
Use the following information for Questions 1 through 5:
Assume you are presented with the following mutually exclusive investments
whose expected net cash
flows are as follows:
EXPECTED NET CASH FLOWS:
Year Project A Project B
0 −$400 −$650
1 −528 210
2 −219 210
3 −150 210
4 1,100 210
5 820 210
6 990 210
7 −325 210
1. ConstructNPV profiles for Projects A and B.
2. What is each project’s IRR?
3. If each project’s costof capital were 10%, which project, if either, should be
selected? If the cost
of capital were 17%, what would be the proper choice?
4. What is each project’s MIRR at the costof capital of 10%? At 17%? (Hint:
Consider Period 7 as
the end of Project B’s life.)
5. What is the crossoverrate, and what is its significance?
Use the following information for Questions 6 through 8:
The staff of Porter Manufacturing has estimated the following net after-tax cash
flows and probabilities for
a new manufacturing process:
Line 0 gives the costof the process, Lines 1 through 5 give operating cash flows,
and Line 5* contains the
estimated salvage values. Porter’s costof capital for an average-risk project is
10%.
Net After-Tax Cash Flows
Year
0 −$100,000 −$100,000 −$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000

5. 4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
6. Assume that the project has average risk. Find the project’s expected NPV.
(Hint: Use expected
values for the net cash flow in each year.)
7. Find the best-caseand worst-caseNPVs. What is the probability of occurrence
of the worst case
if the cashflows are perfectly dependent (perfectly positively correlated) over time
8. Assume that all the cash flows are perfectly positively correlated. That is,
assume there are only
three possible cash flow streams over time—the worst case, the most likely (or
base) case, and
the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are
represented by
each of the columns in the table. Find the expected NPV, its standard deviation,
and its
coefficient of variation for each probability.
Use the following information for Question 9:
At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its
accounts payable were
$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35%
in 2014. Total assets
and accounts payable are proportional to sales, and that relationship will be
maintained. Wallace typically
uses no current liabilities other than accounts payable. Common stockamounted to
$625,000 in 2013,
and retained earnings were $395,000. Wallace has arranged to sell $195,000 of
new common stockin
2014 to meet some of its financing needs. The remainder of its financing needs will
be met by issuing
new long-term debt at the end of 2014. (Because the debt is added at the end of the
year, there will be no
additional interest expense due to the new debt.) Its net profit margin on sales is
5%, and 45% of
earnings will be paid out as dividends.
9. What were Wallace’s total long-term debt and total liabilities in 2013?
FIN 534 Week 10 Homework Set 5
Use the following information for Questions 1 through 3:

6. Boehm Corporation has had stable earnings growth of 8% a year for the past 10
years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8
million. However, in 2014 earnings are expected to jump to $12.6 million, and
Boehm plans to invest $7.3 million in a plant expansion. This onetime unusual
earnings growth won’t be maintained, though, and after 2014 Boehm will return to
its previous 8% earnings growth rate. Its target debt ratio is 35%.
Calculate Boehm’s total dividends for 2014 under each of the following policies:
1. Its 2014 dividend payment is set to force dividends to grow at the long-run
growth rate in earnings
2. It continues the 2013 dividend payout ratio
3. It uses a pure residual policy with all distributions in the form of dividends (35%
of the $7.3 million investment is financed with debt).
4. It employs a regular-dividend-plus-extras policy, with the regular dividend being
based on the long-run growth rate and the extra dividend being set according to the
residual policy.
Use the following information for Questions 5 and 6:
Schweser Satellites Inc. produces satellite earth stations that sell for $100,000
each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and
sold each year, profits total $500,000, and the firm’s assets (all equity financed) are
$5 million. The firm estimates that it can change its productionprocess, adding $4
million to investment and $500,000 to fixed operating costs. This change will (1)
reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but
(3) the sales price on all units will have to be lowered to $95,000 to permit sales of
the additional output. The firm has tax loss carry forwards that render its tax rate
zero, its costof equity is 16%, and it uses no debt.
5. What is the incremental profit? To get a rough idea of the project’s profitability,
what is the project’s expected rate of return for the next year (defined as the
incremental profit divided by the investment)? Should the firm make the
investment? Why or why not?
6. Would the firm’s break-even point increase or decrease if it made the change?
Use the following information for Questions 7 and 8:
Supposeyou are provided the following balance sheet information for two firms,
Firm A and Firm B (in thousands of dollars)
Earnings before interest and taxes for both firms are $30 million, and the effective
federal plus-state tax rate is 35%.
7. What is the return on equity for each firm if the interest rate on current liabilities
is12% and the rate on long-term debt is 15%?
8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt
rises to 16%, and that the rate on existing long-term debtremains unchanged. What
would be the return on equity for Firm A and Firm B under these conditions?

7. 9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and
the dollar costof a compactJapanese-manufactured car was $10,000. Supposethat
now the exchange rate is 120 yen per dollar. Assume there has been no inflation in
the yen costof an automobile so that all price changes are due to exchange rate
changes. What would the dollar price of the car be now, assuming the car’s price
changes only with exchange rates?