A report broken down into the following sections:
Summary results and recommendations—up front, concise, and to the point.
Answers to the 6 questions asked—devote a paragraph to each, with individual headings
Original Title
ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM
A report broken down into the following sections:
Summary results and recommendations—up front, concise, and to the point.
Answers to the 6 questions asked—devote a paragraph to each, with individual headings
A report broken down into the following sections:
Summary results and recommendations—up front, concise, and to the point.
Answers to the 6 questions asked—devote a paragraph to each, with individual headings
15 years, they will maintain their dividend at $7/share FOR MORE CLASSES VISIT tutorialoutletdotcom A firm recently paid a dividend of $7/share. Over the next 15 years, they will maintain their dividend at $7/share. Then afterwards, they will change their dividends to grow at a constant 6%/year every year, forever. %. a. How much dividend is paid in year 31? b. What is the stock price? 2. A stock will pay the following dividends: $5 in year 1, $6 in year 2, $7 in year 3. After year 3, they will maintain a zero growth dividend policy. %. Find the stock price. 3. A firm has a zero growth dividend policy and recently paid $2/share. Next year, they will pay an abnormally large dividend payment of $10/share. Afterwards, they will continue to pay their constant dividend payments of $2/share. %. Find the stock price ------------------------------------------------------------------------------------ ARE 171B Department of Ag and Resource FOR MORE CLASSES VISIT tutorialoutletdotcom Important: You must write your answers on the sheet on pg. 3 of this assignment and you must attach explanations and derivations of your answers. Please turn your homework in at lecture or directly to your TA. Late homeworks will automatically be given a score of zero. In this homework assignment, you will get some data on the S&P 500 Index and on S&P 500 Index Options from the Internet and evaluate the performance of the Black-Scholes option pricing model. Go to http://finance.yahoo.com. Enter the symbol ^SPX to obtain information on the S&P 500 index and then click on Historical Prices. Change the start date to Jan 01, 2000, the end date to February 28, 2014, and click on "Monthly" and then "Get Prices. We will only be interested in the "Close" column, which gives the value of the S&P 500 at the close of trading on the last day of each month. Go to the bottom of the page and click on " Download to Spreadsheet" and save the data in an Excel file. Now open up your spreadsheet file. (It will be easiest if you re-order the data because Yahoo gives it to you in reverse order - you can use the Sort command in Excel to do this.) Create a new column in Excel that measures the change in the natural logarithm of the S&P 500 from one month to the next, i.e. the monthly returns on the S&P 500. Compute the average and standard deviation of returns. (You should get 0.0017 as the average return, i.e. 0.17% per month). The variance of returns is the standard deviation squared. If you multiply your estimated variance by 12, you will get an estimate of the annualized return variance (2) that you can use in computing the Black-Scholes option price. On the following page, you will find some quotes on S&P 500 options from cboe.com on March 3. These are European options and represent just some of the traded options on March 3. Calculate the Black-Scholes price for call options with strike prices of 1800, 1850, and 1900 that expire in April, May, and June. It is easiest to do this in Excel. The NORMSDIST function can be used to get the appropriate values from the cumulative normal distribution, i.e. N(d). Compare the predicted Black-Scholes price to the actual price in the market. You can try more strike prices if you want to. (The difference between your answer and the market price will be quite large in some cases.) Next, take the Black-Scholes formula and plug in different values of the variance (2) until the Black-Scholes price equals the market price. The variance that makes these two equal is known as the implied volatility. Finally, use put-call parity to compute the Black-Scholes price of put options with exercise prices of 1800, 1850, and 1900 that expire in April, May, and June. Compare the predicted Black-Scholes price to the actual price in the market. Department of Ag and Resource Economics UC Davis S&P 500 Index Options Closing Prices from Monday March 3 April April April April April April April May May May May May May May June June June June June June June Strike Call Price Put Price 1600 246.80 4.25 1725 128.75 10.05 1775 81.40 19.25 1800 63.80 24.80 1850 29.95 41.30 1900 11.25 66.50 2000 0.30 158.40 1600 245.25 7.55 1725 131.85 17.60 1775 90.75 N/A 1800 71.90 32.50 1850 N/A 49.70 1900 16.25 77.40 2000 1.30 161.80 1600 249.60 13.35 1725 140.00 28.75 1775 101.00 39.75 1800 83.00 46.85 1850 51.45 64.90 1900 27.20 90.65 2000 4.25 167.70 Here is some information that you will need: 1) The value of S&P 500 index at the time I pulled these quotes was: S =1845.73 2) Expiration date: All options expire on the Saturday after the third Friday of the month. See http://www.cboe.com/TradTool/2014_CBOEwebsite.pdf for a calendar of upcoming expiration dates. 3) The annual risk-free rate: use the yield on 3 month Treasury Bills, which was 0.04% on March 3 (i.e., 0.0004). Department of Ag and Resource Economics UC Davis Name: Discussion Time: ARE 171B Answer Sheet for Homework 6 Winter 2014 Please write your answers to each question on the appropriate line. The material in bold on the first page indicates the questions that you need to answer. You should turn in a printout of your Excel spreadsheet to show that you have done the work. (If you do not turn in such a printout, you will get a zero). Questions (1) (4) are worth three points each. Questions (5) is worth six points and there are seven partial credit points. (1) Average Return: Std Deviation: (2) B.S. Call Prices: Apr 1800: May 1800: Jun 1800: Apr 1850: May 1850: Jun 1850: Apr 1900: May 1900: Jun 1900: Apr 1800: May 1800: Jun 1800: Apr 1850: May 1850: Jun 1850: Apr 1900: May 1900: Jun 1900: A ------------------------------------------------------------------------------------ ASSESSMENT CASE PAPER ANALYSIS FOR MORE CLASSES VISIT tutorialoutletdotcom A report broken down into the following sections: Summary results and recommendationsup front, concise, and to the point. Answers to the 6 questions askeddevote a paragraph to each, with individual headings Attached exhibits which are readable and understandable (I suggest using Calibri font in 11 pitch for the spreadsheet(s), because it is plain and easy to read) Spreadsheet printout(s) showing your derivation of Operating Cash Flows Incremental Cash Flows, including investment and salvage Warranty costs WACC NPV, IRR, Payback, and Profitability Index Any other supporting exhibits you feel are relevant A file containing your spreadsheet file, including all supporting elements. I want to get a sense of how well you used the power of the Excel program to make your calculations. A simple typed report is adequate. I do not need fancy graphics or covers. Use 12 pitch, Times Roman font for the body of the report. Single spacing is preferred, and will allow you more than enough space to complete your report in less than 10 pages. You should refer back to your exhibits for data or calculations, keeping them out of the main body of the report. Make sure name is listed on a cover sheet, as well as the project title and the date. The cover page does not count against the 5 page limit. I am a stickler for grammar, punctuation, and spelling (GPS). Proof read your document well. Remember, you are selling your recommendations on this project to the CEO, so presentation is very important. GPS is worth 15% of the report grade. ------------------------------------------------------------------------------------ Bayerische Motoren Werke Aktiengesellschaft FOR MORE CLASSES VISIT tutorialoutletdotcom Bayerische Motoren Werke Aktiengesellschaft (DB:BMW) > Financials > Key Stats In Millions of the trading currency, except per share items. Currency: Order: Decimals: Trading Currency Latest on Right Capital IQ (Default) Conversion: Units: Dilution: Today's Spot Rate S&P Capital IQ (Default) Basic Key Financials For the Fiscal Period Ending Currency 12 months Dec-31-2012A EUR 12 months Dec-31-2013A EUR 12 months Dec-31-2014A EUR 12 months Dec-31-2015A EUR LTM 12 months Sep-30-2016A EUR 12 months Dec-31-2016E EUR Total Revenue Growth Over Prior Year 76,848.0 11.7% 76,059.0 (1.0%) 80,401.0 5.7% 92,175.0 14.6% 94,207.0 4.8% 94,929.46 2.99% Gross Profit Margin % 14,475.0 18.8% 14,283.0 18.8% 15,766.0 19.6% 16,868.0 18.3% 17,425.0 18.5% 22.67% EBITDA Margin % 10,585.0 13.8% 10,499.0 13.8% 12,046.0 15.0% 12,801.0 13.9% 12,968.0 13.8% 14,540.5 15.32% EBIT Margin % 8,174.0 10.6% 7,827.0 10.3% 8,944.0 11.1% 9,308.0 10.1% 9,421.0 10.0% 9,892.61 10.42% Earnings from Cont. Ops. Margin % 5,111.0 6.7% 5,329.0 7.0% 5,817.0 7.2% 6,396.0 6.9% 6,963.0 7.4% - Net Income Margin % 5,085.0 6.6% 5,303.0 7.0% 5,798.0 7.2% 6,369.0 6.9% 6,920.0 7.3% 6,756.84 7.12% 7.76 4.1% 8.08 4.2% 8.83 9.3% 9.7 9.8% 10.54 13.3% 10.25 5.64% Diluted EPS Excl. Extra Items Growth Over Prior Year All results are taken from the most recently filed statement for each period. When there has been more than one, earlier filings can be viewed on the individual statement pages. Growth rates for the LTM period are calculated against the LTM period ending 12 months before. All forward period figures are consensus mean estimates provided by the brokers and may not be on a comparable basis as financials. Growth rates for forward periods are calculated against prior period estimates or actual pro forma results as disclosed on the Estimates Consensus page. Latest Capitalization (Millions of EUR) Currency Share Price Shares Out. EUR 84.82 656.8 Market Capitalization Ordinary Shares Shares Out * Ordinary Shares Share Price = Ordinary Shares Market Capitalization + Preferred Stock Shares Out * Preferred Stock Share Price = Preferred Stock Market Capitalization - Cash & Short Term Investments + Total Debt + Pref. Equity + Total Minority Interest = Total Enterprise Value (TEV) 54,863.3 602.0 84.8 51,060.6 54.8 69.4 3,802.7 4,549.0 93,498.0 239.0 144,051.3 Book Value of Common Equity + Pref. Equity + Total Minority Interest + Total Debt = Total Capital 45,189.0 239.0 93,498.0 138,926.0 **For companies that have multiple share classes that publicly trade, we are incorporating the different prices to calculate our company level market capitalization. Please click on the value to see the detailed calculation. Prices shown on this page are the close price of the companys primary stock class. Shares shown on this page are total company as-reported share values. Total Liability includes Total Debt, Minority Interest and Pref. Equity. Net Liability includes Total Liability, net of Cash and Short Term Investments. TEV includes Market Cap and Net Liability. Total Capital includes Common Equity and Total Liability. Valuation Multiples based on Current Capitalization 12 months Dec-31-2015A LTM 12 months Sep-30-2016A 12 months Dec-31-2016E 12 months Dec-31-2017E 12 months Dec-31-2018E TEV/Total Revenue 1.4x 1.5x 1.52x 1.47x 1.43x TEV/EBITDA 9.8x 10.7x 9.91x 9.78x 9.38x 13.3x 14.6x 14.56x 14.57x 14.31x P/Diluted EPS Before Extra 8.7x 8.0x 8.28x 8.35x 8.19x P/BV 1.3x 1.2x 1.20x 1.09x 1.00x Price/Tang BV 1.3x 1.3x - - - For the Fiscal ------------------------------------------------------------------------------------ Further Exercises Model two (2) Business Processes FOR MORE CLASSES VISIT tutorialoutletdotcom 3.7 Further Exercises Model two (2) Business Processes 1. Exercise 3.10 - Handling Down payments and 2. Exercise 3.11 - Assessing Credit Risk. 1. Please read both Cases carefully to insure proper analysis and modeling. (Pg. 93) Then read "Process Discovery" start from Pg. 155 and answer questions below. 1. Identify the various discovery methods available to an individual(s) attempting to construct either an "as-is" or "should- be" process model. 2. Discuss the strengths and limitations of such a "discovery process" regardless of the methodology. 3. Describe how you might systematically gather the required pieces of information about "how a book order" is processed by an on-line retailer. 4. Finally, assuming that you obtained sufficient information to create an appropriate process model what specific steps would you use and briefly discuss elements of each step. 5. Create a "As-is", "Should-be" process model for ------------------------------------------------------------------------------------ Hand in Problem Set 2 FOR MORE CLASSES VISIT tutorialoutletdotcom Hand in Problem Set 2 Please hand a paper copy of your work to your class teacher at the beginning of class 8 (week 9). Thorndike Oil (TO) is a diversified company with two operating divisions: Oil and Telecom which represent 70% and 30% of the firms value, respectively. TO has no debt on its balance sheet. To estimate the cost of capital for each division, TO has identified one principal competitor for each of its two divisions. The competitors are pure-plays, i.e., they are not diversified and operate in only one industry each. They maintain a constant Debt-Equity ratio at all times. Assume that the debt of the two competitors is risk-free, the risk-free interest rate is 1%, the expected return on the market portfolio is 6% and that the CAPM holds. Competitor VP-Oil AB&B-Telecom Equity Beta 0.8 1.5 D/E 2/6 1/4 a. Estimate the expected return on TOs equity. Now assume that TO is considering a change in its capital structure that will increase its leverage. Two plans are considered: 1. Issue $55 million immediately in debt and maintain its level in perpetuity. 2. Issue $90 million immediately in debt, repay $20 million of its principal in one year, $20 million in two years and maintaining the remaining $50 million in perpetuity. Assume that in both plans TO will be able to borrow at the risk-free interest rate; that all proceeds are paid out to equity holders and that in Plan 2 the reduction in debt is financed by issuing equity. Corporate tax rate is 35% and there are no other markets imperfections. b. Which of these two plans would you recommend? Explain. ------------------------------------------------------------------------------------ lease agreement for production equipment FOR MORE CLASSES VISIT tutorialoutletdotcom Multiple Choice 1. On January 1 of the current year, Tire Company enters into a five- year lease agreement for production equipment. The lease requires Tire Co to pay $12,500 per year in lease payments. At the end of the five-year lease term, Tire Co can purchase the equipment for $30,000. The fair value of the equipment $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tires controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. Tire Co would normally depreciate equipment of this type using the straight-line method. What amount is the carrying value of the asset related to this lease at December 31, of the current year? A. $40,000 B. $45,000 C. $56,000 D. $63,000 2. A company leases trucks and properly classifies the leases into capital leases. The leases have a ten-year term and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions? A. Leases are not eligible for the fair value option. B. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings. C. Recognize the change to fair value accounting with an unrealized loss in the income statement. D. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income. 3. An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group: Carrying Value: $100,000,000 Sum of the undiscounted cash flows 95,000,000 Fair value 80,000,000 What is the value of the impairment loss? A. B. C. D. $0 $5,000,000 $15,000,000 $20,000,000 1 4. A company has an operating lease for its office space. The lease term is 120 months and requires monthly rent of $15,000. As an incentive for the company to enter into the lease, the lessor granted the first eight months rent at no cost. What amount of monthly rent/lease expense should be recognized over the life of the lease? A. B. C. D. $14,000 $14,062 $15,000 $16,000 5. Seans trial balance has the following selected items: Cash (includes $10,000 in a bond sinking fund for long-term bond payables) Accounts receivable Allowance for doubtful accounts Deposits received from customers Merchandise inventory Unearned rent Investment in Trading Securities $50,000 20,000 5,000 3,000 7,000 1,000 2,000 What amount should Sean report as total current assets in its balance sheet? A. $64,000 B. $67,000 C. $72,000 D. $74,000 6. A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable ne presented in the balance sheet? A. At the face amount. B. At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. C. At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate. D. At the face amount minus a discount calculated at the imputed interest rate. 2 7. Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 21, Year 1, that should be used in the calculation of basic earnings per share in the financial statements issued on March 1, Year 2? Date January 1, Year 1 April 1, Year 1 June 1, Year 1 February 15, Year 2 March 15, Year 2 A. B. C. D. Transactions Beginning Balance 100,000 Issued 30,000 shares for cash 50% stock dividend 2-for-1 stock split Issued 40,000 shares for cash 147,500 183,750 295,000 367,500 8. On January 1, 2016, a companys new president was awarded a $200,000 bonus that would be paid out in two $100,000 installments in 2018 (year 3) and 2019 (year 4) of employment, contingent on employment through the year ending December 31, 2017. How much should the company expense for this bonus in 2017 and 2018? A. $0 for 2017; $100,000 for 2018 B. $100,000 for 2017 and $0 for 2018 C. $100,000 for 2017 and $100,000 for 2018 D. $200,000 for 2017 and $0 for 2018 9. A company, upon initial recognition of an asset retirement obligation, should not take which of the following actions? A. Allocate asset retirement cost to expense over the useful life of the related asset. B. Measure the asset retirement cost at fair value. C. Capitalize the asset retirement cost by increasing the carrying amount of the related asset. D. Capitalize the asset retirement cost at its undiscounted cash flow value 3 10. On January 1, 2016, Olson Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Olson initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is reduction in earnings in 2016? A. $0 B. $200,000 C. $400,000 D. $1,200,000 11. On December 31, 2015, the Meisenhelder Company had 250,000 shares of common stock issued and outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Meisenhelders net income for the year ended December 31, 2016 was $700,000. During 2016, Meisenhelder declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share (rounded)? A. $2.16. B. $3.50. C. $3.10. D. $2.80. 12. The following information pertains to Hurce Company's outstanding stock for 2016: Common Stock, $1 Par Shares Outstanding , 1/1/2016 2 for 1 stock split, 4/1/2016 Shares Issued, 7/1/2016 Preferred Stock, $100 par, 7% cumulative Shares outstanding, 1/1/2016 10,000 10,000 5,000 4,000 What is the number of shares Hurce should use to calculate 2016 basic earnings per share? A. 20,000. B. 22,500. C. 25,000. D. 27,000. 4 13. Velasco Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes: A. A credit to accumulated depreciation. B. A debit to accumulated depreciation. C. A debit to a depreciable asset. D. The change does not require a journal entry. 14. During 2016, Hutton Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO. A. Hutton is not required to make any accounting adjustments. B. Hutton has made a change in accounting principle requiring retrospective adjustment. C. Hutton has made a change in accounting principle requiring prospective application. D. Hutton needs to correct an accounting error. 15. Hepburn Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2018. How much should Hepburn record as amortization expense for this copyright for 2015? A. $14,400. B. $7,200. C. $18,000. D. $12,000. 16. Cooper Inc. took physical inventory at the end of 2015. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count. A. Cooper needs to correct an accounting error. B. Cooper has made a change in accounting principle, requiring retrospective adjustment. C. Cooper is required to adjust a change in accounting estimate prospectively. D. Cooper is not required to make any accounting adjustments. 17. Heuer Company's prepaid insurance was $8,000 at December 31, 2015, and $10,000 at December 31, 2016. Heuer reported insurance expense of $15,000 on the 2016 income statement. What amount would be reported in the statement of cash flows as insurance paid using the direct method? A. $13,000. B. $17,000. C. $15,000. D. $23,000. 5 18. Which of the following circumstances creates a future taxable amount? A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned. B. Accrued compensation costs for future payments. C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting. D. Investment expenses incurred to obtain tax-exempt income (not tax deductible). 19. During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be: A. $30 million. B. $60 million. C. $50 million. D. $45 million. 6 20. Gotting Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2016. How much should Gotting record retrospectively as the effect of change? A. $0. B. $12,000. C. $8,000. D. $14,400. Problems Information for Problems 1 and 2: Drake, Inc. has two loans recorded on its books. Loan 1 was obtained on January 1, Year 1, and Loan 2 was entered into on January 1, Year 2. Drakes year end is December 31. For the two situations related to the loans below, prepare the appropriate journal entries. Each loan should be accounted for independent of the other loan. Round numbers to the nearest dollar. 1. Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest due and paid annually on December 31. Drake records interest annually on December 31. Drake incorrectly recorded the journal entry for the Year 1 interest expense and payment as a debit to accrued interest payable and a credit to cash. Prepare the net journal entry (entries) to correct Year 1 and properly record the interest attributable to the loan as of, and for the year ended December 31, Year 2. Account Name Debit Credit 7 2. Loan 2 is an 8%, $1,000,000 loan with interest due annually on December 31. Drake did not record or pay the required Year 2 interest payment until January 1, Year 3. Prepare the journal entry (entries) Drake should record at December 31, Year 2. Account Name Debit Credit 3. On January 1, 2016, Shelley Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Shelley to make annual payments of $100,000 at the end of each year for ten years with title to pass to Shelley at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Shelley uses the straight-line method of depreciation for all of its fixed assets. Shelley accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Shelley should record interest and depreciation expense for 2016: Interest expense: _____________ Depreciation expense: _____________ 8 4. The following information is for Moyano, Inc. for the year ended December 31, 2016. Moyano had a cash and cash equivalents balance of $5,200 on January 1, 2016, and $2,320 on December 31, 2016. Required: Prepare a statement of cash flows in good form for the year using the direct method for operating activities. ------------------------------------------------------------------------------------ Practice Set Chapters 21 and 25 FOR MORE CLASSES VISIT tutorialoutletdotcom Practice Set Chapters 21 and 25 1. Name: B Corporation is considering a copy machine that can be leased for $4,000 a year for 6 years. The company's marginal tax rate is 27 percent and the yield to maturity on the company's debt is 5.9 percent. Compute the cost to lease if lease payments and associated tax savings are at the a. beginning of each year Cost to lease = Present value of future cash flows = 4000 + 4000/1.059 + 4000/1.059^2 + 4000/1.059^3 + 4000/1.059^4 + 4000/1.059^5 + 4000/1.059^6 = $ b. end of each year Cost to lease = Present value of future cash flows = = 12000/1.059 + 12000/1.059^2 + 12000/1.059^3 + 12000/1.059^4 + 12000/1.059^5 + 12000/1.059^6+12000/1.059^7 = $ 2. You want a new automobile for personal use. Neither depreciation nor interest payments will be tax deductible. You can buy the automobile with a $2,000 down payment and a 9 percent, forty- eight month loan. The monthly payments will be $665. Alternately, you can lease the automobile with; a $2000 NON refundable deposit, a $1600 refundable security deposit and lease payments of $617 at the beginning of each month for 48 months. Using a 9 percent annual required return to evaluate the salvage value, what must the car be worth at the end of 48 months for the purchase to be more attractive than the lease? What is the indifference point? Hint-- You will need to find the cost of own and the cost to lease then you will need to run a goal-seek or manually change the foregone salvage value to find the foregone salvage value that sets the cost to lease equal to the cost to own (by changing the salvage value). First, it is important to discover the present value of money paid by buying the car Monthly Rate = 0.09/12 = 0.0075 Net Present Value = 2000 + 665 (1/1.0075 +1/1.0075^2 +...+1/1.0075^48) = 2000 + 665 x (1/0.0075)[1 - (1/1.0075^48)] = = The value for buying at the end of 48 month assuming 9% = = ____ x (1.0075)^48 = ******************************************************** ***************************************** For the lease present value = 2000 +1600 + 617 x (1/0.0075)[1 - (1/1.0075^48)] = Value of this lease at the end of 48 months = ____ x (1.0075^(48)) = 34,748.12 ******************************************************** ***************************************** Hence to find the minimum salvage value so that buying is more attractive than leasing i.e. to find indifference point. The value at the end of 48 months buy buying = The value at the end of 48 months by leasing + Salvage value That is ____ = ____ + Salvage value As a result, the minimum salvage value = Salvage value more than this salvage value will make buying more attractive 3. T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $2.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic beneNits, and cash Nlows are expected to continue forever and are not expected to grow in the future. Assuming a 25 percent tax rate and a 8 percent after-tax required return, what is net cash Nlow? Assuming year-end cash Nlows, what is the value of M Corporations capital? If M Corporation has long-term debt of $3 million, what is the value of the equity of M Corporation? Answer: EBIT = $2,750,000 Tax Expenses = 25% x 2,750,000 = 687,500 EBT = 2,750,000 - 687,500 = 2,062,500 Since, asset replacement cost approximately equals depreciation Net Cash flow remain same as EBT i.e. $2,062,500 Net Cash flow = $2,062,500 Assuming year-end cash flows, what is the value of M Corporations capital? Answer: Value of M Corporations capital = 2,062,500/0.09 Value of M Corporations capital = $22,916,666.70 If M Corporation has long-term debt of $3 million, what is the value of the equity of M Corporation? 4. Answer: Value of the equity of M Corporation = $22,916,666.70 - $3,000,000 Value of the equity of M Corporation = $19,916,666,70 N Corporation is considering the acquisition of A Corporation. A Corporation has earnings before interest and tax of $4.75 million, and asset replacement cost approximately equals depreciation. EfNiciencies gained through the merger will reduce As operating costs by $1,820,000. Cash Nlows occur at year-end. a. Assuming a 25 percent tax rate and a 12 percent required return, what is the value of As capital without a merger? b. 5. Assuming a 25 percent tax rate and a 12 percent required return, what is the value of As capital after a merger? F Corporation is considering the acquisition of T Corporation. Without the merger, T Corporations cash Nlow to capital is expected to be $6 million next year and is expected to grow at a constant 4 percent a year thereafter. With a merger, T Corporations constant growth rate will be increased to 6 percent. The tax rate is 40 percent and the after-tax required return is 10 percent. Assume year-end cash Nlows. a. What is the value of Ts capital if T is not acquired by F Corporation? Cash &low in year (I) = 6 million x (1+0.04)i After tax Cash flow in year (I) = $6 million x (1+0.04)i x (1-0.4) = 2.1 million x (1+0.04)i PV = $2 million / {1 - (1.04/1.12)} = 2 x 1.12/0.08 = $28 million b. What is the value of Ts capital if T is acquired by F Corporation? Merger Cash flow in year (i) = 6 million x (1+0.06)i After tax Cash flow in year (i) = $6 million x (1+0.06)i x (1-0.3) = 2.1 million x (1+0.06)i PV = $2 million / {1 - (1.06/1.12)} = 2 x 1.12/0.06 = $37.33 million 6. (Stock for Stock Merger) A Corporation is considering the acquisition of X Corporation. Each corporation has the following data: Existing Income Number of Shares A Corporation $8,200,000 621,000 X Corporation $4,200,000 365,000 Synergistic additional beneNits from the combination are $1,800,000. What is the minimum exchange ratio is necessary to keep the X shareholders whole in terms of earnings per share? What is the maximum exchange ratio would the A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share? (note you will need to use the formulas in the book to solve this) 7. (Cash for Stock Merger) This problem requires that you integrate the material learned in prior chapters. You have been given the job of evaluating the following merger candidate. You have collected the following cash Nlow estimates for the acquisition candidate for the proposed merger (in millions): Year 1 2 3 4 5__ Cash Nlows now for the target 60 80 100 125 150 Additional cash Nlows (synergy) 40 70 100 125 150 Total cash Nlows from target (after merger) 100 150 200 250 300 Risk free rate of return Beta for this project (the company after merging) Market risk premium Pre-tax cost of debt Marginal after tax rate Number of shares outstanding for the target company (millions) Current market price per share for the target company Percentage of the acquisition Ninanced with debt Percentage of the acquisition Ninanced with common equity 4% 1.07 5% 8% 20% 14 $51 34% 66% What is the after tax cost of debt for this merger (as we did in chapter 16)? What is the after tax cost of common equity for this merger (as we did in chapter 16)? What is the weighted average cost of capital for this acquisition candidate (as we did in chapter 16)? Please run a net present value using the WACC calculated above with the total cash Nlows from the target (given above) to determine the maximum price per share you are willing to pay for this target candidate? Based what you calculated and the current market price, would you pursue this candidate? ------------------------------------------------------------------------------------ The Bureau of Economic Analysis FOR MORE CLASSES VISIT tutorialoutletdotcom To answer this question, you must obtain data from the Bureau of Economic Analysis (BEA),http://www.bea.gov, on the U.S. balance of payments (BOP) tables. You can either use theinteractive tables or the "US International Transactions" pre-formatted tables released onDecember 15, 2016, (link). Obtain the following annual data for United States in 2015 .1. Based on table 1.1, what is the trade balance (TB) for goods, services, and total? 2. Based on table 1.1, what is the net factor income from abroad (NFIA), net unilateraltransfers (NUT), and the current account (CA)? 3. Based on table 1.2, what is the most important component of net factor receipts fromabroad and net factor payments abroad? 4. Based on table 1.1., what is the balance of the financial account (FA) as defined in thetextbook? 5. Based on table 1.1., what is the component that accounts for the largest increase inforeign assets owned by the United States (abstracting from "other investment assets")?What is the component that accounts for the largest increase in liabilities owed by theUnited States?3 6. Based on table 1.1., explain how the balance of payments identity (CA+FA+Capitalaccount=0) is satisfied after the statistical discrepancy adjustment. 7. Download "Table 1.1. U.S. Net International Investment Position at the End of thePeriod", from the BEA website. Plot in one figure the total U.S. Assets, Liabilities,and Net Investment Position (or External wealth) between 1976 and 2015 (at an annualfrequency). ------------------------------------------------------------------------------------ The Finance Department of Zeta Auto Corporation FOR MORE CLASSES VISIT tutorialoutletdotcom Introduction: You have recently been hired as a Financial Analyst in the Finance Department of Zeta Auto Corporation which is seeking to expand production. The CFO asks you to help decide whether the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza. Deliverable: Write a report providing the CFO with your recommendation whether Zeta should set up the plant to produce the Spenzas and support your recommendation by in-depth analysis in Excel. In your report, explain the results of each portion of your analysis (represented by the tabs on the Excel template). Submit all the completed Excel worksheets with the completed responses to the questions posed to support your report and recommendation. Provide a one-page Executive Summary summarizing the results of your analysis and recommendation. Steps to Completion: Capital Investment Data To assess the suitability of the project you begin by listing the various cash flows. A consultant has been paid $50,000 to do a market survey. She reports back that Zeta can sell 7,000 Spenzas for $80,000 each in years 1 and 2, and 4,000 Spenzas for $80,000 each in years 3 and 4. The consultant also estimates that the increased sales of the Spenza will cannibalize the sale of an existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 4 years. Monzas are priced at $65,000. After 4 years it is expected the Spenza will be phased out, and the plant will be put to other uses generating $15 M annually. However, this decision can be reevaluated at the end of year 3, based on new information which will become at that time. Your consultant has prepared her estimates of what this new information might be. These estimates are given in the attached Excel spreadsheet. The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000 cars. In addition, at the beginning of each year the plant will require the Net Working Capital outlay equal to 4.75% of direct manufacturing costs (excluding labor and overheads) in the coming year. The NWC outlay will be recovered after 4 years. The CFO provided you with historical information about Monzas cost structure (Excel sheet attached) and noticed that Spenza will have the following differences: Spenzas body will be made from reinforced carbon, which makes the car lighter, thus significantly improving mileage range per battery charge. 80% of the carbon cost is the cost of energy and the estimated carbon cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the current cost of electricity in Michigan, where the plant will be located. This cost is 70% of the average nationwide retail electricity price. EIA electricity cost projections are provided in the Excel sheet. Battery Pack cost for Spenza is $15,000 per car. Cost of materials for engine and other parts will be identical to Monzas. Labor cost of $4,000 per car is based on annual production of 10,000 Spenzas. Labor is unionized; number of workers and wages do not depend on the number of units produced. Overheads at the new plant will be identical to total overheads at the existing Monza plant. IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes (equal depreciation in all years and not an accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule (see the Excel sheet attached) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $15 M annually. Modeling Financial Metrics and Cash FlowsDepreciation You have to decide whether Zeta should set up the plant to produce the Spenzas by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods. What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? What will be the depreciation using MACRS? Which schedule would you recommend to use? EBIT What will be the costs and revenues for the first four years? What will be the incremental EBIT (Earnings before Interest and Taxes) each year? Interest and Taxes You now have to need to determine interest costs and taxes. Assume that the cost of setting up the plant will be 50% financed by debt with an interest rate of 7%. At this point you are getting closer to the cash flows the project will produce, and need to determine the tax rate. You research tax rates and determine that the appropriate tax rate is 40%. What incremental taxes Zeta will pay if the Spenza plant is set up? Net Income What will be the incremental Net Income for Zeta from the project each year? Incremental OCF Now you can calculate the net increase in cash flows from the project. What will be the incremental OCF (Operating Cash Flow) each year? Free Cash Flow The next step will be calculating FCF taking into account OCF and other incremental cash flows, including opportunity costs! At this point we are still assuming that the project will last only for four years. What will be the FCF (Free Cash Flow) each year? WACC and CAPM The next step will be estimating WACC. Using Yahoo Finance! or other financial sources available on the course website find auto- making industrys beta, market risk premium and the risk free rate. Estimate the WACC using the earlier assumption about the projects financing and the CAPM equation for the cost of equity. Decision Criteria NPV and IRR Now you are ready to calculate the first criterion that is used to assess projects. What will be the Net Present Value of the project? You should also calculate another widely used criterion. What will be the IRR of the project? Analyzing Risk using Scenario Analysis You consider the electricity cost as one of the major factors affecting your variable costs and would like to perform some additional analysis to check the projects sensitivity to electricity costs. As was mentioned EIA has several electricity cost projections (Excel sheet, tab Energy Prices Forecast). First you decide to see how your recommendations might change under different cost scenarios. Perform scenario analysis on the electricity cost and present the summary of results. Break-even Analysis Next, you would like to find the maximum electricity cost in year 1 at which the project would still be advisable. For simplicity assume 0.5% annual growth of electricity costs. Find the break-even value for the electricity cost in year 1. Monte Carlo Simulation Finally, you would like to perform a Monte Carlo simulation. Possible distribution assumptions are provided in Excel Spreadsheet tab Crystal Ball Simulation, but you are welcome to make (and explicitly state) your own and use Random Numbers generator in Data Analysis Pack. Based on your analysis, what is the probability that the project will be profitable? [Crystal Ball] You also want to estimate the sensitivity of your project to different factors. Using Crystal Ball, please create a Tornado Diagram and discuss its results. ------------------------------------------------------------------------------------ what percentage of all jobs in the United States? FOR MORE CLASSES VISIT tutorialoutletdotcom 1. The service sector makes up approximately what percentage of all jobs in the United States? a. 12% b. 40% c. 66% d. 79% e. 90% 2. Which is not true regarding differences between goods and services? a. Tangible goods are generally produced and consumed simultaneously; services are not. b. Most goods are common to many customers; services are often unique to the final customer. c. Services tend to have a more inconsistent product definition than goods. d. Services tend to have higher customer interaction than goods. e. All of the above are true. 3. Which is not true regarding differences between goods and services? a. Services are generally produced and consumed simultaneously; tangible goods are not. b. Services tend to be more knowledge-based than goods. c. Services tend to have a more inconsistent product definition than goods. d. Goods tend to have higher customer interaction than services. e. None of the above is true. 4. Which of the following services is least likely to be unique, i.e., customized to a particular individuals needs? a. dental care b. hairdressing c. legal services d. elementary education e. computer consulting 5. Which of the following is not a typical service attribute? a. intangible product b. easy to store c. customer interaction is high d. simultaneous production and consumption e. difficult to resell 6 Final Examination BAM421 Operations Management 6. Which of the following attributes is most typical of a service? a. production and consumption occur simultaneously b. tangible c. mass production d. consistency e. easy to automate 7. Experience differentiation ________________. a. isolates the consumer from the delivery of a service b. is an extension of product differentiation in the service sector c. uses only the consumers senses of vision and sound d. keeps consumers from becoming active participants in the service e. is the same as product differentiation, but applied in the service sector 8. Franz Colruyt has achieved low-cost leadership through ________________. a. effective use of voice mail b. plastic, not paper, shopping bags c. background music that subtly encourages shoppers to buy more d. converting factories, garages and theaters into retail outlets e. exclusive use of the Euro 9. A firm producing a good is more likely to have which set of the following characteristics compared to a firm providing a service? a. many subjective quality standards, tangible product and locate away from customers b. many subjective quality standards, intangible product and locate away from customers c. many objective quality standards, tangible product and locate near customers d. many objective quality standards, tangible product and locate away from customers e. many objective quality standards, intangible product and locate away from customers 10. Which of the following influences layout design? a. inventory requirements b. capacity needs c. personnel levels d. technology decisions e. All of the above influence layout decisions. 11. The largest contributor to productivity increases is ________________, estimated to be responsible for _______________ of the annual increase. a. management; over one-half b. Mr. Deming; one-half c. labor; two-thirds d. capital; 90% e. technology; over one- half 12. Which of the following is not true when explaining why productivity tends to be lower in the service sector than in the manufacturing sector? a. Services are typically labor-intensive. b. Services are often difficult to evaluate for quality. c. Services are often an intellectual task performed by professionals. d. Services are difficult to automate. e. Service operations are typically capital intensive. 13. Three commonly used productivity variables are ________________. a. quality, external elements and precise units of measure b. labor, capital and management c. technology, raw materials and labor d. education, diet and social overhead e. quality, efficiency and low cost 14. Firm A operates 10 hours each day, producing 100 parts/hour. If productivity were increased 20%, how many hours would the plant have to work to produce 1000 parts? a. less than 2 hours b. between 9 and 10 hours c. between 2 and 6 hours d. between 6 and 8 hours e. between 8 and 9 hours 15. A cleaning company uses 10 lbs each of chemicals A, B and C for each house it cleans. After some quality complaints, the company has decided to increase its use of chemical A by an additional 10 lbs for each house. By what % has productivity (houses per pound of chemical) fallen? a. 0% b. 10% c. 15% d. ------------------------------------------------------------------------------------ Zeta Spenza Project Given MACRS Schedule FOR MORE CLASSES VISIT tutorialoutletdotcom ntroduction: You have recently been hired as a Financial Analyst in the Finance Department of Zeta Auto Corporation which is seeking to expand production. The CFO asks you to help decide whether the firm should set up a new plant to manufacture the roadster model, the Zeta Spenza. Deliverable: Write a report providing the CFO with your recommendation whether Zeta should set up the plant to produce the Spenzas and support your recommendation by in-depth analysis in Excel. In your report, explain the results of each portion of your analysis (represented by the tabs on the Excel template). Submit all the completed Excel worksheets with the completed responses to the questions posed to support your report and recommendation. Provide a one-page Executive Summary summarizing the results of your analysis and recommendation. Steps to Completion: Capital Investment Data To assess the suitability of the project you begin by listing the various cash flows. A consultant has been paid $50,000 to do a market survey. She reports back that Zeta can sell 7,000 Spenzas for $80,000 each in years 1 and 2, and 4,000 Spenzas for $80,000 each in years 3 and 4. The consultant also estimates that the increased sales of the Spenza will cannibalize the sale of an existing model, the Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each of the 4 years. Monzas are priced at $65,000. After 4 years it is expected the Spenza will be phased out, and the plant will be put to other uses generating $15 M annually. However, this decision can be reevaluated at the end of year 3, based on new information which will become at that time. Your consultant has prepared her estimates of what this new information might be. These estimates are given in the attached Excel spreadsheet. The cost of setting up the plant is to be $250 M with annual manufacturing capacity of 10,000 cars. In addition, at the beginning of each year the plant will require the Net Working Capital outlay equal to 4.75% of direct manufacturing costs (excluding labor and overheads) in the coming year. The NWC outlay will be recovered after 4 years. The CFO provided you with historical information about Monzas cost structure (Excel sheet attached) and noticed that Spenza will have the following differences: Spenzas body will be made from reinforced carbon, which makes the car lighter, thus significantly improving mileage range per battery charge. 80% of the carbon cost is the cost of energy and the estimated carbon cost body per car of $14,000 is based on electricity cost of 7 cents /per kWh, which is the current cost of electricity in Michigan, where the plant will be located. This cost is 70% of the average nationwide retail electricity price. EIA electricity cost projections are provided in the Excel sheet. Battery Pack cost for Spenza is $15,000 per car. Cost of materials for engine and other parts will be identical to Monzas. Labor cost of $4,000 per car is based on annual production of 10,000 Spenzas. Labor is unionized; number of workers and wages do not depend on the number of units produced. Overheads at the new plant will be identical to total overheads at the existing Monza plant. IRS allows you to straight line depreciate the cost of the plant over 4 years for tax purposes (equal depreciation in all years and not an accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule (see the Excel sheet attached) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $15 M annually. Modeling Financial Metrics and Cash FlowsDepreciation You have to decide whether Zeta should set up the plant to produce the Spenzas by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods. What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? What will be the depreciation using MACRS? Which schedule would you recommend to use? EBIT What will be the costs and revenues for the first four years? What will be the incremental EBIT (Earnings before Interest and Taxes) each year? Interest and Taxes You now have to need to determine interest costs and taxes. Assume that the cost of setting up the plant will be 50% financed by debt with an interest rate of 7%. At this point you are getting closer to the cash flows the project will produce, and need to determine the tax rate. You research tax rates and determine that the appropriate tax rate is 40%. What incremental taxes Zeta will pay if the Spenza plant is set up? Net Income What will be the incremental Net Income for Zeta from the project each year? Incremental OCF Now you can calculate the net increase in cash flows from the project. What will be the incremental OCF (Operating Cash Flow) each year? Free Cash Flow The next step will be calculating FCF taking into account OCF and other incremental cash flows, including opportunity costs! At this point we are still assuming that the project will last only for four years. What will be the FCF (Free Cash Flow) each year? WACC and CAPM The next step will be estimating WACC. Using Yahoo Finance! or other financial sources available on the course website find auto- making industrys beta, market risk premium and the risk free rate. Estimate the WACC using the earlier assumption about the projects financing and the CAPM equation for the cost of equity. Decision Criteria NPV and IRR Now you are ready to calculate the first criterion that is used to assess projects. What will be the Net Present Value of the project? You should also calculate another widely used criterion. What will be the IRR of the project? Analyzing Risk using Scenario Analysis You consider the electricity cost as one of the major factors affecting your variable costs and would like to perform some additional analysis to check the projects sensitivity to electricity costs. As was mentioned EIA has several electricity cost projections (Excel sheet, tab Energy Prices Forecast). First you decide to see how your recommendations might change under different cost scenarios. Perform scenario analysis on the electricity cost and present the summary of results. Break-even Analysis Next, you would like to find the maximum electricity cost in year 1 at which the project would still be advisable. For simplicity assume 0.5% annual growth of electricity costs. Find the break-even value for the electricity cost in year 1. Monte Carlo Simulation Finally, you would like to perform a Monte Carlo simulation. Possible distribution assumptions are provided in Excel Spreadsheet tab Crystal Ball Simulation, but you are welcome to make (and explicitly state) your own and use Random Numbers generator in Data Analysis Pack. Based on your analysis, what is the probability that the project will be profitable? [Crystal Ball] You also want to estimate the sensitivity of your project to different factors. Using Crystal Ball, please create a Tornado Diagram and discuss its results. ------------------------------------------------------------------------------------