Comprehensive Homework Problems Set (HWPS) Spring

| June 13, 2016

Question
Comprehensive Homework Problems Set (HWPS)
Spring 2015
INSTRUCTIONS
Note that Comprehensive homework problems set is an individual assignment; therefore,
working with or copying from other students is strictly prohibited.
Academic Dishonesty: Students are expected to comply with the universitys rules and
regulations on academic integrity and honesty. Appropriate disciplinary actions will be
enforced, if these rules and regulations are violated.

** Make sure to follow the directions.
** There are 30 points for all problems.
** Deadline: Friday June 22, 2015 (6/22/2015) before 10:55 p.m. This deadline will
NOT be extended under any circumstance. Solutions received after the deadline
will be ignored and receive zero point. You need to upload your final solutions in
Course Blackboard site as a single file. Any excuse of uploading wrong file will
NOT be accepted so make sure to upload the correct file when you submit the
file containing solutions.
** Please note that only one submission is permitted.
** You must show your work step by step. (No credit is given, if you just put the
final solution for each problem)
** You must put your name on all solution sheets. Solutions without name will be
ignored. You need submit your homework to Blackboard. Solutions emailed to my
email addresses will be ignored.
***You can use Excel for calculations; if you wish, but all solutions must be typed
as Microsoft Word text. The scanned versions or pictures of the solutions are
NOT accepted. Also, make sure to attach the correct file when you submit your
homework.
If you miss the deadline of the homework, please do NOT email me your
homework. Score 0 will be assigned to the missed homework .
PROBLEMS
1) Mr. J. Terry needs to arrange financing for the expansion of his computer manufacturing
operations to produce more computers. A domestic bank (Banco di Sardegna) offers to lend the
required $20,000,000 on a loan, which requires interest to be paid at the end of each month.
The quoted rate is 12 percent, and the principal must be repaid at the end of the year. An
international bank (Banca Nazionale del Lavoro) offers 9 percent, daily compounding with
interest and principal due at the end of the year. What is the difference in the effective annual
rates charged by the two banks? (365-day year)(3 points)

2) Your father has $775,000 and wants to retire. He expects to live for another 30 years, and he
also expects to earn 8.5% on his invested funds. How much could he withdraw at the beginning
of each of the next 30 years and end up with zero in the account? (2 points)
3) Warsaw Production Company had $34,000,000 in sales last year. The companys net income
was $800,000, its total assets turnover was 5.0, and the companys ROE was 14 percent. The
company is financed entirely with debt and common equity. What is the companys debt ratio? (2
points)
4) G. Buffon International Corporation (GBIC) is considering an investment project with the
following cash flows:
Year
0
1
2
3
4

Cash Flow
-$100,000
40,000
90,000
30,000
60,000

GBICs cost of capital is 12 percent. What is the projects regular payback? What is the
project’s MIRR? What is Projects NPV? (6 points)
5) Dr. S. Dargil recently took his company Filing Documents Corporation (FDC) – public through
an initial public offering. He is expanding the business quickly to take advantage of an otherwise
unexploited market. Growth for his company is expected to be 40 percent for the first three years
and then he expects it to slow down to a constant 15 percent. The most recent dividend was
$0.75. Based on the most recent returns, the beta for his company is approximately 1.75. The
risk-free rate is 4.5 percent and the market risk premium is 8 percent. What is the current price of
FDC’s stock?(4 points)
6) Ratoon Company has a bond outstanding with 10 years to maturity, an 8.50 percent coupon,
semiannual payments, and a $1,000 par value. The bond has a 5.50 percent yield to maturity, but
it can be called in 5 years at a price of $1,140. What is the bonds yield to call? (3 points)
7) Dobson Dairies has a capital structure, which consists of 60 percent long-term debt and 40
percent common stock. The companys CFO has obtained the following information:
1*

2*

The firm’s non-callable bonds mature in 15 years have an 8.00% annual coupon, a
par value of $1,000, and a market price of $1,150.00. The companys tax rate is
35%. The companys common stock is expected to pay a $3.00 dividend at year
end, and the dividend is expected to grow at a constant rate of 7 percent a year.
The common stock currently sells for $60 a share.
Assume the firm will be able to use retained earnings to fund the equity portion of its
capital budget.

What is the companys weighted average cost of capital (WACC)? (5 points)
8) Mrs. Milva, the CFO of the Red Scarf Corporation (RSC), is considering a capital budgeting
project to buy a new machine. The price of the machine is $99,000. The project requires
$25,000 net operating working capital. The amount of net working capital would be recovered at

end of the projects life. The machine would be depreciated on a straight-line basis (at 33.33% per
year) over the project’s 3-year life with a zero salvage value. Annual sales revenues are $100,000
and annual operating costs (excluding depreciation) are $35,000. Revenues and operating costs
are expected to be constant over the project’s life. The RSCs WACC is 11% and its tax rate is 40
percent. What is the project’s NPV? (5 points)

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