# Comprehensive Homework Problems Set (HWPS) Spring

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)