Tutorial I

1) What is the price of a 15-year zero coupon bond paying $1,500 at

maturity, assuming semi-annual compounding, if the YTM is:

a) 6%

b) 8%

c) 10%

2) ABC Corp. issued 15-year bonds 2 years ago at a coupon rate of 5.9%.
The bonds make semiannual payments. If these bonds currently sell for
105% of par value, what is the YTM?

3) A Japanese company has a bond outstanding that sells for 106% of its
¥100,000 par value. The bond has a coupon rate of 2.8% paid annually
and matures in 21 years. What is the YTM of this bond?

4)ABC Co. just paid a dividend of $1.95 per share on its stock. The
dividends are expected to grow at a constant rate of 4.5% per year
infinitely. If investors require a return of 11% on the stock, what is the
current price? What will the price be in 3 years? In 15 years?

5) The next dividend payment by ECY Inc. will be $2.90 per share. The
dividends are anticipated to maintain a growth rate of 5.5% forever. If
the stock currently sells for $53.10, what is the required return?
6) Based on the following information, calculate the expected return
and standard deviation for the two stocks.

State of Probability of Rate of return if state occurs

Economy State of Economy Stock A Stock B
Recession 0.30 0.06 -0.20

Normal 0.55 0.07 0.13

Boom 0.15 0.11 0.33

7) You own a portfolio equally invested in a risk-free asset and two

stocks. If one of the stocks has a beta of 1.73 and the total portfolio is
equally risky as the market, what must the beta be for the other stock
in your portfolio?

8) ABC Co. has 8.3 million shares of common stock outstanding. The
current share price is $53, and the book value per share is $4. The
company also has two bond issues outstanding. The first bond issue has
a face value of $70 million and a coupon rate of 7% and sells for 108.3%
of par. The second issue has a face value of $60 million and a coupon
rate of 7.5% and sells for 108.9% of par. The first issue matures in 8
years, the second issue in 27 years.

a) What are the company’s capital structure weights on a book value

basis?

b) What are the company’s capital structure weights on a market value

basis?

c) Which are more relevant, the book or market value weights? Why?
9) Given the following information for ABC Co., find the WACC. Assume
the company’s tax rate at 35%.

Debt: 10,000 5.6% coupon bonds outstanding. $1,000 par value. 25

years to maturity, selling for 97% of par: the bonds make semi-annual
payments.

Equity: 425,000 shares outstanding, selling for $61 per share:the beta is
0.95.

Market: EMRP 7% and 3.8% risk-free rate.

10) ABC Corp. has no debt but can borrow at 6.5%. The firm’s WACC is
currently 9.8%, and the tax rate is 35%.

a) What is the company’s cost of equity?

b) If the company converts to 25% debt, what will its cost of equity be?

c) If the company converts to 50% debt, what will its cost of equity be?

d) What is the company’s WACC? In part b)? In part c)?

11) ABC Co. expects its EBIT to be $145,000 every year forever. The
company can borrow at 8%. The company currently has no debt, and its
cot of equity is 14%. If the tax rate is 35%, what is the value of the
company? What will the value be if the company borrows $135,000 and
uses the proceeds to repurchase shares?
12) ABC Corp. has EBIT of $850,000 per year, that is expected to
continue in perpetuity. The unlevered cost of equity for the company is
14%, and the corporate tax rate is 35%. The company also has a
perpetual bond issue outstanding with a market value of $1.9 million.

a) What is the value of the company?

b) The CFO of the company informs the president of the company that
the value of the company is $4.3 million. Is the CFO correct?

13) ABC Construction currently has debt outstanding with a market

value of $75,000 and a coat of 9%. The company has EBIT of $6,750
that is expected to continue in perpetuity. Assume there are no taxes.

a) What is the value of the company’s equity? What is the debt-to-value

ratio?

b) What is the equity value and the debt-to-value ratio, if company’s

growth rate is 3%?

c) What is the equity value and the debt-to-value ratio, if company’s

growth rate is 7%?
 Tutorial II

1) ABC Co. has the following mutually exclusive projects:

Year Project A Project B

0 -$20,000 -$24,000

1 13,200 14,100

2 8,300 9,800

3 3,200 7,600

a) Suppose the company’s payback period cut-off is 2 years. Which of

these two projects should be chosen?

b) Suppose the company uses the NPV rule to rank these two projcts.
Which project should be chosen, if the appropriate discount rate is
15%?

2) ABC Inc. has a project with the following cash flows.

Year Cash flows ($)

1 -24,000
2 9,700
3 13,700
4 6,400

The company evaluates all projects by applying the IRR rule. If the
appropriate interest rate is 9%, should the company accept the project?
3) Consider the following cash flows on two mutually exclusive projects
for the ABC Corp. Both projects require an annual return of 14%.

Year Project A Project B

0 -$850,000 -$1,650,000

1 320,000 810,000

2 470,000 750,000

3 410,000 690,000

As a financial analyst, you are asked the following questions.

a) If your decision rule is to accept the project with the greater IRR,
which project should you choose?
b) Because you are fully aware of the IRR rule’s scale problem, you
calculate the incremental IRR for the cash flows. Which project
should you choose then?
c) To be prudent, you compute the NPV for both projects. Which
project should you choose? Is it consistent with the incremental
IRR rule?

4) ABC Restaurant is considering the purchase of a $7,500 souffle

maker. The machine has an economic life of 5 years and will be fully
depreciated by the straight line method. The machine will produce
1,300 souffles per year, with each costing $2.15 to make and priced at
$5.25. Assume that the discount rate is 14% and the tax rate is 34%.
Should the company make the purchase?
5) ABC Co. is considering a new investment. Financial projections in
USD for the investment are as given below. The corporate tax rate is
34%. Assume all sales revenue is received in cash, all operating costs
and income taxes are paid in cash, and all cash flows occur at the end of
the year. All net working capital (NWC) is recovered at the end of the
project.

Year 0 Year 1 Year 2 Year 3 Year 4

Investment 27,400

Sales revenue 12,900 14,000 15,200 11,200

Operating costs 2,700 2,800 2,900 2,100

Depreciation 6,850 6,850 6,850 6,850

NWC spending 300 200 225 150 ?

a) Compute the incremental net income of the investment for each

year.

b) Compute the incremental cash flows of the investment for each year.

Suppose the appropriate discount rate is 12%. What is the NPV of the
project?

6) We are evaluating a project that costs $588,000, has an eight-year

life, and has no salvage value. Assume that depreciation is straight line
to zero over the life of the project. Sales are projected at 70,000 units
per year. Price per unit is $36, variable cost per unit is $20, and fixed
costs are $695,000 per year. The tax rate is 35%, and we require a
return of 15% on this project.
a) Calculate the accounting break-even point.

b) Calculate the base-case cash flow and NPV. What is the sensitivity of
NPV to changes in the sales figure? Explain what your answer tells you
about a 500-unit decrease in projected sales.

c) What is the sensitivity of the OCF to changes in the variable cost

figure? Explain what your answer tells you about a $1 decrease in
estimated variable cost.

7) Zoso is a rental car company that is trying to determine whether to

add 25 cars to its fleet. The company fully depreciates all its rental cars
over 5 years using the straight line method. The new cars are expected
to generate $215,000 in earnings before taxes and depreciation for 5
years. The company is entirely financed by equity and has a 35% tax
rate. The required return on the company’s unlevered equity is 13%
and the new fleet will not change the risk of the company.

a) What is the maximum price that the company should be willing to

pay for the new fleet of cars if it remains an all-equity company?

b) Suppose the company can purchase the fleet of cars for $650,000.
Additionally, assume the company can issue $430,000 of 5-year debt to
finance the project at the risk-free rate of 8%. All principal will be
repaid in one balloon payment at the end of the fifth year. What is the
adjusted present value (APV) of the project?
 Tutorial III

1) Consider the following financial statement information for ABC Inc.

Item Beginning Ending

Inventory $17,385 $19,108

Accounts receivable 13,182 13,973

Accounts payable 15,385 16,676

Net Sales $216,384

Cost of goods sold 165,763

Calculate the operating and cash cycles. How do you interpret your
answer?

2) ABC Co.’s purchases from suppliers in a quarter are equal to 75% of

the next quarter’s forecast sales. The payable period is 60 days. Wages,
taxes and other expenses are 20% of sales as noted below, and interest
and dividends are $73 per quarter. No capital expenditures are
planned.

Q1 Q2 Q3 Q4

Sales $1,435 $1,680 $1,520 $1,280

Sales for the first quarter of the following year are projected at $1,645.
Calculate the company’s cash outlays by completing the following:
 Q1 Q2 Q3 Q4

Payment of accounts

Wages, taxes and other expenses

Interest and Dividends

Total

3) ABC Co. has the following figures ($) for the second quarter of 2019.

April May June

Credit sales 601,900 627,300 693,790

Credit purchases 232,850 277,900 317,380

Cash disbursements

Wages, taxes and exp. 62,964 76,364 79,670

Interest 18,058 18,058 18,058

Equipment purchases 131,400 144,200 0

The company predicts that 5% of its credit sales will never be collected,
35% of its sales will be collected in the month of the sale, and the
remaining 60% will be collected in the following month. Credit
purchases will be paid in the month following the purchase. In march
2019, credit sales were $332,640, and credit purchases were $247,100.
Prepare the cash budget for the period April – June, 2019 for the
company.

4) A firm offers terms of 1/10, net 30. What effective annual interest
rate does the firm earn when a customer does not take the discount?
What will be the effective rate if:

a) The cash discount is changed to 2%.

b) The credit period is increased to 60 days.

c) The discount period is increased to 15 days.

5) ABC Co. sells on credit terms of net 30. Its accounts are, on average,
5 days past due. If annual credit sales are $8.95 million, what is the
company’s balance sheet amount of accounts receivable?

6) ABC Inc. is considering a change in its cash-only policy. The new

terms would be net one month. Based on the following information,
determine if the company should extend credit or not. The required
return is 2.5% per month.

Current policy New policy

Price per unit $104 $108

Cost per unit $47 $47

Unit sales per month 2,870 2,915

7) A cycle co. has decided to offer credit to its customers during the
spring selling season. Sales are expected to be 700 bicycles. The
average cost of a cycle is $650. The owner knows that only 96% of the
customers will be able to make their payments. To identify the
remaining 4%, the company is considering subscribing to a credit
agency. The initial charge for this service is $950, with an additional
charge of $15 per individual report. Should the company subscribe to
the agency?
 Tutorial IV

1) The owners’ equity accounts for a company are shown below:

Common stock ($1 per value) $40,000

Capital surplus 155,000

Retained earnings 538,400

Total owners’ equity 733,400

a) If the company’s stock currently sells for $39 per share and a 10%
stock dividend is declared, how many new shares will be
distributed? Show how the equity accounts would change.
b) If the company declared a 25% stock dividend, how would the
accounts change?

2) For the company in Problem 1, show how the equity accounts will
change if:

a) The company declares 4-for-1 stock split. How many shares are
outstanding now? What is the new par value per share?

b) The company declares a 1-for-5 reverse stock split. How many shares
are outstanding now? What is the new par value per share?
3) Roll corp. currently has 465,000 shares of stock outstanding that sell
for $73 per share. Assuming no market imperfections or tax effects
exist, what will the share price be after?

a) 5-for-3 stock split

b) 15% stock dividend

c) 42.5% stock dividend

d) 4-for-7 reverse stock split

Determine the new no. of shares in the above cases.

4) The balance sheet of Levy Corp. is shown here in market value terms.
There are 14,000 shares of stock outstanding.

Cash $62,000 Equity $507,000

Fixed assets 445,000

Total $507,000 Total $507,000

The company has declared a dividend of $1.60 per share. The stock
goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock
selling for today? What will it sell for tomorrow? What will the balance
sheet look like after the dividends are paid?
5) In the previous Problem 4), suppose the company has announced
that it is going to repurchase $22,400 worth of stock. What effect will
this transaction have on the equity of the company? How many shares
will be outstanding? What will the price per share be after the
repurchase? Ignoring tax effects, show how the share purchase is
effectively the same as a cash dividend.