Show equation or excel function (e.g. =average(b3:b10)) and work for credit.

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Austen Warren
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1 Members: Please print and sign your name here Print your name Sign your name We acknowledge that we had no help from other teams or humans.

2 1. What is the appropriate goal of financial managers? Can managers decisions affect this goal in any way? If so, how? What are some of the drawbacks to setting profit maximization as the main goal of a company? Can managers decisions affect this goal in any way? If so, how? What are the major factors affecting stock price?

3 2. a. Explain the concept of beta. b. The CAPM predicts that the return of Mission Tea Corp. is 12.6 percent. If the risk-free rate of return is 6 percent and the expected return on the market is 6.6 percent, then what is Mission s beta? Show equation and work for credit.

4 3. Santiago Hernandez is planning to invest $125,000 in a money market account for two years. The account pays interest of 3.75 percent compounded on a monthly basis. How much will Santiago have in two years? Michael Carter is expecting an inheritance of $2.5 million in five years. If he had the money today, he could earn interest at an annual rate of 6.35 percent. What is the present value of this inheritance? What is the future value of an investment of $6,000 for five years compounded at the following rates and frequencies: a percent compounded monthly b percent compounded daily c. 1.5 percent compounded continuously Twenty- five years ago, Amanda Cortez invested $12,000 in an account paying an annual interest rate of 4.75 percent. What is the value of the investment today? What is the interest on interest earned on this investment? You just bought a corporate bond at $1, today. In five years, the bond will mature and you will receive $1,000. What is the rate of return on this bond?

5 4. a. Groves Corp. is expecting annual cash flows of $252,000, $287,000, $321,500, and $401,000 over the next four years. If it uses a discount rate of 9.25 percent, what will be the present value of this cash flow stream? b. Freisinger, Inc., is expecting a new project to start paying off, beginning at the end of next year. It expects cash flows to be as follows: $433,767, $478,254, $475,544, $478,623, and $444,535. If Freisinger can reinvest these cash flows to earn a return of 7.8 percent, what is the future value of this cash flow stream at the end of five years? City officials plan to build a new multipurpose stadium. The projected cost of the stadium in 2010 dollars is $12.5 million. Assume that it is 2007 and city officials intend to put away a certain amount at the end of each of the next three years in an account that will pay 9.25 percent. What is the annual payment necessary to meet the projected cost of the stadium? c. You have just won a lottery that promises an annual payment of $219,213 beginning immediately. You will receive a total of 20 payments. If you can invest the cash flows in an investment paying 6.75 percent annually, what is the present value of this annuity?

6 5. a. Torino Foods issued 12-year bonds three years ago with a coupon of 6 percent. If the current market rate is 5.5 percent and the bonds pay annual coupons, what is the current market price of this bond? b. Kim Sanchez recently bought a 13-year zero coupon bond which compounds interest semiannually. If the current market rate is 4.25 percent, what is the maximum price he should have paid for this bond? c. Five-year bonds of Infotech Corporation are currently priced at $ They pay semi-annual coupons of 5.5 percent. If you bought these bonds today, what would be the yield to maturity and effective annual yield that you would earn? d. The Sunset Company wants to borrow on a twelve-year term from its bank. The lender determines that the firm should pay a default risk premium of 2.15 percent over the treasury rate. The five-year treasury rate is currently 1.65 percent. The firm also faces a marketability risk premium of 0.50 percent. What is the total borrowing cost to the firm? e. Mission Corp. has issued six-year bonds that are paying 6 percent semiannual coupons. If the opportunity cost for Brianna Lindner is 6.00 percent, what is the maximum price that she would be willing to pay for this bond?

7 6. a. Mason Corp. is a manufacturer of consumer staples and has experienced no growth for the past six years while paying a dividend of $3.50 every year. The CFO expects the firm to have no growth and for dividends to remain constant for the near future. If the required rate of return is 11 percent, what should be the price of this stock today? b. Bucknell, Inc., recently paid a dividend of $3.00. Management forecasts dividend growth of 3 percent per year for the foreseeable future. What is the value of the stock today with a discount rate of 13 percent? c. Bradley Corp. is growing at a constant rate of 4.2 percent every year. Last week the company paid a dividend of $0.85. If dividends are expected to grow at the same rate as the firm and the required rate of return is 12 percent, what should be the stock s price four years from now (P 4 )? d. Wichita Technologies is expected to grow at a rate of 15 percent for the next three years and then stabilize with annual growth of 6 percent. The company will pay no dividend for the first two years and will pay a dividend of $1.10 in year 3. What will be the value of the company s stock when the company s supernormal growth ends? What is the value of the stock today? Assume that dividends will grow at the same rate as the firm once Wichita starts paying them. The required rate of return is 14 percent. e. UNC Bancorp has issued preferred stock with no maturity date. It has a par value of $100 and pays a quarterly dividend of $1.20. If the required rate of return is 7 percent, what is the value of the stock today?

8 7. a. Techno Corp. is considering developing new computer software. The cost of development will be $655,000 and management expects the net cash flow from sale of the software to be $165,000 for each of the next six years. If the discount rate is 15 percent, what is the net present value of this project? IRR? MIRR? Explain your recommendation. b. Payback method: Parker Office Supplies management is considering replacing the company s outdated inventorymanagement software. The cost of the new software will be $198,000. Cost savings are expected to be $48,500 for each of the first three years and then drop to $38,875 for the following two years. What is the payback period for this project? c. Net present value: Raycom, Inc. needs a new overhead crane and two alternatives are available. Crane T costs $1.85 million and will produce cost savings of $965,000 in each of the next three years. Crane R will cost $1.775 million and will yield annual cost savings of $915,000 for the next three years. The required rate of return is 13 percent. Which of the two options should Raycom choose based on NPV criteria, IRR criteria, MIRR criteria, and why?

9 8. FITCO is considering the purchase of new equipment. The equipment costs $380,000, and an additional $180,000 is needed to install it. Use straight-line deprecation over a five-year life. The equipment will generate additional annual revenues of $400,000. These will grow at 3.0% per year. The annual cash operating expenses of $180,000. These will be at the same percentage of revenues. The salvage value, when the equipment sales in five years, is $85,000. There is an initial working capital investment of $20,000 is required. During the life of the investment, working capital needs are expect to be 10% of revenues. FITCO is in the 38 percent tax bracket, and its cost of capital is 10 percent. What is the project NPV? IRR? MIRR? Should FITCO accept the project?

[Type here] Section 2, Version B [Type here]

[Type here] Section 2, Version B [Type here] FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2017 FINAL EXAM PUT YOUR NAME, SECTION NUMBER AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes