Jerome Powell is set to serve a second term as chairman of the Federal Reserve.

Under Powell, consumers can expect the central bank to maintain its stance on inflation and interest rates.

President Joe Biden announced Monday that he is nominating Jerome Powell for a second term as chairman of the Federal Reserve, which means Americans can expect the U.S. central bank to maintain its patient stance on inflation and interest rates.

Biden praised Powell and the Fed for “decisive” action that cushioned the impact of the Covid pandemic.

In March 2020, the Fed first cut interest rates to near zero and has held them there ever since, along with instituting a monthly bond-buying program to bolster the economy.

Only after its most recent policy meeting did the central bank say it would begin to taper those emergency stimulus efforts.

More from Personal Finance: 88% of Americans are worried about inflation Where to make and save money as inflation rises 46% of Americans expect to retire in debt

“With the Federal Reserve at an inflection point of starting to dial back stimulus, continuity at Fed chair is key,” said Greg McBride, chief financial analyst at Bankrate.com.

“It’s tough to change jockeys in the middle of the race.”

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

Since the start of the pandemic, the Fed’s historically low borrowing rates have made it easier for most Americans to access cheaper loans and less desirable to hoard cash.

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Only recent indications of rising inflation have caused the central bank to start to move away from its easy money policy.

October’s consumer price index came in at a scorching 6.2% year-over-year, the biggest inflation surge in more than 30 years.

The first Fed rate hike is now expected as early as July, but only after the Fed has finishes tapering its bond-buying program.

“Making this announcement on Monday morning before U.S. markets open is no coincidence and should alleviate any jitters from uncertainty about the Fed creeping in as we head into the Thanksgiving holiday,” McBride said.

PayPal was one of the first movers of the Web 1.0 era. Online auction house eBay, another stalwart of e-commerce’s infancy, owned PayPal for many years, but it was spun out from eBay in 2015. PayPal was valued at $1.5 billion nearly 20 years ago and now has a market cap of nearly $240 billion, which shows the growth in online sales worldwide in that period (eBay is now worth $45 billion).

“PayPal’s long-running experience in online payments is a unique asset that is becoming more valuable as e-commerce becomes a bigger piece of the pie,” says Morningstar’s Brett Horn.

Having been symbiotic for years, PayPal and eBay have now gone their separate ways and eBay users get paid directly into their bank accounts, although eBay customers will still be able to pay at checkout with PayPal until 2023. Dutch payment firm Adyen, which is one of Europe’s fastest growing tech firms, is to take PayPal’s place in the eBay infrastructure.

PayPal moved on from the divorce quickly and has been linked with a deal with photo sharing website Pinterest. At the time the deal was discussed in October, Morningstar’s Ali Mogharabi said he could see the logic in the tie-up: “The deal could provide PayPal an opportunity to expand into developing commerce platforms for merchants. If that is the firm’s thinking behind an acquisition, it will be entering a competitive landscape which includes firms like Amazon and Shopify.”

But he thought a similar outcome could be achieved if PayPal teamed up with Pinterest rather than buying it. Now the deal appears to be off, after objections from PayPal shareholders. But PayPal could still be keen to expand into “social commerce”, the next growth area in ecommerce – in blunt terms, rather than just looking at nice pictures with occasional ads (Instagram, Pinterest), these companies want you to look at the images and then buy what’s in them. Instagram owner Facebook (newly rebranded to Meta) is already dominant in this space, and Shopify has teamed up with TikTok with the same aim.

Let’s now look at PayPal’s move into the cryptocurrency space.

U.S. users of the site have been able to buy Bitcoin and Ethereum since last year, and U.K. PayPal customers can now do the same after a summer 2021 launch. You could say that PayPal is just responding to demand, but crypto is still unregulated in the U.K.

AJ Bell’s head of investment analysis Laith Khalaf has some concerns: processing transactions using cryptocurrency is one thing, but will users want to “buy and hold” coins for investment purposes on the platform? Users can already use digital money (linked to dollars, pounds and euros) without cash changing hands, so why add an extra layer of complexity, risk and cost?

“Crypto is clearly hugely volatile, and while businesses have bills to pay in dollars, pounds and euros, they’re unlikely to want to store lots of crypto on their balance sheet, lest prices take one of their habitual nosedives,” he says. “Of course, currently consumers get paid in traditional currencies too, so if crypto is being exchanged at both ends to facilitate a transaction, it’s really just a digital fig leaf covering up a payment that could have been made without it, minus the costs of conversion, not to mention the additional energy used in mining crypto.”

This could be a good time to mention that one of PayPal’s founders was Tesla’s Elon Musk, who has played no small role in bringing cryptocurrencies into the mainstream (although Tesla has U-turned on accepting Bitcoin as payment).

PayPal owns mobile payment service Venmo, which has just partnered with Amazon. It will start accepting Venmo payments next year. PayPal is also expanding its crypto offering, as well as investing further into the buy-now-pay-later area. Whatever your moral stance on this offering, it’s a growing space and fintech company Klarna is preparing to float on the back of the business model.

BUSN 379 Full Class Finance Latest Click Link Below To Buy: http://hwcampus.com/shop/busn-379-full-class-finance-latest/ Or Visit www.hwcampus.com BUSN 379 Homework Week 1-7 BUSN 379 Homework Week 1 Chapter 2: 8, 14, and 19 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. • Note: you will not receive credit for items without calculations. Chapter 2 Assignment 8. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Please calculate by completing the Income Statement below: Income Statement Sales $34,630 Costs $10,340 Depreciation $2520 EBIT $21,770 Interest $1,750 Taxable income $20,020 Taxes $7,007 Net income $13,013 14. a. To calculate the OCF, we need to create an income statement. The income statement starts with sales (revenues) and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Please calculate by completing the Income Statement below: Income Statement Sales $167,000 Costs $88,600 Other Expenses $4,900 Depreciation $11,600 EBIT $61,900 Interest $8,700 Taxable income $53,2000 Taxes $18,620 Net income $34,580 1. The cash flow to creditors is the interest paid, minus any new borrowing. We know that $4,000 of debt were “redeemed”, so we know net borrowing changed by $4,000 (This is your net new borrowing). Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is:…. 2. a. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $2,600,000 Cost of goods sold $1,535,000 Other expenses $465,000 Depreciation $520,000 EBIT $80,000 Interest $245,000 Taxable income -$165,000 Taxes (35%) $0 Net income -$165,000 1. The operating cash flow for the year was:… 2. Please write here your answer in essay format…. BUSN 379 Homework Week 2 Chapter 4: 8, 17, and 18 Chapter 5: 1, 4, and 12 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 4 Exercise #8. You need to compute “r”. Assume the PV is $1. The future value is $13,113. The periods or time are 131. You can compute r by using the following methods: 1. Solving for interest in your financial calculator. 2. Using the following formula: r=(FV/PV)1/t – 1 3. Using the following online calculator (easiest method): http://www.moneychimp.com/calculator/discount_rate_calculator.htm Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #17 You need to compute the PV. 1. Solving for PV in your financial calculator. 2. Using the following formula: PV=FV/(1+r)t 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #18 You need to compute the FV. 1. Solving for FV in your financial calculator. 2. Using the following formula: FV=PV(1+r)t 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Chapter 5 Exercise #1 To solve this exercise, you need to find the PV of each cash flow and add them up. You can: 1. Solve for PV for each cash flow in your financial calculator. Then add them all up. 2. Solve for PV using the following formula: PV=FV/(1+r)t . Then add them all up. 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/CFCalcExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #4: (a) If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? You need to find the PV of an annuity. To do so, you can: 1. Solve for PVA in your financial calculator. 2. Use the formula on Page 132 – The Present Value Annuity 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMCalculator.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #12 Here you need to find the EAR. There are two ways: 1. You can use the formula EAR = [1 + (APR / m)]m – 1 2. Use an online calculator (easiest method): http://www.pine-grove.com/online-calculators/equivalent-rate-calculator.htm Provide a snapshot of your online calculator, your formula or the financial calculator inputs. BUSN 379 Homework Week 3 Chapter 6: 16 Chapter 7: 11 and 12 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 6, Exercise #16: Both Bond Bill and Bond Ted have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. (a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond Ted? If the bonds were priced at par value, the initial price was $1,000. $1,000 is the “default” face value (par price) of a bond unless otherwise stated. In order to find the current price, you can: 1. Compute the present value (which equals the price) of the bond following Example 6.3 on Page 174 of your textbook. Note that the coupon is $35 (7% coupon rate = $70/2 = $35. It is divided by two because it is paid semiannually)…. 2. (b) If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by graphing bond prices versus YTM. 3. (c) What does this problem tell you about the interest rate risk of longer-term bonds? Chapter 7, Exercise #11: E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay today? Here you should make two calculations. The first one is to compute the price of the stock at Year 19, since no dividends will be paid until Year 20. Since this is preferred stock, you will use the following formula: Pt = Dt+1 / R Chapter 7, Exercise #12: Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. (a) If you want a return of 12 percent, how much will you pay for the stock? (b) What if you want a return of 8 percent? (c) What does this tell you about the relationship between the required return and the stock price? BUSN 379 Homework Week 4 Chapter 8: 3, 4, 5, and 6 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 8 • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Exercise #3: 3. Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them Year Cash Flow (A) Cash Flow (B) 0 −$55,000 −$ 95,000 1 19,000 18,000 2 27,000 26,000 3 24,000 28,000 4 9,000 260,000 Exercise #4 Calculating AAR. You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the project’s average accounting return (AAR)? Exercise #5 Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? Year Cash Flow 0 −$153,000 1 78,000 2 67,000 3 49,000 Exercise #6 Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? There are several ways to calculate the NPV: 1. Using Excel (function NPV). If you use Excel, compute the NPV of all cash flows from years 1 to 3. Then subtract the initial investment. Do not include the initial investment (Year 0) cash flow under the formula NPV. Your result will not be correct. 2. Using trial and error as provided in Example 8.1, Page 242 3. Using your financial calculator 4. Using an online calculator (recommended process): http://zenwealth.com/businessfinanceonline/CB/CBCalculator.html The “Cost of Capital” is your “required return”. Make sure the initial investment is negative. You need to add a minus sign (-) in front of it…. BUSN 379 Homework Week 5 Chapter 11: 4, 7, 17, and 29 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 11, Exercise #4 Portfolio Expected Return. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much money will you invest in Stock X? In Stock Y? Here, we are given the expected return of the portfolio and the expected return of each asset in the portfolio, and are asked to find the weight of each asset. Review Section 11.2 and Table 11.5 of your textbook. We can use the equation for the expected return of a portfolio to solve this problem. Since the total weight of a portfolio must equal 1 (100%), the weight of Stock Y must be one minus the weight of Stock X. Mathematically speaking, this means: E(Rp) = Expected Return = (Return of X * Weight of X) + Return of Y * (1 – Weight of X) — We can now solve this equation for the Weight of X… Exercise #7 Calculating Returns and Standard Deviations. Based on the following information, calculate the expected return and standard deviation for the two stocks. State of Probability of State Rate of Return if State Occurs Economy of Economy Stock A Stock B Recession .15 .02 -.30 Normal .55 .10 .18 Boom .30 .15 .31 • Calculate the expected return. The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs… Exercise #17 Using CAPM. A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset currently earns 3.8 percent. 1. What is the expected return on a portfolio that is equally invested in the two assets? 2. If a portfolio of the two assets has a beta of .7, what are the portfolio weights? 3. If a portfolio of the two assets has an expected return of 9 percent, what is its beta? 4. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain (a) Expected Return. Again, we have a special case where the portfolio is equally weighted, so we can sum the returns of each asset and divide by the number of assets since they are equally invested. The expected return of the portfolio is:… Exercise #29 SML Suppose you observe the following situation: State of Probability of Return if State Occurs Economy State Stock A Stock B Bust .10 -.12 -.05 Normal .65 .09 .10 Boom .25 .35 .21 1. Calculate the expected return on each stock. 2. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expected market risk premium? (a)The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs. So, the expected return of each asset is: Expected Return = (Probability of State 1 * Rate of Return for State 1)+ (Probability of State 2 * Rate of Return for State 2)+ (Probability of State 3 * Rate of Return for State 3)… BUSN 379 Homework Week 6 Chapter 12: 3, 5, 6, and 15 Chapter 13: 1 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 12, Exercise #3 Calculating Cost of Equity. Stock in CDB Industries has a beta of .90. The market risk premium is 7 percent, and T-bills are currently yielding 3.5 percent. CDB’s most recent dividend was $1.80 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $47 per share, what is your best estimate of CDB’s cost of equity? Exercise #5 Calculating Cost of Preferred Stock. Sixth Fourth Bank has an issue of preferred stock with a $6.25 stated dividend that just sold for $108 per share. What is the bank’s cost of preferred stock? Exercise #6 Calculating Cost of Debt. ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.1 percent annually. What is ICU’s pretax cost of debt? If the tax rate is 38 percent, what is the aftertax cost of debt? Chapter 13, #1 EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession. b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe? BUSN 379 Homework Week 7 Chapter 17: 6, 7, 14 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 17, Exercise #6 Calculating Net Float. Each business day, on average, a company writes checks totaling $19,500 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $37,200. The cash from the payments is available to the firm after two days. Chapter 17, Exercise #7 Size of Accounts Receivable. Essence of Skunk Fragrances, Ltd., sells 6,500 units of its perfume collection each year at a price per unit of $270. All sales are on credit with terms of 1/10, net 30. The discount is taken by 40 percent of the customers. What is the amount of the company’s accounts receivable? In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 3/10, net 30 to preserve its market share. How will this change in policy affect accounts receivable? Chapter 17, Exercise #14 EOQ. The Trektronics store begins each month with 740 phasers in stock. This stock is depleted each month and reordered. If the carrying cost per phaser is $26 per year and the fixed order cost is $340, what is the total carrying cost? What is the restocking cost? Should the company increase or decrease its order size? Describe an optimal inventory policy for the company in terms of order size and order frequency. BUSN 379 Case 1 Week 2 Case I is due at the end of this week. Prepare a memo in Word, which answers the questions in the Chapter 2 Case, Cash Flows and Financial Statements at Sunset Boards, Inc., on page 51 of the textbook. Use Excel to solve any financial calculations. You will be graded on correct financial analysis, proper use of technology, business-like presentation of technology, and business-like presentation. Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained. The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers. Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Paula Wolfe to evaluate the performance of the company over the past year. After rooting through old bank statements, sales receipts, tax returns, and other records, Paula has assembled the following information: 2013 2014 Cost of goods sold $169,969 214,607 Cash 24,524 26,056 Depreciation 47,980 54,230 Interest expense 10,442 11,954 Selling & administrative expenses 33,425 43,626 Accounts payable 43,344 48,090 Net fixed assets 211,680 264,021 Sales 333,426 406,427 Accounts receivable 17,378 22,542 Notes payable 19,757 21,571 Long-term debt 106,848 119,976 Inventory 36,570 50,185 New equity 0 20,160 Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and has a 20 percent tax rate. You are Paula’s assistant, and she has asked you to prepare the following: 1. An income statement for 2013 and 2014. 2. A balance sheet for 2013 and 2014. 3. Operating cash flow for each year. 4. Cash flow from assets for 2014. 5. Cash flow to creditors for 2014. 6. Cash flow to stockholders for 2014. 7. How would you describe Sunset Boards’ cash flows for 2014? Write a brief discussion. 8. In light of your discussion in the previous question, what do you think about Tad’s expansion plans? Preview: As requested, attached are the financial statements of Sunset Boards, Inc. from 2013-2014. It includes: 1. Income Statement 2. Balance Sheet 3. Operating Cash Flow Highlights of Financial Statements In analyzing the financial statements, horizontal analysis and vertical analysis were… BUSN 379 Case 2 Week 4 S&S AIR’S MORTGAGE Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris’s analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $35 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility. Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR. Mark decides to ask Christie about a “smart loan” he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments. Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Todd’s prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage. Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $35 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment. Mark and Todd are satisfied with Christie’s answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. 1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage? 2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal? 3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? 4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan? 5. What are the payments for the interest-only loan? 6. Which mortgage is the best for the company? Are there any potential risks in this action? Preview: … The amortization table below for the first six months of the 30-year mortgage shows that of the first amortization payment of $212,098.17, only $34,181.51 goes to the… BUSN 379 Case 3 Week 6 Case III – Chapter 8 Case, Bullock Gold Mining, page 274 is due this week. Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $650 million today, and it will have a cash outflow of $72 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table on this page. Bullock Mining has a 12 percent required return on all of its gold mines. Year Cash Flow 0 −$650,000,000 1 80,000,000 2 121,000,000 3 162,000,000 4 221,000,000 5 210,000,000 6 154,000,000 7 108,000,000 8 86,000,000 9 −72,000,000 QUESTIONS 1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine. 2. Based on your analysis, should the company open the mine? 3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project. Preview: In this calculation, two scenarios were assumed :(1)- Capital outlay includes the cost of closing the mine and (2)- only the initial capital requirement is considered, i.e., $…. BUSN 379 Discussions Week 1-7 All Posts 270 Pages DeVry BUSN 379 Financial Management and Business Ethics Discussions Week 1 All Posts 43 Pages DeVry BUSN 379 Financial Management Discussions 1 Week 1 All Posts 23 Pages DeVry What are some of the most important financial management decisions? Can you provide some real-life examples? 1. Identify three good investment opportunities for the firm. Obtain a short-term loan to purchase materials. c. Evaluate the level of risk of a project. d. Sale long-term bonds to raise funds. e. Determine the cheapest sources of financing for a project. f. Determine the return of a potential project. g. Calculate the cash flows for a project. Which of the following would you assign to the income statement and which to the balance sheet? a. Accounts receivable b. Cost of goods sold c. Net working capital d. Interest expense e. Taxes f. Current assets such as inventories g. Short-term loans h. Cash on hand i. Consulting revenues j. Inventory k. Plant and equipment l. Retained earnings m. Accounts payable n. Selling and administrative expenses Do you believe a company can be profitable but short on cash or vice versa? What do you think, class?… BUSN 379 Business Ethics Discussions 2 Week 1 All Posts 20 Pages DeVry Do you believe that the firm’s social responsibilities conflict with the ultimate goal of shareholder’s wealth maximization? Consider issues such as the protection of the environment and the creation of jobs. Is wealth maximization the same for all types of companies (e.g. corporations versus sole proprietors)? What about firms that trade internationally? What is the difference between the market and the book value of the firm? Can you provide one recent example of unethical behavior by businesses? What about an example of an ethical issue you face at work? Why is business ethics important for financial management?… BUSN 379 Time Value of Money and Loans and Interest Rates Discussions Week 2 All Posts 44 Pages DeVry BUSN 379 Time Value of Money Discussions 1 Week 2 All Posts 23 Pages DeVry Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of time value of money? The time value of money is the cornerstone of finance. Consider some real-life simple applications such as buying a house, investing in a bond or even your salary. Why would you say that money changes value over time? Why do you believe postponement of consumption plays a role in the TVM? Any other examples you can provide? Given the concept of postponement of consumption, what are your thoughts regarding the use of debt? Do you believe that using debt can have a positive side? What about a negative side? Should we aim to be debt-free?… BUSN 379 Loans and Interest Rates Discussions 2 Week 2 All Posts 21 Pages DeVry What is the difference between the annual percentage rate (APR) and the effective annual rate (EAR)? Which rate do you believe is more relevant for financial decisions and why? Yes, in fact EAR is more relevant because it is the true cost of borrowing considering compounding. The conclusion that we can reach is that by using APR (instead of EAR) banks and financial institutions that consumers to believe they are paying a lower interest rate than they really are. Most consumers are not aware of the concept of compounding and therefore when they have a loan with 5% APR, they believe they are paying 5% interest, but are not aware that the actual interest on the loan may be higher if the rate compounds more than once a year. In recent years we have seen increased concerns about certain financial products such as subprime mortgages or payday loans. Based on our discussions from Week 1 about business ethics, do you believe it is ethical for financial institutions not to disclose the EAR on loans? Let’s try out an example: First Choice Bank charges 9% APR compounded quarterly on its business loans. National Emerald Bank charges 3% APR compounded monthly. What are the EARs for the two banks, which bank is the better choice? If this were to be an investment and the bank offers you 9% and 3% respectively, would you still take the same bank?… BUSN 379 Bond Valuation and Risk and Stock Valuation Discussions Week 3 All Posts 42 Pages DeVry BUSN 379 Bond Valuation and Risk Discussions 1 Week 3 All Posts 21 Pages DeVry What are some of the most important risks associated with bonds? Why investing in bonds? Types of bonds. Bond risks. Bonds vs. Stocks Do you believe US T-bills (US Government bonds) are risk free? What about bonds issued by foreign governments? How do you believe the recent discussions about the debt ceiling can raise questions about US T-bill risk?… BUSN 379 Stock Valuation Discussions 2 Week 3 All Posts 21 Pages DeVry Are there any instances in which companies should not pay dividends? How do dividends impact the value of a share of stock? How can you relate the concept of time value of money learned in Week 2 to stock valuation? The dividend growth model can be applied when dividend growth is constant (or constantly zero). However, most companies do not increase dividends at the same rate forever. For example, a company is not likely to increase dividends at 5% for the next 20 years. It would probably increase it by 5, then 3, then 4 and so forth. There will be change. What does this tell us about the model? Even with these considerations, the basic way to price a stock is with the dividend growth model. The formula is R=D1/P0 + g. Remember that preferred stock does not have growth so the “g” is zero. As we discuss this model, consider the following questions: 1. Assume you buy stock from Company X. The next dividend (the dividend D1 one year from now) is $5. You expect the stock to grow at a rate of 3% indefinitely and the return you required from this stock is 6%. What is the price of the stock today? 2. If you increase the dividend to $6, what happens to the stock price? 3. If you increase the rate of return required to 8%, what happens to the stock price? 4. What would the price of the stock be if this were to be preferred (instead of common stock)?… BUSN 379 Net Present Value and Related Tools and Internal Rate of Return Discussions Week 4 All Posts 35 Pages DeVry BUSN 379 Net Present Value and Related Tools Discussions 1 Week 4 All Posts 18 Pages DeVry Discuss the pros and cons of net present value. Class, we learned in Week 2 that we can take the cash inflows and outflows of a project and use the Present Value to analyze if the project was worth or not. Can you provide some examples of real-life project scenarios?… BUSN 379 Internal Rate of Return Discussions 2 Week 4 All Posts 17 Pages DeVry Are there situations where a manger would prefer to use IRR? Why? Class, consider the project length, the competition and the estimated sales. How do these factors affect project risk? A company is planning on building a new production facility. The initial investment is $50 million and each year for the next 20 years they expect to receive $10 million in revenues from the project. In year 5 they need to invest an additional $20 million in equipment. Do you see the problem here? In year 1 and 5 cash flows will be negative. This is different from other traditional projects in which year 1 is the only that has negative cash flows. Thus, if you calculate the IRR for this project you may end up with two of them, which one do you use? This is the main drawback of the method. Any other drawbacks you see in using the IRR? … BUSN 379 Basics of Risk and Measuring Risk Discussions Week 5 All Posts 39 Pages DeVry BUSN 379 Basics of Risk Discussions 1 Week 5 All Posts 20 Pages DeVry What is the difference between systematic and nonsystematic risk? What are some examples of each? Class, last week we learned that projects are subject to risk. Consider some of the examples we learned last week. What systematic and non-systematic risks can you identify? Why is it important to differentiate between these two? How do systematic risks affect the diversification process? A market is a “group” of assets. These could be a group of stocks or bonds. To understand the concept of a market within the context of beta, you need to understand that beta is a mathematical and statistical measure that compares the changes in return of any given asset to a “market”. For instance, a given asset could be Coca Cola. Because Coca Cola stock is traded in the S&P500, in order to obtain Coca Cola’s beta we would compare the changes in return for its stock vis-a-vis those of the S&P500. If the beta resulting from this analysis is higher than 1, we would say that Coca Cola has more systematic risk that all the companies in the S&P500 combined and viceversa. With this idea in mind: 1. What other markets can you think of? 2. If Coca Cola also trades in the New York Stock Exchange (NYSE) may we find a different beta for it?… BUSN 379 Measuring Risk Discussions 2 Week 5 All Posts 19 Pages DeVry What are some statistical measures of risk and what type of risk do they measure? Consider for a moment the idea that beta reflects market driven risk. Which company do you expect to have a higher beta, Coca Cola or Disney? Go to Yahoo Finance, look for each company and under the left bar you will see “Key Statistics”. Select “Key Statistics” and then look for the beta on the right under the headline “Trading Information”. Look at your results and consider consumption patterns. Why would you expect one company to have a higher beta than the other? What can beta tell us about each of these companies? What types of risks can we understand through beta? Can you think of some examples of companies that would have a high beta? What about low betas?… BUSN 379 Cost of Capital and Leverage Discussions Week 6 All Posts 36 Pages DeVry BUSN 379 Cost of Capital Discussions 1 Week 6 All Posts 19 Pages DeVry How can you explain the concept of cost of capital? Do you believe that a firm should use the same cost of capital for all of its projects? Why or why not? How can you compute the cost of debt? What about the cost of equity? How do you believe you can calculate the cost of retained earnings? What would be some examples of flotation costs and how would they impact the cost of equity? Would flotation costs increase or decrease the cost of equity?… BUSN 379 Leverage Discussions 2 Week 6 All Posts 17 Pages DeVry What is the impact of financial leverage on wealth creation? What is the relationship between financial leverage and risk? How can you explain the concept of operating leverage? How would you compare and contrast this concept to financial leverage? How would the EPS increase or decrease using debt in the firm’s capital structure?… BUSN 379 Short-Term Planning and Cash Management Discussions Week 7 All Posts 31 Pages DeVry BUSN 379 Short-Term Planning Discussions 1 Week 7 All Posts 17 Pages DeVry How are the operating and cash cycles of the firm different? Why are they important? Can you provide some examples of transactions that affect the cash account? Certainly inventory is an important aspect of the cash and operating cycles. Inventory may require a significant amount of investments, while it may take a long time to either produce and sell or market the product. Consider a company such as HP which has to buy parts and pieces for its computers, assemble these parts and then ship the product to the customer or sell them to distributors as Best Buy or Wal-mart. The cycle of producing and selling an item can take a few days. Do you see how these process can affect your cash cycle? To minimize this effect, companies use a just-in-time (JIT) inventory system. What do you believe are some industries or companies that can use this system successfully and why? Would all company benefit from JIT? How can a company use JIT or EOQ to maximize its cash and operating cycles? consider the cash and operating cycle…what industries do you believe would be the most prone to have quicker cash cycles or operating cycles?… BUSN 379 Cash Management Discussions 2 Week 7 All Posts 14 Pages DeVry What strategies can a firm use to optimize its cash cycle? How does the credit policy affect cash management? Other than discounts, how do you believe firms can accelerate payments from clients? What are some strategies you as a financial manager would recommend? How do you bring in more cash to your business? What strategies can you use? And what sources of short-term financing can you use to help in obtaining more cash for immediate needs? Consider the following practical example: You place an order for 100 units of inventory Part A at a unit price of $522. The supplier offers terms of 2/25, net 40. How much should you remit if you take the discount? How do you believe a company can “prove” its creditworthiness to vendors, for instance material vendors?… BUSN 379 Final Exam DeVry (TCO 1) Likeline, Inc., has sales of $445,000, costs of $173,000, depreciation expense of $72,000, interest expense of $36,000, and a tax rate of 35 percent. What is their net income? (Points : 20) Sales $445,000 Less: Cost $173,000 Depreciation $72,000…. (TCO 1) Hammett, Inc. has sales of $19,570, costs of $9,460, depreciation expense of $2,130, and interest expense of $1,620. If the tax rate is 35 percent, what is the operating cash flow, or OCF? Show your work Operating cash flow in this case would be… 19,570 Sales (9,460)… (TCOs 2 and 3) Cee Co. issued 20-year, $1,000 bonds at a coupon rate of 7 percent. The bonds make annual payments. If the YTM on these bonds is 4 percent, what is the current bond price? (Points : 20) (TCO 3) Sixteenth Bank has an issue of 6% preferred stock with a $100.00 par value that just sold for $89 per share. What is the bank’s cost of preferred stock? (Show your work and round your answer to two decimal places. (Points : 20) The bank’s cost of preferred stock…. (TCOs 3 and 5) You own a portfolio that has $2,600 invested in Stock A and $3,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio? (Show your work.) (Points : 20) Total Portfolio = 2600 + 3400 = $6000 Ratio of Stock A/ total = $2600/6000 = 43.33%…. Ra= Rf + Ba (Rm – Rf) Ra = … WACC = ((E/V) * Re) +((E/V) * Rp) + [((D/V) * Rd)*(1-T)] Where: • E = Market value of the company’s equity, preferred stock or debt • V = Total Market Value of the company (E + D); therefore… When doing a credit evaluation and scoring, the “classic five Cs of credit” is commonly used. These are: 1. Character – this is the customer’s… 2. Capacity – this pertains to the… 3. Capital – refers to the… (TCO 1) Provide three examples of situations in which business ethics play a role in the financial management process. Explain your rationale, and how these situations may affect the value of the firm. (Points : 20) 1. The ultimate goal of companies is to maximize the value of shareholder’s equity. In striving to achieve this objective, companies are prone to… Capital asset pricing model (CAPM) depicts the relationship between risk and expected return on a risky asset or security through the formula below: Ra= Rf … Where the factors that make up the model and their sources are: • Note: Ra – represents the…

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BUSN 379 Full Class Finance Latest Click Link Below To Buy: http://hwcampus.com/shop/busn-379-full-class-finance-latest/ Or Visit www.hwcampus.com BUSN 379 Homework Week 1-7 BUSN 379 Homework Week 1 Chapter 2: 8, 14, and 19 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. • Note: you will not receive credit for items without calculations. Chapter 2 Assignment 8. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Please calculate by completing the Income Statement below: Income Statement Sales $34,630 Costs $10,340 Depreciation $2520 EBIT $21,770 Interest $1,750 Taxable income $20,020 Taxes $7,007 Net income $13,013 14. a. To calculate the OCF, we need to create an income statement. The income statement starts with sales (revenues) and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Please calculate by completing the Income Statement below: Income Statement Sales $167,000 Costs $88,600 Other Expenses $4,900 Depreciation $11,600 EBIT $61,900 Interest $8,700 Taxable income $53,2000 Taxes $18,620 Net income $34,580 1. The cash flow to creditors is the interest paid, minus any new borrowing. We know that $4,000 of debt were “redeemed”, so we know net borrowing changed by $4,000 (This is your net new borrowing). Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is:…. 2. a. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $2,600,000 Cost of goods sold $1,535,000 Other expenses $465,000 Depreciation $520,000 EBIT $80,000 Interest $245,000 Taxable income -$165,000 Taxes (35%) $0 Net income -$165,000 1. The operating cash flow for the year was:… 2. Please write here your answer in essay format…. BUSN 379 Homework Week 2 Chapter 4: 8, 17, and 18 Chapter 5: 1, 4, and 12 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 4 Exercise #8. You need to compute “r”. Assume the PV is $1. The future value is $13,113. The periods or time are 131. You can compute r by using the following methods: 1. Solving for interest in your financial calculator. 2. Using the following formula: r=(FV/PV)1/t – 1 3. Using the following online calculator (easiest method): http://www.moneychimp.com/calculator/discount_rate_calculator.htm Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #17 You need to compute the PV. 1. Solving for PV in your financial calculator. 2. Using the following formula: PV=FV/(1+r)t 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #18 You need to compute the FV. 1. Solving for FV in your financial calculator. 2. Using the following formula: FV=PV(1+r)t 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Chapter 5 Exercise #1 To solve this exercise, you need to find the PV of each cash flow and add them up. You can: 1. Solve for PV for each cash flow in your financial calculator. Then add them all up. 2. Solve for PV using the following formula: PV=FV/(1+r)t . Then add them all up. 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/CFCalcExercise.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #4: (a) If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? You need to find the PV of an annuity. To do so, you can: 1. Solve for PVA in your financial calculator. 2. Use the formula on Page 132 – The Present Value Annuity 3. Using the following online calculator (easiest method): http://zenwealth.com/businessfinanceonline/TVM/TVMCalculator.html Provide a snapshot of your online calculator, your formula or the financial calculator inputs. Exercise #12 Here you need to find the EAR. There are two ways: 1. You can use the formula EAR = [1 + (APR / m)]m – 1 2. Use an online calculator (easiest method): http://www.pine-grove.com/online-calculators/equivalent-rate-calculator.htm Provide a snapshot of your online calculator, your formula or the financial calculator inputs. BUSN 379 Homework Week 3 Chapter 6: 16 Chapter 7: 11 and 12 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 6, Exercise #16: Both Bond Bill and Bond Ted have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. (a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond Ted? If the bonds were priced at par value, the initial price was $1,000. $1,000 is the “default” face value (par price) of a bond unless otherwise stated. In order to find the current price, you can: 1. Compute the present value (which equals the price) of the bond following Example 6.3 on Page 174 of your textbook. Note that the coupon is $35 (7% coupon rate = $70/2 = $35. It is divided by two because it is paid semiannually)…. 2. (b) If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by graphing bond prices versus YTM. 3. (c) What does this problem tell you about the interest rate risk of longer-term bonds? Chapter 7, Exercise #11: E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay today? Here you should make two calculations. The first one is to compute the price of the stock at Year 19, since no dividends will be paid until Year 20. Since this is preferred stock, you will use the following formula: Pt = Dt+1 / R Chapter 7, Exercise #12: Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. (a) If you want a return of 12 percent, how much will you pay for the stock? (b) What if you want a return of 8 percent? (c) What does this tell you about the relationship between the required return and the stock price? BUSN 379 Homework Week 4 Chapter 8: 3, 4, 5, and 6 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 8 • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Exercise #3: 3. Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them Year Cash Flow (A) Cash Flow (B) 0 −$55,000 −$ 95,000 1 19,000 18,000 2 27,000 26,000 3 24,000 28,000 4 9,000 260,000 Exercise #4 Calculating AAR. You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the project’s average accounting return (AAR)? Exercise #5 Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? Year Cash Flow 0 −$153,000 1 78,000 2 67,000 3 49,000 Exercise #6 Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? There are several ways to calculate the NPV: 1. Using Excel (function NPV). If you use Excel, compute the NPV of all cash flows from years 1 to 3. Then subtract the initial investment. Do not include the initial investment (Year 0) cash flow under the formula NPV. Your result will not be correct. 2. Using trial and error as provided in Example 8.1, Page 242 3. Using your financial calculator 4. Using an online calculator (recommended process): http://zenwealth.com/businessfinanceonline/CB/CBCalculator.html The “Cost of Capital” is your “required return”. Make sure the initial investment is negative. You need to add a minus sign (-) in front of it…. BUSN 379 Homework Week 5 Chapter 11: 4, 7, 17, and 29 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 11, Exercise #4 Portfolio Expected Return. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much money will you invest in Stock X? In Stock Y? Here, we are given the expected return of the portfolio and the expected return of each asset in the portfolio, and are asked to find the weight of each asset. Review Section 11.2 and Table 11.5 of your textbook. We can use the equation for the expected return of a portfolio to solve this problem. Since the total weight of a portfolio must equal 1 (100%), the weight of Stock Y must be one minus the weight of Stock X. Mathematically speaking, this means: E(Rp) = Expected Return = (Return of X * Weight of X) + Return of Y * (1 – Weight of X) — We can now solve this equation for the Weight of X… Exercise #7 Calculating Returns and Standard Deviations. Based on the following information, calculate the expected return and standard deviation for the two stocks. State of Probability of State Rate of Return if State Occurs Economy of Economy Stock A Stock B Recession .15 .02 -.30 Normal .55 .10 .18 Boom .30 .15 .31 • Calculate the expected return. The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs… Exercise #17 Using CAPM. A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset currently earns 3.8 percent. 1. What is the expected return on a portfolio that is equally invested in the two assets? 2. If a portfolio of the two assets has a beta of .7, what are the portfolio weights? 3. If a portfolio of the two assets has an expected return of 9 percent, what is its beta? 4. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain (a) Expected Return. Again, we have a special case where the portfolio is equally weighted, so we can sum the returns of each asset and divide by the number of assets since they are equally invested. The expected return of the portfolio is:… Exercise #29 SML Suppose you observe the following situation: State of Probability of Return if State Occurs Economy State Stock A Stock B Bust .10 -.12 -.05 Normal .65 .09 .10 Boom .25 .35 .21 1. Calculate the expected return on each stock. 2. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expected market risk premium? (a)The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs. So, the expected return of each asset is: Expected Return = (Probability of State 1 * Rate of Return for State 1)+ (Probability of State 2 * Rate of Return for State 2)+ (Probability of State 3 * Rate of Return for State 3)… BUSN 379 Homework Week 6 Chapter 12: 3, 5, 6, and 15 Chapter 13: 1 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 12, Exercise #3 Calculating Cost of Equity. Stock in CDB Industries has a beta of .90. The market risk premium is 7 percent, and T-bills are currently yielding 3.5 percent. CDB’s most recent dividend was $1.80 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $47 per share, what is your best estimate of CDB’s cost of equity? Exercise #5 Calculating Cost of Preferred Stock. Sixth Fourth Bank has an issue of preferred stock with a $6.25 stated dividend that just sold for $108 per share. What is the bank’s cost of preferred stock? Exercise #6 Calculating Cost of Debt. ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.1 percent annually. What is ICU’s pretax cost of debt? If the tax rate is 38 percent, what is the aftertax cost of debt? Chapter 13, #1 EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession. b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe? BUSN 379 Homework Week 7 Chapter 17: 6, 7, 14 Instructions: • Please submit your homework using this template. • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet. • If you used a financial calculator, provide your inputs. • If you used an online calculator, provide a snapshot at all possible. • If you used a formula, write down your step-by-step calculations. • Please complete all items highlighted in yellow. Note: you will not receive credit for items without calculations Chapter 17, Exercise #6 Calculating Net Float. Each business day, on average, a company writes checks totaling $19,500 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $37,200. The cash from the payments is available to the firm after two days. Chapter 17, Exercise #7 Size of Accounts Receivable. Essence of Skunk Fragrances, Ltd., sells 6,500 units of its perfume collection each year at a price per unit of $270. All sales are on credit with terms of 1/10, net 30. The discount is taken by 40 percent of the customers. What is the amount of the company’s accounts receivable? In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 3/10, net 30 to preserve its market share. How will this change in policy affect accounts receivable? Chapter 17, Exercise #14 EOQ. The Trektronics store begins each month with 740 phasers in stock. This stock is depleted each month and reordered. If the carrying cost per phaser is $26 per year and the fixed order cost is $340, what is the total carrying cost? What is the restocking cost? Should the company increase or decrease its order size? Describe an optimal inventory policy for the company in terms of order size and order frequency. BUSN 379 Case 1 Week 2 Case I is due at the end of this week. Prepare a memo in Word, which answers the questions in the Chapter 2 Case, Cash Flows and Financial Statements at Sunset Boards, Inc., on page 51 of the textbook. Use Excel to solve any financial calculations. You will be graded on correct financial analysis, proper use of technology, business-like presentation of technology, and business-like presentation. Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained. The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers. Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Paula Wolfe to evaluate the performance of the company over the past year. After rooting through old bank statements, sales receipts, tax returns, and other records, Paula has assembled the following information: 2013 2014 Cost of goods sold $169,969 214,607 Cash 24,524 26,056 Depreciation 47,980 54,230 Interest expense 10,442 11,954 Selling & administrative expenses 33,425 43,626 Accounts payable 43,344 48,090 Net fixed assets 211,680 264,021 Sales 333,426 406,427 Accounts receivable 17,378 22,542 Notes payable 19,757 21,571 Long-term debt 106,848 119,976 Inventory 36,570 50,185 New equity 0 20,160 Sunset Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and has a 20 percent tax rate. You are Paula’s assistant, and she has asked you to prepare the following: 1. An income statement for 2013 and 2014. 2. A balance sheet for 2013 and 2014. 3. Operating cash flow for each year. 4. Cash flow from assets for 2014. 5. Cash flow to creditors for 2014. 6. Cash flow to stockholders for 2014. 7. How would you describe Sunset Boards’ cash flows for 2014? Write a brief discussion. 8. In light of your discussion in the previous question, what do you think about Tad’s expansion plans? Preview: As requested, attached are the financial statements of Sunset Boards, Inc. from 2013-2014. It includes: 1. Income Statement 2. Balance Sheet 3. Operating Cash Flow Highlights of Financial Statements In analyzing the financial statements, horizontal analysis and vertical analysis were… BUSN 379 Case 2 Week 4 S&S AIR’S MORTGAGE Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris’s analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $35 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility. Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR. Mark decides to ask Christie about a “smart loan” he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments. Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Todd’s prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage. Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $35 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment. Mark and Todd are satisfied with Christie’s answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. 1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage? 2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal? 3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? 4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan? 5. What are the payments for the interest-only loan? 6. Which mortgage is the best for the company? Are there any potential risks in this action? Preview: … The amortization table below for the first six months of the 30-year mortgage shows that of the first amortization payment of $212,098.17, only $34,181.51 goes to the… BUSN 379 Case 3 Week 6 Case III – Chapter 8 Case, Bullock Gold Mining, page 274 is due this week. Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $650 million today, and it will have a cash outflow of $72 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table on this page. Bullock Mining has a 12 percent required return on all of its gold mines. Year Cash Flow 0 −$650,000,000 1 80,000,000 2 121,000,000 3 162,000,000 4 221,000,000 5 210,000,000 6 154,000,000 7 108,000,000 8 86,000,000 9 −72,000,000 QUESTIONS 1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine. 2. Based on your analysis, should the company open the mine? 3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project. Preview: In this calculation, two scenarios were assumed :(1)- Capital outlay includes the cost of closing the mine and (2)- only the initial capital requirement is considered, i.e., $…. BUSN 379 Discussions Week 1-7 All Posts 270 Pages DeVry BUSN 379 Financial Management and Business Ethics Discussions Week 1 All Posts 43 Pages DeVry BUSN 379 Financial Management Discussions 1 Week 1 All Posts 23 Pages DeVry What are some of the most important financial management decisions? Can you provide some real-life examples? 1. Identify three good investment opportunities for the firm. Obtain a short-term loan to purchase materials. c. Evaluate the level of risk of a project. d. Sale long-term bonds to raise funds. e. Determine the cheapest sources of financing for a project. f. Determine the return of a potential project. g. Calculate the cash flows for a project. Which of the following would you assign to the income statement and which to the balance sheet? a. Accounts receivable b. Cost of goods sold c. Net working capital d. Interest expense e. Taxes f. Current assets such as inventories g. Short-term loans h. Cash on hand i. Consulting revenues j. Inventory k. Plant and equipment l. Retained earnings m. Accounts payable n. Selling and administrative expenses Do you believe a company can be profitable but short on cash or vice versa? What do you think, class?… BUSN 379 Business Ethics Discussions 2 Week 1 All Posts 20 Pages DeVry Do you believe that the firm’s social responsibilities conflict with the ultimate goal of shareholder’s wealth maximization? Consider issues such as the protection of the environment and the creation of jobs. Is wealth maximization the same for all types of companies (e.g. corporations versus sole proprietors)? What about firms that trade internationally? What is the difference between the market and the book value of the firm? Can you provide one recent example of unethical behavior by businesses? What about an example of an ethical issue you face at work? Why is business ethics important for financial management?… BUSN 379 Time Value of Money and Loans and Interest Rates Discussions Week 2 All Posts 44 Pages DeVry BUSN 379 Time Value of Money Discussions 1 Week 2 All Posts 23 Pages DeVry Why does money have a time value? Can you provide at least one real-life scenario in which you can apply the concept of time value of money? The time value of money is the cornerstone of finance. Consider some real-life simple applications such as buying a house, investing in a bond or even your salary. Why would you say that money changes value over time? Why do you believe postponement of consumption plays a role in the TVM? Any other examples you can provide? Given the concept of postponement of consumption, what are your thoughts regarding the use of debt? Do you believe that using debt can have a positive side? What about a negative side? Should we aim to be debt-free?… BUSN 379 Loans and Interest Rates Discussions 2 Week 2 All Posts 21 Pages DeVry What is the difference between the annual percentage rate (APR) and the effective annual rate (EAR)? Which rate do you believe is more relevant for financial decisions and why? Yes, in fact EAR is more relevant because it is the true cost of borrowing considering compounding. The conclusion that we can reach is that by using APR (instead of EAR) banks and financial institutions that consumers to believe they are paying a lower interest rate than they really are. Most consumers are not aware of the concept of compounding and therefore when they have a loan with 5% APR, they believe they are paying 5% interest, but are not aware that the actual interest on the loan may be higher if the rate compounds more than once a year. In recent years we have seen increased concerns about certain financial products such as subprime mortgages or payday loans. Based on our discussions from Week 1 about business ethics, do you believe it is ethical for financial institutions not to disclose the EAR on loans? Let’s try out an example: First Choice Bank charges 9% APR compounded quarterly on its business loans. National Emerald Bank charges 3% APR compounded monthly. What are the EARs for the two banks, which bank is the better choice? If this were to be an investment and the bank offers you 9% and 3% respectively, would you still take the same bank?… BUSN 379 Bond Valuation and Risk and Stock Valuation Discussions Week 3 All Posts 42 Pages DeVry BUSN 379 Bond Valuation and Risk Discussions 1 Week 3 All Posts 21 Pages DeVry What are some of the most important risks associated with bonds? Why investing in bonds? Types of bonds. Bond risks. Bonds vs. Stocks Do you believe US T-bills (US Government bonds) are risk free? What about bonds issued by foreign governments? How do you believe the recent discussions about the debt ceiling can raise questions about US T-bill risk?… BUSN 379 Stock Valuation Discussions 2 Week 3 All Posts 21 Pages DeVry Are there any instances in which companies should not pay dividends? How do dividends impact the value of a share of stock? How can you relate the concept of time value of money learned in Week 2 to stock valuation? The dividend growth model can be applied when dividend growth is constant (or constantly zero). However, most companies do not increase dividends at the same rate forever. For example, a company is not likely to increase dividends at 5% for the next 20 years. It would probably increase it by 5, then 3, then 4 and so forth. There will be change. What does this tell us about the model? Even with these considerations, the basic way to price a stock is with the dividend growth model. The formula is R=D1/P0 + g. Remember that preferred stock does not have growth so the “g” is zero. As we discuss this model, consider the following questions: 1. Assume you buy stock from Company X. The next dividend (the dividend D1 one year from now) is $5. You expect the stock to grow at a rate of 3% indefinitely and the return you required from this stock is 6%. What is the price of the stock today? 2. If you increase the dividend to $6, what happens to the stock price? 3. If you increase the rate of return required to 8%, what happens to the stock price? 4. What would the price of the stock be if this were to be preferred (instead of common stock)?… BUSN 379 Net Present Value and Related Tools and Internal Rate of Return Discussions Week 4 All Posts 35 Pages DeVry BUSN 379 Net Present Value and Related Tools Discussions 1 Week 4 All Posts 18 Pages DeVry Discuss the pros and cons of net present value. Class, we learned in Week 2 that we can take the cash inflows and outflows of a project and use the Present Value to analyze if the project was worth or not. Can you provide some examples of real-life project scenarios?… BUSN 379 Internal Rate of Return Discussions 2 Week 4 All Posts 17 Pages DeVry Are there situations where a manger would prefer to use IRR? Why? Class, consider the project length, the competition and the estimated sales. How do these factors affect project risk? A company is planning on building a new production facility. The initial investment is $50 million and each year for the next 20 years they expect to receive $10 million in revenues from the project. In year 5 they need to invest an additional $20 million in equipment. Do you see the problem here? In year 1 and 5 cash flows will be negative. This is different from other traditional projects in which year 1 is the only that has negative cash flows. Thus, if you calculate the IRR for this project you may end up with two of them, which one do you use? This is the main drawback of the method. Any other drawbacks you see in using the IRR? … BUSN 379 Basics of Risk and Measuring Risk Discussions Week 5 All Posts 39 Pages DeVry BUSN 379 Basics of Risk Discussions 1 Week 5 All Posts 20 Pages DeVry What is the difference between systematic and nonsystematic risk? What are some examples of each? Class, last week we learned that projects are subject to risk. Consider some of the examples we learned last week. What systematic and non-systematic risks can you identify? Why is it important to differentiate between these two? How do systematic risks affect the diversification process? A market is a “group” of assets. These could be a group of stocks or bonds. To understand the concept of a market within the context of beta, you need to understand that beta is a mathematical and statistical measure that compares the changes in return of any given asset to a “market”. For instance, a given asset could be Coca Cola. Because Coca Cola stock is traded in the S&P500, in order to obtain Coca Cola’s beta we would compare the changes in return for its stock vis-a-vis those of the S&P500. If the beta resulting from this analysis is higher than 1, we would say that Coca Cola has more systematic risk that all the companies in the S&P500 combined and viceversa. With this idea in mind: 1. What other markets can you think of? 2. If Coca Cola also trades in the New York Stock Exchange (NYSE) may we find a different beta for it?… BUSN 379 Measuring Risk Discussions 2 Week 5 All Posts 19 Pages DeVry What are some statistical measures of risk and what type of risk do they measure? Consider for a moment the idea that beta reflects market driven risk. Which company do you expect to have a higher beta, Coca Cola or Disney? Go to Yahoo Finance, look for each company and under the left bar you will see “Key Statistics”. Select “Key Statistics” and then look for the beta on the right under the headline “Trading Information”. Look at your results and consider consumption patterns. Why would you expect one company to have a higher beta than the other? What can beta tell us about each of these companies? What types of risks can we understand through beta? Can you think of some examples of companies that would have a high beta? What about low betas?… BUSN 379 Cost of Capital and Leverage Discussions Week 6 All Posts 36 Pages DeVry BUSN 379 Cost of Capital Discussions 1 Week 6 All Posts 19 Pages DeVry How can you explain the concept of cost of capital? Do you believe that a firm should use the same cost of capital for all of its projects? Why or why not? How can you compute the cost of debt? What about the cost of equity? How do you believe you can calculate the cost of retained earnings? What would be some examples of flotation costs and how would they impact the cost of equity? Would flotation costs increase or decrease the cost of equity?… BUSN 379 Leverage Discussions 2 Week 6 All Posts 17 Pages DeVry What is the impact of financial leverage on wealth creation? What is the relationship between financial leverage and risk? How can you explain the concept of operating leverage? How would you compare and contrast this concept to financial leverage? How would the EPS increase or decrease using debt in the firm’s capital structure?… BUSN 379 Short-Term Planning and Cash Management Discussions Week 7 All Posts 31 Pages DeVry BUSN 379 Short-Term Planning Discussions 1 Week 7 All Posts 17 Pages DeVry How are the operating and cash cycles of the firm different? Why are they important? Can you provide some examples of transactions that affect the cash account? Certainly inventory is an important aspect of the cash and operating cycles. Inventory may require a significant amount of investments, while it may take a long time to either produce and sell or market the product. Consider a company such as HP which has to buy parts and pieces for its computers, assemble these parts and then ship the product to the customer or sell them to distributors as Best Buy or Wal-mart. The cycle of producing and selling an item can take a few days. Do you see how these process can affect your cash cycle? To minimize this effect, companies use a just-in-time (JIT) inventory system. What do you believe are some industries or companies that can use this system successfully and why? Would all company benefit from JIT? How can a company use JIT or EOQ to maximize its cash and operating cycles? consider the cash and operating cycle…what industries do you believe would be the most prone to have quicker cash cycles or operating cycles?… BUSN 379 Cash Management Discussions 2 Week 7 All Posts 14 Pages DeVry What strategies can a firm use to optimize its cash cycle? How does the credit policy affect cash management? Other than discounts, how do you believe firms can accelerate payments from clients? What are some strategies you as a financial manager would recommend? How do you bring in more cash to your business? What strategies can you use? And what sources of short-term financing can you use to help in obtaining more cash for immediate needs? Consider the following practical example: You place an order for 100 units of inventory Part A at a unit price of $522. The supplier offers terms of 2/25, net 40. How much should you remit if you take the discount? How do you believe a company can “prove” its creditworthiness to vendors, for instance material vendors?… BUSN 379 Final Exam DeVry (TCO 1) Likeline, Inc., has sales of $445,000, costs of $173,000, depreciation expense of $72,000, interest expense of $36,000, and a tax rate of 35 percent. What is their net income? (Points : 20) Sales $445,000 Less: Cost $173,000 Depreciation $72,000…. (TCO 1) Hammett, Inc. has sales of $19,570, costs of $9,460, depreciation expense of $2,130, and interest expense of $1,620. If the tax rate is 35 percent, what is the operating cash flow, or OCF? Show your work Operating cash flow in this case would be… 19,570 Sales (9,460)… (TCOs 2 and 3) Cee Co. issued 20-year, $1,000 bonds at a coupon rate of 7 percent. The bonds make annual payments. If the YTM on these bonds is 4 percent, what is the current bond price? (Points : 20) (TCO 3) Sixteenth Bank has an issue of 6% preferred stock with a $100.00 par value that just sold for $89 per share. What is the bank’s cost of preferred stock? (Show your work and round your answer to two decimal places. (Points : 20) The bank’s cost of preferred stock…. (TCOs 3 and 5) You own a portfolio that has $2,600 invested in Stock A and $3,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio? (Show your work.) (Points : 20) Total Portfolio = 2600 + 3400 = $6000 Ratio of Stock A/ total = $2600/6000 = 43.33%…. Ra= Rf + Ba (Rm – Rf) Ra = … WACC = ((E/V) * Re) +((E/V) * Rp) + [((D/V) * Rd)*(1-T)] Where: • E = Market value of the company’s equity, preferred stock or debt • V = Total Market Value of the company (E + D); therefore… When doing a credit evaluation and scoring, the “classic five Cs of credit” is commonly used. These are: 1. Character – this is the customer’s… 2. Capacity – this pertains to the… 3. Capital – refers to the… (TCO 1) Provide three examples of situations in which business ethics play a role in the financial management process. Explain your rationale, and how these situations may affect the value of the firm. (Points : 20) 1. The ultimate goal of companies is to maximize the value of shareholder’s equity. In striving to achieve this objective, companies are prone to… Capital asset pricing model (CAPM) depicts the relationship between risk and expected return on a risky asset or security through the formula below: Ra= Rf … Where the factors that make up the model and their sources are: • Note: Ra – represents the…

The market for sustainability-linked bonds has boomed to reach $80bn in issuance this year, even as some investors question the ‘green’ credentials of the debt that can be used to finance a broad array of corporate initiatives.

The first deal in this nascent sector only took place in 2019, but in a sign of its escalating appeal among businesses and their debt holders, global issuance has grown almost nine-fold since the end of 2020, according to Environmental Finance.

Sustainability-linked bonds lack the more rigorous criteria placed on green bonds, where debt is raised to finance specific green projects. Issuers do not face tight restrictions on how proceeds are used, but must instead agree to certain environmental, social and governance inspired targets.

Failure to meet those pledges typically results in a step-up in interest payments, raising the issuer’s borrowing costs. But examples so far suggest such penalties are relatively small.

US generic drugmaker Teva, which has been embroiled in the US’s opioid crisis, recently issued the largest sustainability-linked bond, raising $5bn pegged to targets to increase access to medicines in low and middle-income countries, and to reduce the company’s greenhouse gas emissions.

Were Teva to fall short of those goals, it would have to fork out just a fraction of a percentage point in higher payments to investors — equivalent to less than $10m of additional annual interest. That extra interest would also only apply after the assessment date in May 2026 for bonds expiring just a couple of years later.

Matt Todd, who analysed Teva’s deal for rating agency S&P Global, said the penalty was “not material” to the debt’s rating. More significant was the low borrowing cost achieved from rampant investor demand for sustainable debt. “It’s good for their cash flow,” he said.

Broadly, proponents of sustainability-linked bonds say that the market’s fast growth heralds green debt moving into the mainstream — allowing companies to make public declarations about sustainability that investors can hold them to, even when they may not have a suitable project to finance themselves through the more established green bond market.

However, critics argue that such expansion is more reflective of the market’s less strict requirements, allowing companies to brandish their new found ESG commitments without having to do much work to substantiate them.

“I think there is tremendous promise in sustainability-linked bonds,” said James Rich, a portfolio manager at Aegon. “But the reality, unfortunately, is that the structures and the penalties for not achieving the targets are mostly not substantial enough to drive real and true change among these companies.”

Teva is not an isolated example. The coupon step-up on a $900m bond issued earlier this year by Level 3 Financing, a subsidiary of Telecoms company Lumen, was just 0.125 percentage points.

Indian cement manufacturer UltraTech Cement meanwhile raised $400m through a 10-year sustainability-linked bond in February. The deal included a much larger 0.75 percentage point coupon increase if the company fails to reach certain targets around reducing carbon emissions. However, the assessment date falls just six months before the debt reaches maturity, making its effect on the company’s interest payments negligible, according to people familiar with the bond.

Investors remain sceptical about how far the sustainability-linked moniker pushes companies to make meaningful change.

“There is a huge gap between what we need and what we are seeing,” said Charles Portier, a portfolio manager at Mirova.

However, others are more hopeful. Scott Mather, in charge of sustainable investments for asset manager Pimco, forecasts that the overarching sustainable bond market — including green bonds, social bonds, sustainability-linked bonds and others — could reach upwards of $10tn over the next five years from its current level of just over $2tn.

Mather also said that sustainability-linked debt should be seen as the “big brother” of the green bond market rather than its smaller sibling.

“The fact companies are committing publicly to sustainability goals is powerful,” said Mather. “It creates an expectation among their stakeholders, their customers, employees and investors, that they are committed to sustainability.”

These are also early days, and bankers note that despite issuance rising rapidly, it is still nowhere near the amount needed to satiate demand. Until that point, borrowers have the upper hand, and that typically means lower borrowing costs and smaller penalties.

Penalties are also not the only thing that matters, said Anjuli Pandit at HSBC, the lead bank on both the Teva and UltraTech deals.

“Investors aren’t buying it in the hope they get the step-up or that they can punish the company,” said Pandit, noting more punitive punishments may put issuers off. “This instrument is about companies asking to be held accountable on these targets and giving investors data to track that. We want that data. We want to open up the door between issuers and investors to get this conversation going.”

As issuance increases and the balance of power shifts, investors may ultimately be able to demand more challenging targets, request more granular data or apply harsher penalties.

Nonetheless, for now, some investors remain unmoved. “We have seen very few examples that have met our requirements to be eligible for our sustainability themed investment strategies,” said Rich. “They are just too wishy-washy.”

Teva declined to comment. Lumen and UltraTech did not respond to a request for comment.

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