REVISED Investment Problems

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Xytex Products just paid a dividend of $1.92 per share, and the stock currently sells for $38. If the discount rate is 15 percent, what is the dividend growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

 

 

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn has a reported equity beta of 1.6, a debt-to-equity ratio of .4, and a tax rate of 40 percent. Based on this information, what is Lauryn’s asset beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

JJ Industries will pay a regular dividend of $.65 per share for each of the next four years. At the end of the four years, the company will also pay out a $71 per share liquidating dividend, and the company will cease operations. If the discount rate is 8 percent, what is the current value of the company’s stock? (Do not round intermediate calculations. Round 

 

Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $55, $312, and $92, respectively. If Able undergoes a 3-for-4 reverse stock split, what is the new divisor? (Do not round intermediate calculations. Round your answer to 5 decimal places.

 

Star Light & Power increases its dividend 2.3 percent per year every year. This utility is valued using a discount rate of 10 percent, and the stock currently sells for $46 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 
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Excel Exam

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MGMT 364 Midterm Exam Spring 2021

 

Name:__________________________

 

 

Problem 1: Amazon – Online Sales

Amazon sells books, music, and many other items over the Internet and is one of the pioneers of online consumer sales. Amazon, based in Seattle, Washington, started by filling all orders using books purchased from a distributor in response to customer orders. As it grew, the company added warehouses, allowing it to react more quickly to customer orders. In 2009, Amazon had about 20 warehouses in the United States and another 30 in the rest of the world. It uses the U.S. Postal Service and other package carriers such as UPS and FedEx to send products to customers. Outbound shipping-related costs at Amazon in 2009 were almost $2 billion.

With the Kindle, Amazon has worked hard to increase sales of digital books. As of 2009, Amazon offered more than 460,000 books in digital form. The company has also added a significant amount of audio and video content for sale in digital form.

Amazon has continued to expand the set of products that it sells online. Besides books and music, Amazon has added many product categories such as toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest acquisitions was Zappos, a leader in online shoe sales. This acquisition added a lot of product variety. According to the Amazon annual report, this required creating 121,000 product descriptions and uploading more than 2.2 million images to the Web site! In 2010, another interesting acquisition by Amazon was diapers.com. Unlike Zappos, this acquisition added little variety but considerable shipping volumes.

Several questions arise concerning how Amazon is structured and the product categories it continues to add:

 

1. What advantages does selling books via the Internet provide over a traditional bookstore? Are there any disadvantages to selling via the Internet?

 

 

2. Should Amazon stock every product it sells?

 

 

3. What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage?

 

 

4. What advantages/disadvantages does the online channel enjoy in the sale of shoes /diapers relative to a retail store?

 

 

 

5. For what products does the online channel offer the greater advantage relative to retail stores? What characterizes these products?

 

 

 

Problem 2.

 

The Green Company is a retailer of gourmet bottled pickles that purchases its products from Whole, a gourmet food manufacturer. Green buys units (from Whole) at a price of $15 per unit and sells them to customers at $45 per unit. Currently Whole produces to Green’s order and delivers all requirements at the start of the period. Leftover inventory at the end of the season will be donated to a charity organization for free. The demand is lost when Green does not have inventory. Whole’s production cost is $10 per unit.

 

Demand(units) Probability
100 0.2
200 0.3
300 0.2
400 0.3

 

 

 

1. Given the current information, how many units of products should Green stock to satisfy demand? What is the associated profit for Whole and Green and for the supply chain in total?

 

 

 

2. If Whole and Green were one integrated company, how many units would be stocked? What is the associated profit for the supply chain?

 

 

 

 

3. Why is there a discrepancy between the previous two questions? What steps would you recommend to coordinate this supply chain?

 

 

Problem 3.

 

The First Bank of Lafayette has a common office for mortgage and commercial credit processing. The process involves several departments: data collection, data verification, loan pricing, loan closing, and loan maintenance. For each of the departments, there are a number of clerks working in parallel. All requests pass through each of the 5 stages.

 

Stage Number of Clerks Set-up Time Processing Time
Data Collection 6 20 minutes 10 minutes
Data Verification 4 25 minutes 3 minutes
Loan Pricing 4 15 minutes 10 minutes
Loan Closing 4 4 minutes 20 minutes
Loan Maintenance 6 10 minutes 20 minutes

 

 

 

Data Regarding orders received shows 40 orders per day for mortgage processing and 20 orders per day for commercial credit. Given that all orders are processed in order of arrival and that every order has to go through all 5 stages, provide the average lead time for First Bank to complete the process. Assume 8 hours of work per day, 5 days per week, and 50 weeks per year.

 
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Personal Financial Planning Case Study

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Personal Finance Case #5

Dan and Sue Koogler, 29 and 28, are trying to get ahead financially. They also want to buy two “big ticket” items (a house and a car) and pay for Dan to complete his college degree requirements. Their primary financial objective, however, is to reduce debt and achieve positive cash flow. The couple also has very little savings and would like to be able to put some money aside.

The Kooglers are parents of a pre-school child and Sue is a stay-at-home mom. Dan is the sole breadwinner and earns $40,000 annually. Sue is interested in returning to the labor force but concerned about whether child care costs and taxes would wipe out whatever she would earn.

Unfortunately, the Kooglers are starting to face some financial difficulty. Monthly payments on their debts are consuming a greater percentage of their income and, along with their mortgage, don’t leave them much income for other expenses. The couple has absolutely no money in savings for emergencies.

Another indicator of financial distress is the couple’s negative net worth. In other words, they owe more than they own. The couple’s assets total $100,600 and include $1,000 in a checking account, $2,600 in Dan’s 401(k), a $84,000 condo, and two cars and personal property worth $13,000.

On the debt side, the couple owes $84,000 on their mortgage, two personal loans totaling $10,000, $7,000 on a credit card, $7,193 on a time share, and $13,000 to Sue’s parents. Their net worth (assets minus debts) is, thus, minus $20,593.

Dan says he would like to retire when he is 55 and “live comfortably and independently.” Neither Sue nor Dan has IRAs, however, and Dan has stopped contributing to his employer 401(k). The couple has no wills. “I don’t have money to pay a lawyer to do the will and am not sure how to do it without a lawyer,” Dan explained.

The couple has $300,000 of term life insurance on Dan and family health insurance with a $250,000 per person limit paid for by Dan’s employer. They carry $300,000 of liability insurance on their cars and $65,000 of condo insurance. There is no disability insurance to cover the loss of Dan’s income should he be unable to work due to accident or illness.

 
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FIN 571 Week 3 Quiz

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1.The operating cycle

 

begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures.

 

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

 

To measure operating cycle we need another measure called the days’ payables outstanding.

 

ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

2.You are provided the following working capital information for the Ridge Company:

Ridge Company

Account$

 

Inventory$12,890

Accounts receivable12,800

Accounts payable12,670

 

Net sales$124,589

Cost of goods sold99,630

Operating cycle: What is the operating cycle for Ridge Company?

 

 

36 days

 

51 days

 

47 days

 

85 days

 

 

 

 

 

 

 

3.Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $85 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order size.

 

 

124 clocks

 

15,294 clocks

 

26,154 clocks

 

161 clocks

4.The asset substitution problem occurs when

 

managers substitute riskier assets for less risky ones to the detriment of equity holders.

 

managers substitute less risky assets for riskier ones to the detriment of bondholders.

 

managers substitute less risky assets for riskier ones to the detriment of equity holders.

 

managers substitute riskier assets for less risky ones to the detriment of bondholders.

5.M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

 

How much are your cash flows today?

 

$150

 

$12.38

 

$15

 

$4.50

 

 

 

 

 

 

6.M&M Proposition 2: Melba’s Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is the appropriate WACC?

 

 

8.80%

 

7.44%

 

8.17%

 

6.35%

 

7.According to the text, the financial plan covers a period of

 

 

one year.

 

ten years.

 

none of these.

 

three to five years.

 

8.The financing plan of a firm will indicate

 

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm’s dividend policy, and the firm’s working capital policy.

 

the firm’s dividend policy, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s dividend policy.

 

 

 

9.Payout and retention ratio: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

 

 

25%, 75%

 

69%, 31%

 

34%, 66%

 

66%, 34%

 

1.The operating cycle

 

begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures.

 

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

 

To measure operating cycle we need another measure called the days’ payables outstanding.

 

ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

2.You are provided the following working capital information for the Ridge Company:

Ridge Company

Account$

 

Inventory$12,890

Accounts receivable12,800

Accounts payable12,670

 

Net sales$124,589

Cost of goods sold99,630

Operating cycle: What is the operating cycle for Ridge Company?

 

 

36 days

 

51 days

 

47 days

 

85 days

 

 

 

 

 

 

 

3.Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $85 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order size.

 

 

124 clocks

 

15,294 clocks

 

26,154 clocks

 

161 clocks

4.The asset substitution problem occurs when

 

managers substitute riskier assets for less risky ones to the detriment of equity holders.

 

managers substitute less risky assets for riskier ones to the detriment of bondholders.

 

managers substitute less risky assets for riskier ones to the detriment of equity holders.

 

managers substitute riskier assets for less risky ones to the detriment of bondholders.

5.M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

 

How much are your cash flows today?

 

$150

 

$12.38

 

$15

 

$4.50

 

 

 

 

 

 

6.M&M Proposition 2: Melba’s Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is the appropriate WACC?

 

 

8.80%

 

7.44%

 

8.17%

 

6.35%

 

7.According to the text, the financial plan covers a period of

 

 

one year.

 

ten years.

 

none of these.

 

three to five years.

 

8.The financing plan of a firm will indicate

 

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm’s dividend policy, and the firm’s working capital policy.

 

the firm’s dividend policy, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s dividend policy.

 

 

 

9.Payout and retention ratio: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

 

 

25%, 75%

 

69%, 31%

 

34%, 66%

 

66%, 34%

 

 

 
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