FIN 301 Introduction to Managerial Finance Assignments- University of Illinois at Chicago
Case 1
Assignment 1: INTRODUCTION TO FINANCIAL MANAGEMENT AND FINANCIAL MARKETS
Overview
This assignment will cover both the role of the financial manager as well as the introductory material on stock market investing. Make sure to fully review all of the required reading material before you begin this assignment. Note that all of the questions are conceptual in nature and will not require any computations. But make sure to thoroughly explain your reasoning behind each answer, and to support your answer using references to the required background readings.
Case Assignment
Question 1: In your small business you have a finance department with a CFO, controller, and treasurer. For the following scenarios, explain which of these three financial executives would be the most likely to work on the issue based on the descriptions of the roles of the CFO, controller, and treasurer from Brealey, Myers, & Marcus (2009) from the required reading.
A. You suspect that a lower-level employee has embezzled about $50,000 over the last three years. You want to try to find out who based on past financial records. Who would be most likely person to look into this issue-the CFO, the treasurer, or the controller? Why?
B. Your chief marketing officer wants to take out a large loan to finance a major advertising campaign that he claims will bring in large sums of new profits over the next few years. However, your chief operating officer wants to take out a large loan to purchase some new equipment and machinery that she claims will save your company a lot of money over the next few years. You would like to see some estimates about which of the two projects will be most likely to increase profits enough to be able to pay back the loan. Who would be most likely person to look into this issue-the CFO, the treasurer, or the controller? Why?
Question 2: Explain whether the following assets are a real asset or a financial asset. Explain your reasoning using the definitions of real vs. financial assets in Brealey, et al., (2009) from the required reading.
A. A certificate of deposit at your local bank
B. A two-bedroom house
C. $50,000 worth of bonds from an airline company
D. Ownership of a copyright to a hit song
Question 3: Complete financial research on Facebook and General Motors using a webpage such as investing.com, finance.yahoo.com, or Bloomberg.com. Based on their stock's P/E ratios, dividend yields, and other information, compare and contrast these two stocks. How would you classify these stocks: growth stock, value stock, or income stock? Explain your reasoning using concepts from the background readings as well as any information you find on these two companies. Your answer should be about 100-150 words and can include graphs or diagrams.
Case 2
Assignment 2: PRESENT VALUE AND BOND VALUATION
Overview
Download the Case 2 Template.
1. Compute the future value for the following:
a. $2,000 after being invested for two years in a savings account with 3% interest rate
b. $5,000 after being invested for ten years in a savings account with a 1% interest rate
c. $3,500 after being invested for nine years in a savings account with an 11% interest rate
2. Compute the present value for the following:
a. $3,000 to be paid in one year with a 9% discount rate
b. $3,000 to be paid in three years with a 9% discount rate
c. $4,000 to be paid in ten years with a 5% discount rate
3. Compute the present value for the following:
a. An investment that will pay you $1,000 in one year, another $1,000 in two years, and a third payment of $1,000 in three years (e.g., three payments of $1,000 to be paid once a year for three years). The discount rate is 4%.
b. The same three $1,000 payments as in part a) above, but with a 6% discount rate
c. An investment that will pay you $2,000 in one year, another $1,500 in two years, and a third payment of $3,000 in three years. The discount rate is 4%.
4. Compute the value of the following bonds assuming a 3% discount rate (required rate of return):
a. A zero-coupon bond that pays $1,000 in five years
b. A bond that pays $1,000 in five years, with five annual coupon payments of $20 each
c. What is the coupon rate if coupon payments are $20 per year? At what discount rate would the value of the bond be "at par" (e.g., be worth $1,000?). Explain your reasoning.
5. This part of the assignment is purely conceptual with no computations required. Explain the following with references to the required readings:
a. What is likely to happen to interest rates if the rate of inflation suddenly increases?
b. Suppose there are two bonds each with coupon payments of $50. The first bond pays $1,000 in five years, and the other one pays $1,000 in ten years. If interest rates increased, would the value of the bonds increase or decrease? Which of the two bonds would have their value change more after the increase in interest rates? Explain your reasoning.
Case 3
Assignment 3: RISK, RETURN, AND STOCK VALUATION
Overview
For this assignment, Questions 1 and 3 are computational in nature. Questions 2 and 4 are conceptual questions. So make sure to thoroughly review the required background readings and make sure you understand the material at a conceptual level and also understand the steps involved in the computations.
Case Assignment
Download the Case 3 Template.
1. Using a dividend discount model, what is the value of a stock that pays an annual dividend of $5 that is not expected to grow and the discount rate is 10%? What will be the value of the stock if the dividend is expected to grow 5% per year?
2. Explain whether each of the following is systematic or unsystematic risk using references to the required background readings:
a. There is a large recession.
b. It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.
c. The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.
3. Use the CAPM to calculate the following:
a. The expected return of a stock with a beta of 2, and risk-free rate of 1%, and a market return of 7%.
b. The beta if the expected return of the stock is 8%, the risk-free rate is 2%, and the market rate of return is 6%.
4. Do you think the following companies would have a high, low, or average beta? Explain your answer using references from the background readings and your knowledge of CAPM and beta:
a. The ACME Umbrella company's stock goes up a lot when it rains, but goes down when it is sunny. Nothing else but the weather seems to impact ACME's stock price.
b. Vultures, Inc., specializes in buying assets of bankrupt companies at a discount. Vultures' stock price seems to go up whenever other companies are doing poorly and going bankrupt, but goes down when other companies are doing well and they have few bankrupt companies to prey on.
c. Unoriginal, Inc., can never decide what products they want to focus on so they make many different products in several different industries. They also invest much of their profits into 100 or so other companies that are listed on the stock exchange.
Case 4
Assignment 4: CAPITAL BUDGETING AND CAPITAL STRUCTURE
Overview
Make sure to thoroughly review the required background readings and work through both the concepts and the computational examples. The videos on computing NPV and IRR using Excel along with the sample spreadsheet should also help. If you are unable to figure out how to make the computations in Excel, then you can get partial credit by computing the answers using a calculator and thoroughly explaining your steps. For conceptual questions, make sure to thoroughly explain the reasoning for your answers and to use references from the required background readings.
Case Assignment
Download the Case 4 Template.
1. The table below gives the initial investment (the negative numbers at "Year 0") for two projects. Compute the payback period, the NPV, and the IRR using Excel. Then rank the two projects based on each of these three criteria, and discuss which projects should be funded based on your computations.
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Firm Cost of Capital:
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11%
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Year
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Project A
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Project B
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0
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-100,000
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-150,000
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1
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25,000
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30,000
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2
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25,000
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30,000
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3
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25,000
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90,000
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4
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25,000
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20,000
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5
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25,000
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20,000
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6
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25,000
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20,000
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2. The ACME Umbrella Company is deciding between two different umbrella factories. Both factories will cost $500,000 to get started. However, the cash flows for each factory will depend on whether the next five years are rainier than average or sunnier than average. Factory A will have cash flows of $130,000 per year for the next five years if the weather is sunnier than average. But if it is rainier than average the cash flows will be $150,000 per year for the next five years. Factory B will have cash flows of $100,000 per year for the next five years if it is sunnier than average, but if it is rainier than average it will have cash flows of $200,000 per year. ACME has a cost of capital of 9%. Based on this information, calculate the following:
a. Calculate the NPV for both factories and for both scenarios (rainy versus sunny). What is the range of NPV for each factory based on your scenario analysis?
b. Based on your answer to a) above, do you think ACME should use the same discount rate of 9% for each factory? Or should they use a risk-adjusted discount rate (RADR)? If so, which factory should have a higher RADR? Explain your answer with references to the background readings.
3. The Carpet Company's shareholders require an 11% return on their investment, and stock makes up 50% of the company's capital structure. The other half of the company's capital structure consists of debt. The interest rate on this debt is 7%. Assume the corporate tax rate is 21%. What is carpet company's WACC?
4. Assume the Carpet Company's corporate tax rate falls to 0%. The company borrows money to buy back and retire half of its outstanding common stock. What happens to the company's WACC?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.
Attachment:- Module-Case-Templates.rar