Assignment: FINANCIAL MANAGEMENT
Questions 1-4 (use below table to answer)
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12 Months Ending
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In Millions of U. S. Dollars
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12/31/2010
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12/31/2009
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12/31/2008
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12/31/2007
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Net income
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$4,000
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$3,050
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$1,490
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$420
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|
Depreciation expense
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1,010
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570
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310
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130
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Changes in working capital
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600
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40
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40
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(200)
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Cash from operating activities
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$5,610
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$3,660
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$1,840
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$350
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Capital expenditures
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$(3,570)
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$(6,980)
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$(3,330)
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$(2,000)
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Cash from investing activities
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$(3,570)
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$(6,980)
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$(3,330)
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$(2,000)
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Interest and financing cash flow items
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$370
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$630
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$0
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$3
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Total cash dividends paid
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0
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0
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0
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0
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Issuance (retirement) of stock
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22
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2,370
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4,400
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1,190
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Issuance (retirement) of debt
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0
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0
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(4)
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(3)
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Cash from financing activities
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$392
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$3,000
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$4,396
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$1,190
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Net change in cash
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$2,432
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$(320)
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$2,906
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$(460)
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1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below.
Based solely on the cash flow statements for 2008 through 2010, select the statement that best describes the major activities of Goggle's management team over the period.
Google's management team has been investing heavily in working capital and financing them with the issuance of stocks and internally generated funds.
Google's management team has been investing heavily in capital expenditures and financing them with the issuance of stocks and internally generated funds.
Google's management team has been spending heavily in paying cash dividends and financing them with the issuance of stocks and internally generated funds.
Google's management team has been investing heavily in capital expenditures and financing them with the issuance of debt and internally generated funds.
2. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
What years did Goggle generate positive cash flow from its operations?
Goggle has generated positive cash flow from its operations during the years 2007 and 2008.
Goggle has generated positive cash flow from its operations during the years 2008 and 2009.
Goggle has generated positive cash flow from its operations during the years 2009 and 2010.
Goggle has generated positive cash flow from its operations during the years 2008, 2009, and 2010.
3. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
How much did Goggle invest in new capital expenditures over the period? (Round to the nearest integer.)
The amount that Google invested in new capital expenditures over the period is $15,930 million.
The amount that Google invested in new capital expenditures over the period is $14,710 million.
The amount that Google invested in new capital expenditures over the period is $16,290 million.
The amount that Google invested in new capital expenditures over the period is $11,030 million.
4. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
Describe Goggle's main source of financing in the financial markets over the period.
Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $985 million.
Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $10 million.
Google's main source of financing in the financial markets over the period was the issuance of common stock for the amount of $8,034.
Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of $985 million.
5. When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________.
agency problem
ownership problem
management problem
moral problem
6.(Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years.
6a. If your required rate of return is 9.30 percent, what is the value of the stock for you?
6b. Should you make the investment?
Questions 7-7a(use below table to answer)
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Depreciation expense
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$65,000
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Cash
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224,300
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Long-term debt
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334,000
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Sales
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573,000
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Accounts payable
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101,600
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General and administrative expense
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78,400
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Buildings and equipment
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895,200
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Notes payable
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75400
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Accounts receivable
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167,400
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Interest expense
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4,790
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Accrued expenses
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7,900
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Common stock
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288,200
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Cost of goods sold
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298,000
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Inventory
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99,100
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Taxes
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51,100
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Accumulated depreciation
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262,900
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Taxes payable
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53,200
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Retained earnings
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262,800
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7. (Review of financial statements) Prepare a balance sheet and income statement for the Warner Company from the scrambled list of items found here in order to answer the question below. The statements do not need to be submitted, only your response to the question.
7a. What can you say about the firm's financial condition based on the prepared financial statements?
8. (Calculating rates of return) The common stock of Placo Enterprises had a market price of $8.34 on the day you purchased it just one year ago. During the past year, the stock had paid a dividend of $0.54 and closed at a price of $11.47. What rate of return did you earn on your investment in Placo's stock? (Round to two decimal places.)
9.(Annuity payments) Ford Motor Company's current incentives include 5.7 percent APR financing for 72 months or $1,100 cash back on a Mustang. Let's assume Suzie Student wants to buy the premium Mustang convertible, which costs $34,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,100 cash back, Suzie can borrow from the VTech Credit Union at 7.7 percent APR for 72 months.
9a. If Suzie chooses 5.7 percent APR financing for 72 months to buy the premium Mustang convertible, which costs $34,000 = PMT(62.632529), what will her monthly payment be? (Round to the nearest cent.)
9b. If Suzie chooses $1,100 cash back to buy the premium Mustang convertible and borrows $32,900 from the VTech Credit Union at 7.7 percent APR for 72 months, how much will her monthly payment be?
9c. Which option should Suzie Student choose?
Question 10a-d use (Use below table to answer)
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Common Stock A
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Common Stock B
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Probability
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Return
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Probability
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Return
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0.35
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12%
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0.25
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- 6%
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0.30
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17%
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0.25
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8%
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0.35
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18%
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0.25
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13%
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0.25
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20%
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10.(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. (use attached table in attachments to answer)
10a. Given the information in the table, what is the expected rate of return for stock B?
10b. What is the standard deviation of stock B?
10c. What is the expected rate of return for stock A?
10d. Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)
11. (Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for $35.67 a share and pays $3.49 in dividends annually. What is the firm's cost of capital for the preferred stock?
12. (Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.54 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years.
12a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to 2 decimal places.)
12b. Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 4.2 percent, and Hetterbrand's beta is 0.78. What is your estimate of the firm's cost of common equity using this method? (Round to 2 decimal places.)
13.(Weighted average cost of capital) In the spring of last year, Tempe Steel learned that the firm would need to re-evaluate the company's weighted average cost of capital following a significant issue of debt. The firm now has financed 33 percent of its assets using debt and 57 percent using equity. Calculate the firm's weighted average cost of capital where the firm's borrowing rate on debt is 7.9 percent, it faces a 34 percent tax rate, and the common stockholders require a 19.7 percent rate of return.
14.(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $440 million. Since the primary asset of this business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing, but Templeton plans to borrow $340 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? (Round to one decimal place.)
14a.What is the appropriate weight of debt?
14b. What is the appropriate weight of common equity?
FINANCIAL INSTITUTIONS
Discussion Board 50-75 words
The importance of understanding the cost of capital to a business. Comment on why it is important, and explain why as debt increases (in capital structure), eventually the WACC will increase (despite the fact debt is usually the lower cost component cost of capital). How does your current or past company, or one you know of, decide on its cost of capital? Finally, What assignments/assessments from this course aligned with your profession? How can the lessons you have learned positively affect your career success (now or in the future)?
Assessment Questions 150-200 words each
1. Describe the idea of "national banking." How is the system evolving today (and into the future)?
2. Summarize the regulatory framework found within the securities industry.
3. How has the banking system evolved into a "dual banking system", and what does this mean?
4. What are some of the ways that moral hazard and adverse selection are limited for insurance products?