Instructions:
1. You will access the quiz during a designated open 24-hour window. The start and finish times will be electronically recorded.
2. There are 2 (TWO) questions on this quiz and 4 (FOUR) pages in total, including this cover page.
3. This is an open-book quiz. You can access any material you want to help you answer the questions.
4. Each question has multiple parts and some are more difficult than others. Attempt each of the parts to achieve full points. If you get stuck on one part, consider moving on to others to maximize your points.
5. All your work and your answers should be furnished within the quiz document. Enough space for the answer is provided.
6. Read the questions carefully.
7. Show all your calculations.
8. Write as clearly as possible so I can understand what you are doing and so I can give you as much credit as possible for the work.
Question 1 - Capital Budgeting Decisions
(a) What is the NPV decision rule in capital budgeting decisions? How is it different from the Internal Rate of Return (IRR) rule and the Payback rule? Outline some of the pitfalls in applying the IRR and Payback rules? What is the Profitability Index (PI)? What are its benefits and potential shortcomings?
b) Tableau is thinking about marketing a new financial software product. Upfront costs to develop and market the product are $3 million. The product is expected to generate profits of $1.25 million per year for 7 years. A second round of marketing costing $1 million is projected for Year 5. The company will also have to provide product support expected to cost $60,000 per year in perpetuity but only starting in Year 3. Assume all profits and expenses occur at the end of the year.
a) What is the net present value (NPV) of this investment if the cost of capital is 7%? Should the firm undertake the project? Can the IRR rule be used to evaluate this investment? Why or why not?
Question 2 - Time Value of Money
Analysts predict that earnings for Panera Bread Company (Nasdaq symbol: PNRA) will grow at 25% per year for the next four years. After that, as competition increases, earnings growth is expected to slow to 5% per year and continue at that level forever. PNRA's earnings this past year was $161.5 million. What is the present value of all future earnings if the discount rate is 11%? (Assume that all cash flows occur at the end of the year.)
Topics Covered:
Arbitrage and Financial DecisionMaking
TheTime Value of Money
Interest Rates: Nominal, Effective Quotes and AdjustmentsReadings
Valuing Bonds
The Yield Curve and Bond Arbitrage
Valuing Projects: Investment Decision Rules
Fundamentals of Capital Budgeting
Valuing Stocks using the Dividend Discount Model
Total Payout and Free Cash Flow Valuation