Business Finance Assignment
1. You're given with a mortgage from your credit union to buy a house that costs $680,000. Suppose you pay $136,000 for down payment and the current average market interest rate is 3.2% for the 20-year mortgage. Answer the following questions:
a) What is the monthly payment if there is no pre-payment penalty?
b) Suppose the credit union says that if you'd like to retire the loan earlier, say at the end of the 7th year, you need to pay (say) $421,000 for the rest of the loan, would you take it given that you have no difficulty to generate the cash flow? Why or why not?
c) Suppose that the credit union also offers you another possible payment program that is they will give you a low 1.2% interest rate for the first 6 years and with a lump-sum payment at the end of the 6th year as $532,000. (The lump-sum payment is a one-time payment that you must pay it off or, you need to re-finance by then.) What is your monthly payment for the first 5 years?
d) Suppose you follow the original mortgage in (a) without any refinancing or prepayment, and after 5 years of payments, you discover the current market interest rate for mortgage drops to 1.8% APR. Instead of paying off the mortgage, you are about to re-finance your mortgage for 15-year mortgage instead. What is your monthly payment for your mortgage now? Is re-financing good for you?
2. Company AFLAC had issued a 15-year coupon bond with 4% coupon rate on the face value as $1,000 and with semi-annual payments. Answer the following questions:
a) Suppose the discount rate for the bond is given as 10%, what is the present value of the bond?
b) Suppose the current market price of the bond is given as $882 per bond, what is the current market discount rate (or so called Yield to Maturity) for the bond?
c) What is the idea of Yield to Maturity? What does it imply?
3. Suppose that you're given the following information of rates of return for three mutual funds in the stock market as assessed by your financial analyst in mutual fund. The "beta's" for these mutual funds are 1.21, 0.91, 0.84, for Fund A, Fund B, and Fund C, respectively. The market return on S&P 500 index is 12% on the average. Answer the following questions:
a) Let the risk-free rate be 2%, what are the required rates of return for Fund B, and Fund C? What model did you apply here? Is this model a market equilibrium condition?
b) What is the purpose of Capital Asset Pricing Model (CAPM)? What is the slope of Security Market Line (SML)? What does this slope represent?
c) If you want to combine Funds A, B, C altogether to form a portfolio. You want to have the portfolio's "beta" to be equal to "one" where Fund B and Fund C together will constitute about ¼ of your initial wealth for investments. What weights should you assign to these funds?
4. Suppose that you're given the following information of rates of return for the stock market as assessed by your financial analyst in mutual fund. Answer the following questions:
a) What are the means, standard deviations for each fund? Why do you need to specify the means and the standard deviations?
b) What are the co-variances for these funds? Are these funds mutually "diversifiable"? Why or why not? (Hint: apply correlation coefficients to tell)
c) Explain the assumption(s) and reason(s) why the expected rate of return of investor can be represented by the expected value of the rate of return.
d) Suppose that Fund A represents the Market Index Portfolio. What are the "beta's" for Fund B and Fund C? What is the difference in concept between standard deviation and beta for Fund B and Fund C?
e) Suppose the risk-free rate is 2% and Fund A represents the Market Index Portfolio. What are the expected rates for Fund B and Fund C now according to CAPM? Are they different from the "means" you calculated in a)? Why?
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States of the world
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Probability
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Fund A
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Fund B
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Fund C
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Boom
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¼
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16%
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12%
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8%
|
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Recovery
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½
|
24%
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36%
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8%
|
|
Recession
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¼
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-32%
|
-20%
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4%
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5. You are given with the following information statements of a public firm Bambie in the airline industry concurrently. (Notice that all negative numbers are parenthesized). The firm has issued 6 million shares of common stock with current market price as $25/per share, the expected dividend is $6.90/per share with 2.5% growth rate, 300,000 shares of preferred stocks with promised preferred dividend and preferred stock price as $2.20/per share and $10.5/per share, respectively. The firm also has currently, 2 million 4.2%-coupon bonds with $1,000 face value that pays the coupons semi-annually. The current bond price is $820/per bond. The bonds are expected to mature at 2025. Answer the following questions:
a) If using the market prices for assessment on rates of return, what is the rate of return the common stock of Bambie? What is the rate of return for their preferred stocks?
b) What is the bond's yield to maturity of the firm's corporate bond?
c) Suppose you are also given with the following financial statements of Bambie for the past three years. What are the historical returns on equity for this company for the past three years? Is the firm Bambie doing well from the perspectives of shareholders? Why or why not?
d) Is this firm well-diversified with their arrangement of capital? That is, are they well diversified with different sources of capital?
e) Based on the given information, provide your ratios analyses. Apply the Du-Pont model and interpret your results for the firm's performance.
f) Provide the common size statements for both Balance Sheet and Income Statement. What kind of noticeable pattern you may identify for the firm? Is this usual for the airline industry?
Balance Sheet (in millions)
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2013
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2014
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2015
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|
Assets
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|
|
|
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Cash
|
30
|
10
|
473
|
|
Marketable securities
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100
|
100
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0
|
|
Accounts Receivable
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920
|
750
|
800
|
|
Inventory
|
710
|
178
|
450
|
|
Plant, Building, and Equipment's (net)
|
1872
|
2802
|
1209
|
|
Investments in affiliates
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0
|
30
|
329
|
|
Total Assets
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3632
|
3870
|
3261
|
|
Liabilities
|
|
|
|
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Short-term debts
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507
|
9
|
30
|
|
Advances from customers
|
111
|
34
|
134
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|
Accounts payable
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685
|
192
|
771
|
|
Interest payable
|
75
|
98
|
62
|
|
Tax payable
|
127
|
147
|
128
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|
Other Accrued Expenses
|
20
|
15
|
35
|
|
Bonds payable
|
925
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1486
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750
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|
Stockholders' Equity
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|
|
|
|
Common stock
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1021
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1055
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1175
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|
Additional paid-in capital
|
74
|
756
|
47
|
|
Retained earning
|
87
|
78
|
129
|
|
Total liabilities and equities
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3632
|
3870
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3261
|
|
Income Statement(in millions)
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|
|
|
|
2013
|
2014
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2015
|
|
Net Sales
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3296
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3418
|
3983
|
|
Cost of Goods Sold
|
2115
|
1979
|
2510
|
|
Selling and General Expenses
|
700
|
812
|
759
|
|
Depreciation Expense
|
160
|
298
|
284
|
|
Interest Expense
|
90
|
109
|
121
|
|
Income Tax Expense
|
195
|
137
|
254
|
|
Net Income
|
36
|
83
|
55
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