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BFIN 322Spring 2021 BFIN 322 Business Finance Spring 2021 EXAM NAME: .......................................................................... Please read each question carefully before answering. You are encouraged to use Excel to complete the exam, and to submit an Excel workbook to the D2L dropbox. If this is not possible, you may print out the exam and write your answers in the spaces provided. You will then need to either scan or photograph the pages of the exam to create a pdf or other common electronic file for submission. 1. You are contemplating buying your first house and want to be sure that you can afford the mortgage payments. Your bank is offering a 30-year, fixed-rate mortgage with a loan amount of $275,000 and an annual interest rate of 4.25%. What would the monthly payment be on this loan? 2. You will receive a 15-year annuity of $1,250 every month for the next 15 years (the first payment is one month from today, one hundred and eighty payments in total) as well as a $12,000 lump sum to be received 15 years from today. What is the present value of these cash flows you will receive in the future if the appropriate discount rate is 6% APR? 3. Exactly 12 years ago, you began depositing $850 per month in a retirement savings account paying interest of 6.25% APR, compounded daily. You have decided to change your investment strategy and will now make monthly deposits of $1,000 to a large-cap growth stock mutual fund with an expected annual rate of return of 11%, compounded annually, for the next 20 years until you retire. a. How much money is in your account today? b. How much will be in your account 20 years from now, when you retire? 4. A US Treasury bond has a coupon rate of 4.50%, semi-annual coupon payments, face value of $1,000, and 30 years to maturity. If the current market yield on similar bonds is 5.85%, what is the price of this bond? 5. A corporate bond with a coupon rate of 5.7%, semi-annual coupon payments, a face amount of $1,000, and 17 years to maturity is currently trading at a price of $1,253.75. What is the yield-to-maturity on this bond? 6. You are covering Park National Bank, Inc. stock, and have prepared the following estimates of the company’s dividends over the next five years: Year 1:$1.50 Year 2:$1.65 Year 3:$1.75 Year 4:$1.83 Year 5:$1.90 After year 5, you expect dividends to grow at a constant rate of 4.0%. The required rate of return on equity is 9.5%. What is the value of the stock based on your estimates? 7. Your company is exploring the possibility of offering a new product. The equipment required to manufacture the new product will cost $900,000 and will be depreciated on a straight-line basis over its six-year life to a salvage value of $90,000. The equipment will be sold at the end of the project for its salvage value. There will also be upfront tooling and set-up costs of $50,000, and a working capital injection of $35,000 which will be recovered at the end of the six-year project life. You estimate that the new product will cost $57.00 to make, and that it will sell for $85.00. Unit sales in year 1 are estimated to be 10,000, and in year 2 are estimated to be 15,000. Unit sales in years 3-6 are estimated to be 25,000. The tax rate for your company is 35%. What are the projected cash flows associated with this project, and what is the NPV using a discount rate of 20%? 8. Century Plumbing Fixtures stock has a Beta of 1.15, the risk-free interest rate is 2.5%, and the equity risk premium is 5.5%. The yield to maturity on Century Plumbing Fixtures’ debt is 6.15%. The company is financed 40% with equity, and 60% with debt. The company’s tax rate is 21%. What is the WACC for Century Plumbing Fixtures? 9. Enterprise Software, Inc. has reported the following numbers for the fiscal year just ended: (millions) Revenue $ 39,658 EBIT $ 12,710 Interest expense $ 1,193 Taxes $ 2,182 Capital Expenditures $ 1,736 Depreciation, other non-cash items $ 1,165 Working Capital increase $ 1,608 Cash $ 21,620 Total assets $ 136,048 Total liabilities $ 86,128 Shares 4,238 a. Calculate Enterprise Software’s free cash flow for the year just reported. b. Calculate the following financial ratios for Enterprise Software: Operating (EBIT) margin Net margin Tax rate Return on equity Return on total assets Leverage ratio Total asset turnover Times interest earned Earnings per share You this page as extra work space. Business Finance BFIN 441 Financial Statement Analysis Week 2 Chapters 1-3 Financial Framework BFIN 322 Business Finance Exam Review Topics Spring 2021 Peter Rubicam, CFA Montana State University 1 Exam Procedure Final Exam file will be available on D2L starting at 12:01 am Monday April 26th Submissions are due in the provided D2L dropbox by 11:59 pm that same day You are encouraged to use Excel to solve the problems, and to submit an Excel workbook as your completed exam If you have the ability to print out the file, complete it, and scan or photograph it for submission as a PDF, you may do so By necessity, this exam will be considered a “take home” exam, meaning that you may refer to the text and other resources while completing the exam 2 Summary of Topics Covered Review previous exams If payment frequency and compounding period differ (ie. Monthly payments to an account with daily compounding), use EAR Interest rate used must match payment frequency (ie. With monthly payments, divide annual rate by 12) Time Value of Money Bond Pricing Coupon rate ONLY determines the amount of coupon payments Discount cash flows by the yield-to-maturity Yield-to-maturity can only be found by using a financial calculator or Excel Stock Valuation Dividend discount model with constant growth terminal value Determine cost of equity using CAPM model (Beta, risk free rate, equity risk premium) 3 Determine operating cash flows Determine cash flows associated with asset resale Calculate NPV, IRR Capital Budgeting Financial Ratios, FCFF Calculate financial ratios Calculate FCFF 4 TVM Sample Problem 1 You are initiating a retirement savings plan. For the next 20 years, you intend to deposit $500 per month in a stock mutual fund that you estimate will have an annual return of 9.5%. After year 20, you will take a more conservative approach for the final 10 years of your plan, investing that same $500 per month in a bond fund that should have an annual return of 5.5%. How much should you have in your retirement fund when you retire 30 years from now? Solution: First, find the balance at the end of year 20. FV = $500 * [(1 + .095/12)240 – 1]/(.095/12) FV = $500 * 711.9235461 = $355,961.77 TVM Sample Problem 1 (cont.) Treat the balance at the end of year 20 as a lump sum deposit into the bond fund. FV = $355,961.77 * (1 + .055/12)120 FV = $355,961.77 * 1.7310764 = $616,197.03 Then find the FV of the last 10 years of $500 deposits. FV = $500 * [(1 + .055/12)120 -1]/(.055/12) FV = $500 * 159.5075819 = $79,753.79 Total at end of year 30 = $616,197.03 + $79,753.79 = $695,950.82 TVM Sample Problem 1 (cont.) Using the financial calculator: First: N = 240, I/Y = 9.5/12, PV = 0, PMT = -$500, CPT – FV = $355,961.77 Then, change sign on the result to negative, and enter as PV. PV = -$355,961.77, N = 120, I/Y = 5.5/12, PMT = -$500, CPT – FV = $695,950.82 TVM Sample Problem 2 You want to establish a college fund for your newborn child, who will start college 18 years from now. The current cost of four years of college is $125,000, and this is expected to rise by 2.5% annually over the next 18 years. If your college savings account pays annual interest of 7.25%, compounded daily, how much must you deposit every month in order to have enough money to cover all four years of college 18 years from now? First, find future cost of four years of college: FV = $125,000 * (1 + .025)18 = $194,957.34 Next, find EAR: EAR = (1 + .0725/365)365 – 1 = .075185 TVM Sample Problem 2 (cont.) Next, find deposit amount: $194,957.34 = C * [(1 + .0751851/12)18*12 -1]/(.0751851/12) $194,957.34 = C * 455.5145434 C = $427.99 Calculator inputs: N = 216, I/Y = 7.51851/12, PV = 0, FV = 194,957.34, CPT - PMT Bond Sample Problem 1 A US Treasury bond has a face amount of $1,000, a coupon rate of 5% paid semi-annually, and a term to maturity of 20 years. If the bond’s current yield is 6.15%, what is its current price? Bond Sample Problem 1 Solution Find coupon payment: (.05 * $1,000)/2 = $25 Find PV of coupons: PV = $25 * [1 – (1 + (.0615/2))-40]/(.0615/2) PV = $25 * 22.8370753 PV = $570.93 Find PV of face amount: PV = $1,000/(1 + (.0615/2))40 PV = $297.76 Total = $570.93 + $297.76 = $868.69 Bond Sample Problem 1 Solution (cont.) Using the financial calculator: N = 40, I/Y = 6.15/2, PMT = 25, FV = 1,000, CPT - PV Bond Sample Problem 2 A firm issues a bond with a face amount of $1,000, a coupon rate of 6% with annual coupon payments, and a