Day: April 26, 2018

1. Why is it necessary to know about time value of money concepts? Why can’t you just make judgments about future cash flows based purely on the size of the cash flows?

2. Define Future Value.

3. Define Present Value.

4. What are annuities?

5. (calculating future value) You buy an 8 year, 7% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

6. (calculating present value) What’s the present value of $10,000 to be received in 6 years? (Your required rate of return is 10% a year.)

7. (calculating the rate of return) A friend promises to pay you $500 three years from now if you loan him $400 today. What interest rate is your friend offering you?

8. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 6% annual interest, how much will you have at the end of the 20th year?

9. (calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $700 a year at the end of the next 5 years? (Your required rate of return is 6% a year.)

10. (Rate of return of an annuity) You would like to have $1,000,000 40 years from now, but the most you can afford to invest each year is $1,000. What annual rate of return will you have to earn to reach your goal?

11. (Monthly compounding) If you bought a $1,000 face value CD that matured in six months, and which was advertised as paying 6% annual interest, compounded monthly, how much would you receive when you cashed in your CD at maturity?

12. (Annualizing a monthly rate) Your credit card statement says that you will be charged 1.03% interest a month on unpaid balances. What is the Effective Annual Rate (EAR) being charged?
13. (Monthly loan payment) Best Buy has a flat-screen HDTV on sale for $1,799. If you could borrow that amount from Carl’s Credit Union at 6% for 1 year, what would be your monthly loan payments?

14. (PV of a perpetuity) If your required rate of return was 6% a year, how much would you pay today for $100 a month forever? (that is, the stream of $100 monthly payments goes on forever, continuing to be paid to your heirs after your death)

15. (PV of an uneven cash flow stream) what is the PV of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

16. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

17. Define the Capital Asset Pricing Model (CAPM).

18. Define “beta” as it applies to common stocks.

19. You have two stocks in your portfolio. $20,000 is invested in a stock with a beta of 0.6 and $40,000 is invested in a stock with a beta of 1.4. What is the beta of your portfolio?

20. If the risk-free rate is 2% and the expected rate of return on the stock market is 7%, what is the required rate of return on a stock with a beta of 1.4 according to the CAPM?

Q7. The zero coupon bonds of Markus Inc. have a market price of RM394.47, a face value of RM1,000, and a yield to maturity of 6.87%. When will this bond mature? (Answer in number of years.)
Q8. Windmill Corp has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at RM894.60 and has a par value of RM1,000. Interest is paid semiannually. What is the yield to maturity?
Q9. Creative Inc. has a current beta of 1.6. The market risk premium is 7 percent and the risk-free rate of return is 3 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.9?
Q10. The Bystanders Company has 100,000 bonds outstanding that are selling at par value (RM1,000). Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million preferred stocks and 5 million shares of common stock outstanding. The preferred stock has par value of RM100 and fixed dividend of 10.5 percent and is selling at RM56 per share. The common stock has a beta of 1.2 and sells for RM38 a share. The Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Bystander’s weighted average cost of capital?

I’m having a hard time setting up an Excel solver model for the problem below:
Owens-Wheat uses two production lines to produce three types of fiberglass mats. The demand requirements for each type of mat (in tons) for the next four months are as follows:

Month Mat Type
1 2 3
1 200 300 400
2 300 100 300
3 200 400 200
4 300 200 100

If it were dedicated to simply producing a mat of a single type, a single line 1 machine could produce either 20 tons of a type 1 mat or 30 tons of a type 2 mat. Similarly, a single line 2 machine could produce either 25 tons of type 2 mat or 28 tons of type 3 mat. Note that mat type 1 cannot be produced on line2, while mat type 3 cannot be produced on line 1. If costs $ 5,000 per month to operate a single machine on line 1, and $ 5,500 to operate a single machine on line 2. A cost of $ 2,000 is incurred each time a new machine is purchased for either line, while a cost of $ 1,000 is incurred when a machine is retired from service. At the end of each month, Owens would like a minimum inventory of 50 tons of each mat type and the cost of holding one ton on inventory for a month of any mat type is $ 5. At the beginning of month 1, the company has 5 line 1 machines, and 8 line 2 machines. Determine a minimum cost production schedule for each mat type of each production line.

Q1
Camel Industries is expected to pay an annual dividend of RM1.30 a share next month.
The market price of the stock is RM24.80 and the growth rate is 3 percent. What is the
firm’s cost of equity?
Q2
An investment promises the following cash flow stream: RM1,000 at Time 0; RM2,000 at the
end of Year 1 (or at T=1); RM3,000 at the end of Year 2; and RM5,000 at the end of Year 3.
At a discount rate of 5%, what is the present value of the cash flow stream?
Q3
Recently you invested in a 20-year asset that pays you RM100 at t = 1, RM500 at t = 2,
RM750 at t = 3, and some fixed cash flow, X, at the end of each of the remaining 17
years. You purchased the asset for RM5,544.87. Alternative investments of equal risk
have a required return of 9%. What is the annual cash flow received at the end of each
of the final 17 years, that is, what is X?
Q4
You deposit RM1,000 in a bank account that pays 6% nominal annual interest, compounded
monthly. How much will you have in your account after 3 years?

Please work the following problem on an EXCEL spreadsheet. An elegant solution is not required, Just provide all the steps so I will understand the concept and be able to replicate it for similar problems. Also, provide a written description leading me through the solution.

PROBLEM:

A Company must make decisions on weekly production. The Company makes two products; Patio bars and barstools. Each bar contributes $20 and each barstool contributes $8 toward profit. The Company can sell all the products it makes but market demand requires that they must make at least two barstools for each bar that they produce.

There are constraints on production. The Company will have available only 24,000 units of raw materials, 12,000 labor hours, and $20,000 for supplies. Each bar requires 6 units of raw materials, 2 hours of labor, and $3 in supplies. Each barstool requires 3 units of raw material, 4 hours of labor, $3 in supplies. According to the union contract, the Company must produce 4,000 items each week.

The Company plans to maximize profit contribution for the weekly production. How many bars and how many barstools should the Company produce each week?

All answers should be in a single Excel file.
Show the step by step calculations how it was done and explained thoroughly by using excel:

1 If you deposit $15,000 today and earn 8% annual interest, how much will you have in 9 years?
Answer: $29,985.07

2 Tiffany will receive a graduation gift of $10,000 from her parents in 3 years. If the discount rate
is 7%, what is this gift worth today?
Answer: $8,162.98

3 What is the present value of a 20-year ordinary annuity of $30,000 using a 6% discount rate?
Answer: $344,097.64

4 You deposit $5,000 in an account that pays 8% interest per annum. How long will it take to double your money?
Answer: 9 years

5 The Johnsons have $60,000 to use as a down-payment on a house, and they want to borrow $240,000
from the bank. The current mortgage interest rate is 5%. If they make equal monthly payments for 30 years,
how much will the monthly payment be?
Answer: $1,288.37

6 Tim paid $250 per month into his 401K retirement plan. After 30 years, he had accumulated $500,000. What
average annual rate of interest had he earned over the 30 years?
Answer: 9.42%

7 Charlotte’s firm had sales of $525,000 in the year 2001. By 2012, sales had increased to $1,200,000. What was
the average annual rate of increase?
Answer: 7.80%

Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan – a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan’s onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of the Corcoran Group.

Located on Ox Pasture Road in Southampton, the shingle-style home was built around 1900 and is known as “Gardenside” or “Cara-Mia”. Ms. Balsan, the great-granddaughter of railroad magnate Cornelius Vanderbilt, owned the house until her death in 1964.

According to public records, the estate is owned by Robert G. Goldstein, executive vice president and president of global gaming operations at Las Vegas Sands Corp, and his wife Sheryl, who purchased the house in 2007 for $17.4 million.” (The Wall Street Journal, August 1, 2014, M2)

1. Calculate the annual compound growth rate of the house price during the period when the house was owned by Robert G. Goldstein (since 2007). (Round the number of years to the whole number).
2. Assume that the growth rate you calculated in question #1 remains the same for the next 20 years. Calculate the price of the house in 20 years.
3. Assume the growth rate that you calculated in #1 prevailed since 1900. Calculate the price of the house in 1900.
4. Assume the growth rate that you calculated in #1 prevailed since 1900. Which price was paid for the house in 1964?
5. You were using the time value of money concept to answer the question #3. What is the time point 0 is this problem?

Q7. The zero coupon bonds of Markus Inc. have a market price of RM394.47, a face value of RM1,000, and a yield to maturity of 6.87%. When will this bond mature? (Answer in number of years.)
Q8. Windmill Corp has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at RM894.60 and has a par value of RM1,000. Interest is paid semiannually. What is the yield to maturity?
Q9. Creative Inc. has a current beta of 1.6. The market risk premium is 7 percent and the risk-free rate of return is 3 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.9?
Q10. The Bystanders Company has 100,000 bonds outstanding that are selling at par value (RM1,000). Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million preferred stocks and 5 million shares of common stock outstanding. The preferred stock has par value of RM100 and fixed dividend of 10.5 percent and is selling at RM56 per share. The common stock has a beta of 1.2 and sells for RM38 a share. The Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Bystander’s weighted average cost of capital?

Scenario: Dan Ludwig is the manufacturing production supervisor for Atlantic Lighting Systems. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife “This is the dumbest place I have ever worked. Last year the company set up this budget assuming it would sell 150,000 units. Well, it only sold 140,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 160,000. The company’s making all kinds of money. You’d think I’d get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I’d stayed within budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I ever worked.” (View attachment for data)

Questions:
a) Did Atlantic Lighting Systems increase unit sales by cutting prices or by using some other strategy?
b) Is Mr. Ludwig correct in his conclusion that something is wrong with the company’s performance evaluation process? If so, what do you suggest be done to improve the system?
c) Prepare a flexible budget and recompute the budget variances.
d) Explain what might have caused the fixed costs to be different from the amount budgeted.
e) Assume that the company’s material price variance was favorable and its material usage variance was unfavorable. Explain why Mr. Ludwig may not be responsible for these variances. Now, explain why he may have been responsible for the material usage variance.
f) Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable?
g) Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produced.

Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan – a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan’s onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of the Corcoran Group.

Located on Ox Pasture Road in Southampton, the shingle-style home was built around 1900 and is known as “Gardenside” or “Cara-Mia”. Ms. Balsan, the great-granddaughter of railroad magnate Cornelius Vanderbilt, owned the house until her death in 1964.

According to public records, the estate is owned by Robert G. Goldstein, executive vice president and president of global gaming operations at Las Vegas Sands Corp, and his wife Sheryl, who purchased the house in 2007 for $17.4 million.” (The Wall Street Journal, August 1, 2014, M2)

1. Calculate the annual compound growth rate of the house price during the period when the house was owned by Robert G. Goldstein (since 2007). (Round the number of years to the whole number).
2. Assume that the growth rate you calculated in question #1 remains the same for the next 20 years. Calculate the price of the house in 20 years.
3. Assume the growth rate that you calculated in #1 prevailed since 1900. Calculate the price of the house in 1900.
4. Assume the growth rate that you calculated in #1 prevailed since 1900. Which price was paid for the house in 1964?
5. You were using the time value of money concept to answer the question #3. What is the time point 0 is this problem?