FIN 534 Homework set # 3
Use the following information for questions 1 through 8:
The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market
Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect
those paid during the year. The market data are adjusted to include dividends.
Goodman Industries Landry Incorporated Market Index
Year Stock Price Dividend Stock Price Dividend Includes Dividends
2013 $25.88 $1.73 $73.13 $4.50 17.49 5.97
2012 22.13 1.59 78.45 4.35 13.17 8.55
2011 24.75 1.50 73.13 4.13 13.01 9.97
2010 16.13 1.43 85.88 3.75 9.65 1.05
2009 17.06 1.35 90.00 3.38 8.40 3.42
2008 11.44 1.28 83.63 3.00 7.05 8.96
1. Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and
then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns
are calculated by subtracting the beginning price from the ending price to get the capital gain or
loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning
price. Assume that dividends are already included in the index. Also, you cannot calculate the
rate of return for 2008 because you do not have 2007 data.)
2. Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index.
(Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the
STDEV function in Excel.)
3. Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the
vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE
function.) Are these betas consistent with your graph?
4. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is
5%. What is the required return on the market using the SML equation?
5. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what
would be its beta and its required return?
6. What dividends do you expect for Goodman Industries stock over the next 3 years if you expect
you expect the dividend to grow at the rate of 5% per year for the next 3 years? In other words,
calculate D1, D2, and D3. Note that D0 = $1.50.
7. Assume that Goodman Industries’ stock, currently trading at $27.05, has a required return of
13%. You will use this required return rate to discount dividends. Find the present value of the
dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs.
8. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you
should pay for it?
Use the following information for Question 9:
Suppose now that the Goodman Industries (1) trades at a current stock price of $30 with a (2) strike price of $35. Given the following additional information: (3) time to expiration is 4 months (4) annularized risk
free rate is 5%, and (5) variance of stock return is 0.25.
9. What is the price for a call option using the Black-Scholes Model?
FIN 534 Homework set # 4
Directions: Answer the following questions on a separate document. Explain how you reached the answer
or show your work if a mathematical calculation is needed, or both. Submit your assignment using the
assignment link in the course shell. This homework assignment is worth 100 points.
Use the following information for Questions 1 through 5:
Assume you are presented with the following mutually exclusive investments whose expected net cash
flows are as follows:
EXPECTED NET CASH FLOWS:
Year Project A Project B
0 ?$400 ?$650
1 ?528 210
2 ?219 210
3 ?150 210
4 1,100 210
5 820 210
6 990 210
7 ?325 210
1. Construct NPV profiles for Projects A and B.
2. What is each project’s IRR?
3. If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost
of capital were 17%, what would be the proper choice?
4. What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as
the end of Project B’s life.)
5. What is the crossover rate, and what is its significance?FIN 534 – Homework Set #4
Use the following information for Questions 6 through 8:
The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for
a new manufacturing process:
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the
estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.
Net After-Tax Cash Flows
Year P = 0.2 P = 0.6 P = 0.2
0 ?$100,000 ?$100,000 ?$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
6. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected
values for the net cash flow in each year.)
7. Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case
if the cash flows are perfectly dependent (perfectly positively correlated) over time?
8. Assume that all the cash flows are perfectly positively correlated. That is, assume there are only
three possible cash flow streams over time—the worst case, the most likely (or base) case, and
the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by
each of the columns in the table. Find the expected NPV, its standard deviation, and its
coefficient of variation for each probability.
Use the following information for Question 9:
At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were
$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets
and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically
uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013,
and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in
2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing
new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no
additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of
earnings will be paid out as dividends.
9. What were Wallace’s total long-term debt and total liabilities in 2013?
FIN 534 Homework set # 5
Use the following information for Questions 1 through 3:
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013
Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are
expected to jump
Calculate Boehm’s total dividends for 2014 under each of the following policies:
1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in
2. It continues the 2013 dividend payout ratio.
3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million
investment is financed with debt).
4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the
long-run growth rate and the extra dividend being set according to the residual policy.
Use the following information for Questions 5 and 6:
Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed
costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the
firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production
process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1)
reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on
all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss
carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.
5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the
project’s expected rate of return for the next year (defined as the incremental profit divided by the
investment)? Should the firm make the investment? Why or why not?
6. Would the firm’s break-even point increase or decrease if it made the change?
Use the following information for Questions 7 and 8:
Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in
thousands of dollars).
Firm A Firm B
Current assets $150,000 $120,000
Fixed assets (net) 150,000 180,000
Total assets $300,000 $300,000
Current liabilities $20,000 $80,000
Long-term debt 80,000 20,000
Common stock 100,000 100,000
Retained earnings 100,000 100,000
Total liabilities and equity $300,000 $300,000
Earnings before interest and taxes for both firms are $30 million, and the effective federal
plus-state tax rate is 35%.
7. What is the return on equity for each firm if the interest rate on current liabilities is12% and the
rate on long-term debt is 15%?
8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%,
and that the rate on existing long-term debt remains unchanged. What would be the return on
equity for Firm A and Firm B under these conditions?
9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollar cost
of a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rate is
120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all
price changes are due to exchange rate changes. What would the dollar price of the car be now,
assuming the car’s price changes only with exchange rates?