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Fin 517- Midterm Take-home Spring 2012 You need to show your work to get full credit for

each question. Problem 1- Answer the following questions based on Galaxy financial statements Galaxy Interiors 2009 Income Statement Net Sales Cost of goods sold Depreciation EBIT Interest Paid EBT Taxes Net income $21,41 5 $16,40 8 $1,611 $3,396 $1,282 $2,114 $740 $1,374

Galaxy Interiors Cash Accounts receivable Inventory Current assets

Balance sheet as of Dec. 31, 2008 and 2009 2008 2009 2008 668 297 Accounts payable 1694 1611 1527 Notes payable 2500 3848 2947 Current liabilities 4194 6127

a. b. c. d.

e. f.

4771 Long-term debt 9800 Common Stock 7500 1748 1710 Net fixed assets 9 7 Retained Earnings 2122 2696 2361 2187 2361 2187 Total assets 6 8 Total liab. & equity 6 8 What is the change in the net working capital from 2008 to 2009? Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306 What is the amount of the noncash expenses for 2009? The noncash expense is the depreciation in the amount of $1,611. What is the amount of the net capital spending for 2009? Net capital spending = $17,107 - $17,489 + $1,611 = $1,229 What is the operating cash flow for 2009? What is the cash flow from assets for 2009? What is the amount of net new borrowing for 2009? What is the cash flow to creditors for 2009? What is the amount of dividends paid in 2009? What is the cash flow to stockholders for 2009?

2009 1532 0 1532 1065 0 7000

2. It is now January 1, 2006, and you are considering the purchase of an outstanding bond

a. b. c.
d.

e.

f.
g.

that was issued on January 1, 2004. It has a 10.5 percent annual coupon and a 30-year original maturity (the bond matures in 2034). There is a 5-year call protection (until December 31, 2009), after which time the bond is callable at 110 (that is, at 110 percent of par). Interest rates have declined since the bond was issued, and the bond is now selling at 115.40 percent. You want to determine both the yield to maturity and the yield to call for this bond. (Note: The yield to call considers the impact of a call provision on the actual bond yield. In the calculation, we assume that the bond will be outstanding until the call date, at which time it will be called. Thus, the investor will have received interest payments for the call-protected period and then will receive the call price, in this case, $1,100.) What is the yield to maturity for this bond? What is its yield to call? Which return do you think investors would actually expect? Explain your reasoning. Suppose that the bond had sold at a discount. Would the yield to maturity or the yield to call have been more relevant? What would be the value of the bond described in part (a) if, just after it had been issued, the expected inflation rate rose by 4 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond? What would happen to the bonds' value if inflation fell, and required return declined to 7 percent? Would we now have a premium or a discount bond? What would happen to the value of the bond over time if the required rate of return remained at 13 percent, or if it remained at 7 percent? Given the information in part (f), what are the total return, the current yield, and the capital gains yield? (Assume the bond is held to maturity and the company does not default on the bond.)
3. Your sister turned 35 today, and she is planning to save $5,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 8% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the end of her first retirement year. 4. Today is your birthday and you decide to start saving for your college education. You

will begin college on your 18th birthday and will need $4,000 per year at the end of each of the following 4 years. You will make a deposit 1 year from today in an account paying 12 percent annually and continue to make an identical deposit each year up to and including the year you begin college. If a deposit amount of $2,542.05 will allow you to reach your goal, what birthday are you celebrating today?

5. ABC Corporation paid $3 per share dividend last year. The company is a supernormal

growth and its earnings are expected to grow at a 20 percent rate for next three years and 5 percent thereafter. Its required rate of return on equity is 12%.

a.

b. c.
d.

What is P0? What are prices for period 2 and 3? What are the dividend yields for period 1, 2 and 3? Show that the dividend yield and capital gain yield are equal to required return and are independent for each periods.