Tugas Financial Management

TUGAS FINANCIAL MANAGEMENT

Fery Purwa Ginanjar

Eksekutif B 26 B

1. Problem 3-5 ; Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50 million. What is its ROE? Answer : ROE = (Profit margin)(Total assets turnover)(Equity multiplier) = (3%)(100/50)(2) ROE = 12,0%

2. Problem 3-6 ; Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier? Answer : ROE = ROA x Equity multiplier Equity multiplier = ROE / ROA = 15% / 10% Equity multiplier = 1,5

ROE = (Profit margin)(Total assets turnover)(Equity multiplier) Total assets turnover = ROE / (Profit margin)(Equity multiplier) = 15% / (2%)(1,5) Total assets turnover = 5

3. Problem 4-6 ; What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be? Answer : N-1 N-2 N-3 N-4 N-5 FVA5 = PMT(1+i) + PMT(1+i) + PMT(1+i) + PMT(1+i) + PMT(1+i) = 300(1+0,07)5-1+300(1+0,07)5-2+300(1+0,07)5-3+300(1+0,07)5-4+300(1+0,07)5-5 FVA5 = $1.725,22 (by excel =FV(0.07,5,-300,0,0))

n FVA5 Due = PMT [((1+i) / i) – 1/i] = 300[((1+0,07)5 / 0,07) – 1/0,07] FVA5 Due = $1.845,99 (by excel =FV(0.07,5,-300,0,1))

4. Problem 4-11 ; To the closest year, how long will it take $200 to double if it is deposited and earns the following rates? [Notes: (1) See the Hint for Problem 4-9. (2) This problem cannot be solved exactly with some financial calculators. For example, if you enter PV = –200, PMT = 0, FV = 400, and I = 7 in an HP-12C and then press the N key, you will get 11 years for part a. The correct answer is 10.2448 years, which rounds to 10, but the calculator rounds up. However, the HP-10B gives the exact answer.] a. 7% b. 10% c. 18% d. 100% Answer : a. 7% 400 = 200(1+0,07)N 2 = (1+0,07)N ln(2) = N[(ln(1,07)] N = 0,693147 / 0,067659 = 10,24477 years b. 10% 400 = 200(1+0,10)N 2 = (1+0,10)N ln(2) = N[(ln(1,10)] N = 0,693147 / 0,09531 = 7,272541 years c. 18% 400 = 200(1+0,18)N 2 = (1+0,18)N ln(2) = N[(ln(1,18)] N = 0,693147 / 0,165514 = 4,187835 years d. 100% 400 = 200(1+1,00)N 2 = (1+1,00)N ln(2) = N[(ln(2,00)] N = 0,693147 / 0,693147 = 1 year.

5. Problem 5-2 ; Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? Answer : 850 = 100 / (1+y)1+100 / (1+y)2+...+1.100 / (1+y)12 YTM = 12,48%

6. Probelm 5.5 ; A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond? Answer :

rd = r+ LP + DRP + MRP 9,00 = 6,00 + 0,50 + DRP + 0 DRP = 9,00 – 6,00 – 0,50 DRP = 2,50%

7. Problem 6.4 ;

Answer : 8. Problem 6.8 ; Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio’s beta is 1.12. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 1.75. Calculate your portfolio’s new beta. Answer : w = 100%/20 = 5%

Beta Portofolio (bp) = 1,12

Beta Portofolio (bpn) = w1b1 + w2b2 + ... + w19b19 + w20b20 = 5%(1,12) + 5%(1,12) + ... + 5%(1,12) + 5%(1,75) Beta Portofolio (bpn) = 1,15

9. Problem 7.2 ; Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the value per share of Boehm’s stock? Answer : ^ P 0 = D1 / rs – g = $1,50 / 15% - 7% ^ P 0 = $ 18,75

10. Problem 7.5 ; A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the riskfree rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price? Answer : rRF = 7,5% bi = 1,2 RPM = 4,0%

rs = rRF + (RPM)bi = 7,5% + (4,0%)1,2 rs = 12,30%

11. Problem 8.4 ; The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Answer : Put option = VC – P + Xe -rRFt Put option = $6,56 - $33 + $32-0.06x1 Put option = $3,74

12. Problem 8.7 ; The current price of a stock is $15. In 6 months, the price will be either $18 or $13. The annual risk-free rate is 6%. Find the price of a call option on the stock that has a strike price of $14 and that expires in 6 months. (Hint: Use daily compounding.) Answer : P = $15 P(u) = $18 P(d) = $13

rRF = 6% X = $14

Cu ending up option payoff = Max(18-14) = $4 Cd ending down option payoff = Max(13-14) = $0 Share of stock (Ns) = Cu – Cd / P(u) – P(d) = $4 - $0 / $18 - $13 Share of stock = 0,8

Hedge portofolio’s payoff if stock is up = NsP(u) - Cu = 0,8($18) - $3 = $10,4

Hedge portofolio’s payoff if stock is down = NsP(d) – Cd = 0,8($13) - $0 = $10,4 365(t/n) PV of riskless payoff = $10,4 / (1+rRF/365) = $7,8 / (1+0,06/365)365(0.5/1) = $10,09

Option’s Value (VC) = NsP - Present value of riskless payoff = 0.8 x $15 - $10,09 = $1,91

13. Problem 9.7 ; Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Answer :

WACC = wdrd(1-T) + wpsrps + wsrs = 0,3(6,0%)(1-0,4) + 0,05(5,8%) + 0,65(12%) WACC = 9,17%

14. Problem 9.11 ; Radon Homes’ current EPS is $6.50. It was $4.42 five years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36. a. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) b. Calculate the next expected dividend per share, D1. (Hint: D0 = 0.4($6.50) = $2.60.) Assume that the past growth rate will continue. c. What is Radon Homes’ cost of equity, rs? Answer : a. Growth rate in earnings

b. Expected dividend per share 1 D1 = D0(1+g) = $2,6 (1+0,08)1 D1 = $2,81

c. rs = (D1 / P0) + Expected g = ($2,81 / $36) + 8% = 15,81%

15. Problem 10.7 ;

Answer : 16. Problem 10.12 ; After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year for the 5-year life of the vein. CTC’s cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the project’s NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this, or any other, project? How might these concepts affect the decision in part b?

Answer : a.

b. Yes, in quantitative methods this project is profitable because NPV positif and IRR higher than cost of capital

c. Because, government rules and regulations constrain what companies can do with environmental. For example, suppose a manufacturer is studying a proposed new plant. The company could meet current environmental regulations at a cost of $1 million, but the plant would still emit fumes that would cause some bad will in its neighborhood. Those ill feelings would not show up in the cash flow analysis, but they should still be considered. Perhaps a relatively small additional expenditure would reduce the emissions substantially, make the plant look good relative to other plants in the area, and provide goodwill that in the future would help the firm’s sales and its negotiations with governmental agencies.

17. Problem 11.5 ; Wendy is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 11A. The company’s WACC is 10%, and its tax rate is 40%. a. What would the depreciation expense be each year under each method? b. Which depreciation method would produce the higher NPV, and how much higher would it be? Answer : a. Depreciation expense

Under stright-line depreciation expense :

Depreciation straight-line is $200.000,- peryear

Modified Accelerated Cost Recovery System (MACRS) depreciation expense :

Depreciation MACRS is ; $264.000,- ; $360.000,- ; $120.000,- and $56.000,-

b. NPV

NPV MACRS higher than USL $12.781,64

18. Problem 11.6 ; The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%. a. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year-0 net cash flow?) b. What are the net operating cash flows in Years 1, 2, and 3? c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? d. If the project’s cost of capital is 12%, should the machine be purchased?

Answer : a. Estimated Investment Requirements :

Pice equipment -$ 108.000,- Modification -$ 12.500,- Change in net working capital -$ 5.500,- Total investment -$ 126.000,-

Net cash flow year 0 is $ 126.000,-

b. Operating Cash Flows :

Net operating cash flows year 1 $42.517,75 ; year 2 $47.578,75 and year 3 $34.926,25

c. Termination Cash Flows :

Termination cash flows in year 3 is $50.702,25

d. Project NPV with cost of capital 12%

NPV is $10.840,44 = PURCHASED

19. Problem 12.3 ; Refer to Problem 12-1. Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 12-1?

( Problem 12.1 Baxter Video Products’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The aftertax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year ).

Answer : S0 = $ 5 million g = 20%

S1 = S0 x (1 + g) = $ 5 million x (1 + 20%) =$ 6 million

gS0 = S1 - S2=S = $ 6 million - $ 5 million = $1milion

A0 = $ 3 million A0 / S0 = $ 3 million / $ 5 million = 60,00% L0 = Accrual + Accounts payable = $ 250.000 + $ 250.000 = $ 500.000,-

L0/S0 = $ 500.000 / $ 5.000.000 =10,00% M = 5% POR = 70%

AFN = Required Increase in Assets – Spontaneous Increase – Addition to Retained

= (A0 / S0)S – (L0 / S0)S – S1 x M x (1 – POR) = (A0 / S0)(gS0) – (L0 / S0)(gS0) – (1 + g)S0 x M x (1 – POR) = (0,60) x $ 1 million – (0,10) x $ 1 million – $ 6 million x 0,05 x (1 – 0) = $ 600.000 – $ 100.000,- – $ 200.000,- = $ 200.000,-

AFN = $ 200.000,-

20. Problem 12.5 ; At year-end 2010, Bertin Inc.’s total assets were $1.2 million and its accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2010, and retained earnings were $295,000. Bertin has arranged to sell $75,000 of new common stock in 2011 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 2011. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 6%, and 40% of earnings will be paid out as dividends. a. What were Bertin’s total long-term debt and total liabilities in 2010? b. How much new long-term debt financing will be needed in 2011? (Hint: AFN − New stock = New long-term debt.)

Answer :

A0 = $ 1.2 million Account payable = L0 = $ 375.000,- “Bertin typically uses no current liabilities other than accounts payable” Sales 2010 (S0) = $ 2,5 million g = 25% Sales 2011 (S1) = S0 x (1 + g) = $ 2,5 million x (1 + 25%) = $ 3,125 million

gS0 = S1 - S2 = S = $ 3,125 million - $ 2,5 million = $ 625.000,- A0 / S0 = $ 1,2 million / $ 2,5 million = 48% L0 / S0 = $ 375.000,- / $ 2,5 million = 15% Common stock = $ 425.000,- Retained earnings= $ 295.000,- Stock sell 2011 = $ 75.000,- M = 6% POR = 40% “Total assets & Account payable are proportional to Sales”

a. Total long term debt and Total liablities 2010 : Total assets 2010 = Total liabilities 2010 + Total common equity 2010 $ 1,2 miliion = (Total current liab + Total longterm debt) + $ 720.000,- $ 1,2 miliion = ( $ 375.000,- + Total longterm debt) + $ 720.000,- Total long term debt = $ 105.000,-

Total liabilities = (Total current liab + Total longterm debt) = ( $ 375.000,- + $ 105.000,-) Total liabilities = $ 480.000,-

b. Long term debt 2011 (Hint: AFN − New stock = New long-term debt.)

AFN = Required Increase in Assets – Spontaneous Increase – Addition to Retained

= (A0 / S0)S – (L0 / S0)S – S1 x M x (1 – POR) = (A0 / S0)(gS0) – (L0 / S0)(gS0) – (1 + g)S0 x M x (1 – POR) = (0,48) x $ 625.000 – (0,15) x $ 625.000,- – $3,125million x0,06x(1-0,4) = $ 300.000 – $ 93.750,- – $ 112.500,- = $ 93.750,-

(Hint: AFN − New stock = New long-term debt.) New long term debt = AFN – New stock = $ 93.750,- – $ 75.000,- New long term debt = $ 18.750,-

21. Problem 13.3 ;

Answer : Growth (g) = ($ 707,55 – $ 667,50) / ($ 667,50) = ($ 40,05) / ($ 667,50) = 6,00% Vop(12) = $ 707,55 (1 + 6,00%) / 11,00% - 6,00%

Vop(12) = $ 750,003 / 5,00%

Vop(12) = $ 15.000,06

22. Problem 13.6 ; Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company’s weighted average cost of capital is 12%. a. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) b. Calculate the value of Brooks’s operations.

Answer : a. Terminal, horizon, value of operations (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) :

WACC = 12,00% g = 8,00%

Vop(2) = $ 100.000 x (1 + 8,00%) / 12,00% - 8,00%

Vop(2) = $ 108.000 / 4,00%

Vop(2) = $ 2.700.000,-

b. Value of Brook’s operations :