DOC PREVIEW
UCD ECN 134 - mid1s-practice-S10

This preview shows page 1-2 out of 5 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 5 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 5 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 5 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

[18 pts] 1- Some Financial Terms and Ideas(a) What is securitization?(b) What is financial engineering?(c) What are financial derivatives?(d) What are futures?(e) What is Credit Default Swap (CDS)?(f) How might CDS have contributed to the current financial crisis?[11 pts] 2-Derivation of the formula for Growing Annuity[8 pts] 5- Effective versus Stated Annual RatesFinanciad Economics ECN134Midterm 1Practice test Prof. Farshid Mojaver************************************************************************[18 pts] 1- Some Financial Terms and Ideas (a) What is securitization?(b) What is financial engineering?(c) What are financial derivatives?(d) What are futures?(e) What is Credit Default Swap (CDS)?(f) How might CDS have contributed to the current financial crisis?[15 pts] 2. Calculating Total Cash Flows Schwert Corp. shows the following information on its2010 income statement: sales = $167,000; costs = $91,000; other expenses =$5,400; depreciation expense = $8,000; interest expense =$11,000; taxes = $18,060; dividends = $9,500. In addition, you’re told that the firm issued $7,250 in new equity during 2010 andredeemed $7,100 in outstanding long term debt.a. What is the 2010 operating cash flow?b. What is the 2010 cash flow to creditors?c. What is the 2010 cash flow to stockholders?d. If net fixed assets increased by $22,400 during the year, what was addition to net working capital (NWC)?Answer To find the OCF, we first calculate net income.Income StatementSales $167,000 Costs 91,000 Depreciation 8,000Other expenses 5,400 EBIT $62,600Interest 11,000 Taxable income $51,600 Taxes 18,060Net income $33,540 Dividends $9,500 Additions to RE $24,040a. OCF = EBIT + Depreciation – Taxes = $62,600 + 8,000 – 18,060 = $52,540b. CFC = Interest – Net new LTD = $11,000 – (–$7,100) = $18,100 Note that the net new long-term debt is negative because the company repaid part of its long-term debt.c. CFS = Dividends – Net new equity = $9,500 – 7,250 = $2,250e. Must solve for Change in NWC from CFA = OCF – Net capital spending – Change in NWC But first need to solve for CFA and Change in NWC CFA = CFC + CFS = $18,100 + 2,250 = $20,350 Net capital spending = Increase in NFA + Dep’n = $22,400 + 8,000 = $30,400 CFA = OCF – Net capital spending – Change in NWC $20,350 = $52,540 – 30,400 – Change in NWC => Change in NWC = $1,790. [15 pts] 3. Using Du Pont Identity Y3K, Inc., has sales of $3,100, total assets of $1,580, and a debt-equity ratio of 1.20. If its return on equity is 16 percent, what is its net income?Answer) This is a multi-step problem involving several ratios. The ratios given are all part of theDu Pont Identity. The only Du Pont Identity ratio not given is the profit margin. If weknow the profit margin, we can find the net income since sales are given. So, we beginwith the Du Pont Identity: ROE = 0.16 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E)Solving the Du Pont Identity for profit margin, we get:PM = [(ROE)(TA)] / [(1 + D/E)(S)] PM = [(0.16)($1,1580)] / [(1 + 1.20)( $3,100)] = .0371Now that we have the profit margin, we can use this number and the given sales figure tosolve for net income:PM = .0371 = NI / SNI = .0371($3,100) = $114.91 [15 pts] 4. EFN The most recent financial statement for Martin, Inc., are shown here:Income Statement Balance SheetSales 25,800 Assets 113,000 Debt 20,500Costs 16,500 Equity 92,500Taxable income 9,300 Total 113,000 Total 113,000Taxes (34%) 3,162Net income 6,138Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,841 was paid, and Martin wishes to maintain a constant payout ratio. Next year’s sales are projected to be $30,960. What external financing is needed? Answer) An increase of sales to $30,960 is an increase of: ($30,960 – 25,800) / $25,800 = .20 or 20%Assuming costs and assets increase proportionally, the pro forma financial statements willlook like this:Pro forma income statement Pro forma balance sheetSales $30,960.00 Assets $ 135,600 Debt $ 20,500.00Costs 19,800.00 Equity 97,655.92EBIT 11,160.00 Total $ 135,600 Total $118,155.92Taxes (34%) 3,794.40Net income $ 7,365.60The payout ratio is constant, so the dividends paid this year is the payout ratio fromlast year times net income, or: Dividends = ($1,841.40 / $6,138)($7,365.60) = $2,209.68The addition to retained earnings is:Addition to retained earnings = $7,365 – 2,209.68 = $5,155.92And the new equity balance is: Equity = $92,500 + 5,155.92 = $97,655.92So the EFN is:EFN = Total assets – Total liabilities and equity = $135,600 – 118,155.92 =$17,444.08[11 pts] 2-Derivation of the formula for Growing AnnuityShow that the present value of a growing annuity that pays a stream of cash flows C and grows at a constant rate g for a fixed number of periods T can be simplified to :[12 pts] 3- AnnuityWeak consumer spending has led automobile manufacturers to offer zero interest financing or cash back options to stimulate sales. Suppose you can buy the car of your choice for its negotiated price of $16,200 less $500 cash back, or you can finance the entire $16,200 car cost for 36 months at zero interest. You have the cash necessary to pay for the car in an account that earns a stated annual interest rate of 4%, compounded monthly. You will either finance it or pay cash depending on which is the best deal.a. What is the cost of the financed car to you right now?b. Should you pay cash, or finance the car, and why?c. Now suppose the manufacturers offer 2% rather than zero percent financing. Should you pay cash now or finance the car, and why?Answera. The monthly financed car payment with no interest is: $16,200/36=$450PV= 361204.01111204.0450111TrrC  PV=$15,241.84b. Finance it. By financing, we will actually make profit of $458.16=$15,700-$15,241.84c. First we need to find monthly payment when price is $16,200 ND financing is 2%.mTrACPV .. , PV =$16,200,  mTmTrmrmrA/111/1 A= 9.3412/02.11112/02.0136, C=$16,200/34.913=$464.01Now we need to calculate the PV of a constant stream of income using SAIR of 4%. This is the true value of the financing offer to us. 361204.1111204.0464PV=$15,716.34This is $16 only


View Full Document

UCD ECN 134 - mid1s-practice-S10

Download mid1s-practice-S10
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view mid1s-practice-S10 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view mid1s-practice-S10 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?