FIN 515 MART Teaching Effectively Fin515martdotcom

8/17/2019 FIN 515 MART Teaching Effectively Fin515martdotcom

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IN 515 MART Teaching Effecti

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IN 515 Entire Course

• This tutorial does not contain Final Eam !uide

• FIN 515 "ee# 1 $% 1 Accounting &ersus Finance

• FIN 515 "ee# 1 $% ' Financial Analysis

• FIN 515 "ee# 1 %ui(

• FIN 515 "ee# 1 %ui( )Ne*+ • FIN 515 "ee# 1 ,ro-lem .et

• FIN 515 "ee# ' $% 1 T&M ,assa,ro-lem

• FIN 515 "ee# ' $% ' Assum0tions of the T&M Model

• FIN 515 "ee# ' %ui(

• FIN 515 "ee# ' ,ro-lem .et

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FIN 515 Course ,roect 1 and '

• This Tutorial contains "ee# 2 Course ,roect )2 .ets+ "ee# 3 Cours e ,roect )' .ets+

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IN 515 inal Eam )all 2 .ets

+

• FIN 515 Final Eam .et 1 FIN 515 Final Eam .et ' FIN 515 Final E am .et 2

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5/36

IN 515 inal Eam .et 1

• 14 )TC A+ In the 6nited .tates7 *hich of the follo*ing ty0es of orga ni(ation has the greatest revenue in total8 ),oints 9 5+a4 .ole 0ro0ri etorshi0-4 C cor0orationc4 . cor0orationd4 :imited 0artnershi0 141+"hich of the follo*ing is not a ste0 in the "ACC valuation method8 A+ Com0ute the value of the investment7 including the ta -enefit o f leverage7 -y discounting the free cash flo* of the investment usin

g the "ACC4;+ Com0ute the *eighted average cost of ca0ital4C+ $et ermine the free cash flo* of the investment4$+ Adust the "ACC forthe firm+ ?ervos Inc4 had the f ollo*ing data for '@@ )in millions+4

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6/36

IN 515 inal Eam .et '

• %uestion 1414 )TC A+ $ou-le taation is a dra*-ac# for *hich of th e follo*ing ty0es of -usiness organi(ation ece0t8 %uestion '4'4 )T C A+ .ole 0ro0rietorshi0s have all of the follo*ing advantages ec e0t %uestion 2424 )TC ;+ "hich of the follo*ing *ould cause the 0 resent value of an annuity to decrease8 %uestion B4B4 )TC ;+ In a T &M calculation7 if incoming cash flo*s are 0ositive7 outgoing cash fl o*s must -e %uestion 5454 )TC !+ If net income7 total assets7 and-oo# value of e=uity stayed the same7 *hat *ould -e the effect onthe $u,ont Identity of an increase in sales8 %uestion 3434 )TC $+ Astoc# has ust 0aid a dividend and *ill 0ay a dividend of 24@@ in a

year4 The dividend *ill stay constant for the rest of time4 The retur n on e=uity for similar stoc#s is 1BD4 "hat is ,@8 %uestion 44



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IN 515 inal Eam .et 2

• 14 )TC A+ In the 6nited .tates7 *hich of the follo*ing ty0es of orga ni(ation has the greatest revenue in total8 ),oints 9 5+ .ole 0ro0riet orshi0 C cor0oration . cor0oration :imited 0artnershi0 %uestion ' 4'4 )TC A+ A sole 0ro0rietorshi0 is o*ned -y ),oints 9 5+ one 0erso n4 one or t*o 0eo0le7 -ut if there are t*o o*ners7 they must -e ma rried to each other4 u0 to 1@@ o*ners4 u0 to 3B o*ners4 %uestion 2 424 )TC ;+ "hich of the follo*ing *ould cause the 0resent value ofan annuity to decrease8 ),oints 9 5+ Reducing the num-er of 0ayme nts4 Increasing the num-er of 0ayments4 $ecreasing the interest ra te4 $ecreasing the li=uidity of the 0ayments4 %uestion B4B4



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IN 515 "ee# 1 $% 1 Accounting &ersus inan

ce

• Accounting &ersus Finance )graded+ Much of the analysis done -y f inancial managers is -ased on num-ers that are different from *h at *ould seem to the corres0onding num-ers 0resented in the fin ancial statements4 This difference is not due to any #ind of coo#ingthe -oo#s or other attem0ts to mislead anyone4 ne eam0le is th e use of mar#et value rather than historical cost in the valuation ofassets4 "hat are some other eam0les of the differences -et*eenfinancial management and financial accounting8

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IN 515 "ee# 1 $% ' inancia

l Analysis

• Financial Analysis )g raded+ In this discussion7 *e *ill -e *or#ing *i th the variety of financial analysis tools availa-le to us4 :et


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IN 515 "ee# 1 %ui()Ne*+

• %uestion 14 )TC !+ The lecture says that some ratios ty0ically are-etter *hen they are higher and some of the ratios are -etter *he n they are lo*er4 ,ic# a ratio for *hich a lo*er num-er ty0ically * ould -e 0referred and descri-e a situation7 in *hich a higher num- er for that ratio *ould -e 0referred7 R 0ic# a ratio for *hich a hig her num-er ty0ically *ould -e 0referred and descri-e a situation i n *hich a lo*er num-er for that ratio *ould -e 0referred4 %uestio n '4 )TC !+ As of $ecem-er 217 '@HH7 $avid Cor0


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IN 515 "ee# 1 %ui(

• %uestion 1 )TC !+ "hich do you thin# 0rovides a more valid meas ure of ho* a com0any is doing7 com0arison of current results *ithhistorical results or com0arison of current results *ith the currentresults of another com0any8 %uestion ' )TC !+ ;arnes Cor0s tota l assets at the end of last year *ere B157@@@7@@@ and its net incom e after taes *as 175@7@@@4 "hat *as its return on total assets8%uestion 2 )TC !+ ;et*een $ecem-er 217 '@13 and $ecem-er 217'@17 RE at ;o-cat Industries decreased even though sales increa sed4 6sing the $u,ont Identity7 e0lain *hat else could have ha00 ened to cause this4

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IN 515 "ee# 1 $%s

• FIN 515 "ee# 1 $% 1 Accounting &ersus Finance FIN 515 "ee# 1 $ % ' Financial Analysis FIN 515 "ee# ' $% 1 T&M ,assa,ro-lem FI N 515 "ee# ' $% ' Assum0tions of the T&M Model FIN 515 "ee# 2$% 1 Eam0les of Ca0ital E0enditure From our Industry FIN 515"ee# 2 $% ' Ca0ital ;udgeting Terms and Considerations FIN 515"ee# B $% 1 Mar#et &alue of a .toc# &ersus $$M &alue FIN 515 " ee# B $% ' $ifferences in TM of Real :ife ;onds FIN 515 "ee# 5 $ % 1 Calculating "ACC for a Real Firm FIN 515 "ee# 5 $% ' Finding.toc# &alues for Real .toc#s 6sing ;eta and the .M: FIN 515 "ee#3 $% 1 Eam0les of Real Agency ,ro-lems and >o* They Could >a

ve ;een ,revented FIN 515 "ee# 3 $% ' The Role of Financial Man agers in Ethical Cor0orate !overnance FIN 515 "ee# $% 1 Indust ry A00roaches to "or#ing Ca0ital Financing FIN 515 "ee# $% ' our ,reference for "or#ing Ca0ital Management ,olicy

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IN 515 "ee# ' $% 1 T&M ,assa,ro-lem

• T&M ,assa,ro-lem )graded+ J This *ee#7 the lecture 0rovided so me eam0les of T&M 0ro-lem scenarios4 For your first 0ost7 0rovid e a story 0ro-lem that can -e solved using one or more of the T&Mcalculations4 J our second 0ost can -e a descri0tion of ho* the 0r o-lem 0osed -y another student can -e solved4 our 0rofessor ma

y 0rovide an eam0le4

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15/36

IN 515 "ee# ' $% ' Assum0tions of the T&M

Model

• Assum0tions of the T&M Model )graded+ "hat are some of the ass um0tions -ehind the T&M calculations8 >o* do these assum0tionslimit our a00lication of these calculations8

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IN 515 "ee# ' ,ro-lem .et

• 24Calculate the future value of '@@@ in a4 five years at an interest r ate of 5D 0er yearK -4 ten years at an interest rate of 5D 0er yearK a nd c4 five years at an interest rate of 1@D 0er year4 d4 "hy is the a mount of interest earned in 0art )a+ less than half the amount of in terest earned in 0art )-+8 B4"hat is the 0resent value of 1@7@@@ re ceived a4 t*elve years from today *hen the interest rate is BD 0er

yearK -4 t*enty years from today *hen the interest rate is D 0er y earK and c4 si years from today *hen the interest rate is 'D 0er ye ar8 54our -rother has offered to give you either 57@@@ today or 1@7@@@ in 1@ years4 If the interest rate is D 0er year7 *hich o0tion

is 0refera-le8 34Consider the follo*ing alternatives4 i4 1@@ receive d in 1 year ii4 '@@ received in 5 years iii4 2@@ received in 1@ yearsa4 Ran# the alternatives from most valua-le to least valua-le if theinterest rate is 1@D 0er year4

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17/36

IN 515 "ee# ' %ui(

• FIN 515 "ee# ' %ui( %uestion 1 )TC ;+ ou are a trust fund -a-y4our trust fund is currently *orth 17'2B7@@@4 The 0ro-lem is the t erms of the trust dont allo* you to receive any of the money until

you are '4 ou are no* '14 The fund is earning 4D 0er year4 >o * much *ill the fund -e *orth *hen you are ' and too old to en oy it8Ignore taes4 .ho* your *or#4 If you use Ecel7 sho* the for mula *ith the 0arameters7 and the ans*er4 If you use a formula7 0 rovide the standard formula7 the formula *ith terms su-stituted7 a nd the ans*er4



18/36

IN 515 "ee# 2 Course ,roect 1 )2 ,a0ers+

• This Tutorial contains 2 $ifferent Course ,roects First Course ,roe ctThe 0ur0ose of this 0roect is to hel0 you develo0 s#ills not only i n 0erforming the calculations -ehind financial analysis -ut inter0r eting the num-ers as *ell4ou are to 0ic# a com0any4 ou should 0 ic# one either from the industry in *hich you are currently *or#ingor an industry in *hich you are interested4 ou could also 0ic# a di vision of a com0any4 It is im0erative to use that sufficient data a-o ut your com0any and that it is availa-le4 ne *ay to do this is to 0i c# a 0u-licly held com0any4 If you 0ic# a 0rivately held com0any ora division of a com0any7 ma#e sure that the data necessary to do a

significant financial analysis is availa-le4If you use data that is not0u-licly availa-le7 -e sure to tal# to your manager and to ma#e a-s olutely sure that revealing that data is not a 0ro-lem4ou *ill alsoneed to find a standard against *hich to com0are your findings4 Th is could -e a different com0any in the same industry4 This could al

so -e the same com0any at a different time4

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19/36

IN 515 "ee# 2 $% 1 Eam0les of Ca0ital E0enditure rom Four Indust

r

y

• FIN 515 "ee# 2 $% 1 Eam0les of Ca0ital E0enditure From our I ndustry )graded+ $escri-e a 0otential ca0ital e0enditure 0roect fr om the industry in *hich you no* *or# or an industry in *hich yo u are interested4 "hat is the 0roect8 $escri-e and 0rovide an a00r oimate value of the initial cash flo*4 $escri-e and 0rovide an a00 roimate value of the annual cash flo*s4 ,rovide an estimation of t he life of the 0roect7 as *ell as the eit costs4

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20/36

IN 515 "ee# 2 $% ' Ca0ital ;udgeting Terms and Considerations

• Ca0ital ;udgeting Terms and Considerations ur tet-oo# and lect ure discuss some considerations that should -e ta#en into account*hen doing ca0ital -udgeting4 >o* *ill these considerations affectthe 0roect you descri-ed in the other to0ic8 Incremental earnings7interest e0enses7 taes7 o00ortunity costs7 eternalities7 sun# cost

s7 canni-ali(ation or erosion7 de0reciation7 and salvage valueK as * ell as others4

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21/36

IN 515 "ee# 2 ,ro-lem .et

• "ee# 2 ,ro-lem .et 14 our -rother *ants to -orro* 1@7@@@ from you4 >e has offered to 0ay you -ac# 1'7@@@ in a year4 If the cost o f ca0ital of this investment o00ortunity is 1@D7 *hat is its N,&8 .h ould you underta#e the investment o00ortunity8 Calculate the IRRand use it to determine the maimum deviation allo*a-le in the co

st of ca0ital estimate to leave the decision unchanged4 4 ou are c onsidering an investment in a clothes distri-utor4 The com0any ne eds 1@@7@@@ today and e0ects to re0ay you 1'@7@@@ in a year fr om no*4 "hat is the IRR of this investment o00ortunity8 !iven theris#iness of the investment o00ortunity7 your cost of ca0ital is '@D4



22/36

IN 515 "ee# 2 %ui(

• Com0any A has a -eta of '44 Com0any ; has a -eta of 424 Com0 any C has a -eta of 4G@4 The ris# free rate is 3D and the mar#et ris#0remium is BD4 "hat is the e0ected return of investing in Com0a ny ;8 stoc# 0ortfolio consists of only t*o stoc#s4 ou have 157@@@in Com0any A and '57@@@ in Com0any ;4 Com0any A has an actua

l return of D and Com0any ; has a return of 1'D4 "hat is the ret urn on your 0ortfolio8 A com0any has a ca0ital structure of B@D de -t and 3@D e=uity4 The TM on the com0anys -onds is GD7 and th e com0anys effective ta rate is B@D4 The CF has estimated the c om0anys "ACC to -e G4G3D4 "hat is the com0anys cost of e=uity8



23/36

IN 515 "ee# B $% 1 Mar#et &alue of a .toc# &ersus $$M &alue

• Mar#et &alue of a .toc# &ersus $$M &alue )graded+ .elect a stoc# i n *hich you are interested4 Calculate its 0er share value using the$$M or another method discussed in Cha0ter G4 Then find the curr ent mar#et value of a share of the stoc#4 Com0are that t*o4 Can yo u e0lain the similarity or difference8

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24/36

IN 515 "ee# B $% ' $ifferences in FTM of Real :ife ;onds

• $ifferences in TM of Real :ife ;onds )graded+ $o some research70ro-a-ly on the "e-7 and find some -onds *ith differing yields tomaturity )TM+4 >o* do you e0lain the difference8 ;oth the lectur e and the tet-oo# discuss some factors that may lead to this diffe rence4

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25/36

IN 515 "ee# B Midterm

• %uestion 14 %uestion 9 )TC !+ The firm


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IN 515 "ee# B ,ro-lem .et

• ;onds14 Interest on a certain issue of -onds is 0aid annually *itha cou0on rate of D4 The -onds have a 0ar value of 17@@@4 The yie ld to maturity is GD4 "hat is the current mar#et 0iece of these -on ds8 The -onds *ill mature in 5 years4 ;onds'4 A certain -ond has1' years left to maturity4 Interest is 0aid annually at a cou0on rate

of 1@D4 The -onds are currently selling for 5@4 "hat is their TM 8 ;onds24 A certain -ond 0ays a semiannual cou0on rate at a 1@Dannual rate4 The -ond has a 0ar value of 17@@@4 There are eight ye ars to maturity4 The yield to maturity is GD4 "hat is the current 0ri ce of the -ond8 ;ondsB4 A 0articular cor0orate -ond has a 0ar val

ue of 17@@@4 Cou0on 0ayments are B@ and are 0aid t*ice a year4.even years are left on the life of the -ond4The TM is GD4 "hat is t he 0rice of the -ond8 ;ond54 A given -ond has 5 years to maturity 4



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IN 515 "ee# 5 $% ' inding .toc# &alues for Real .toc#s 6sing ;eta an

d the .M:

• Finding .toc# &alues for Real .toc#s 6sing ;eta and the .M: )grade d+ ur second discussion to0ic concerns the calculation of stoc# va lues using the Ca0ital Asset ,ricing Model )CA,M+4 "e *ill start *it h a discussion of ris# and *or# to*ards 0ractical a00lication of themodel4 The tet-oo# 0rovides a list of -etas for a selection of stoc#

s4 Choose a fe* firms from that list and discuss *hether the -etasare *hat you *ould e0ect4 ;e sure to e0lain *hy or *hy not4

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29/36

IN 515 "ee# 5 0ro-lem .et

• Cha0ter 1@ )0ages 2B52B+9 B4 ou -ought a stoc# one year ago fo r 5@ 0er share and sold it today for 55 0er share4 It 0aid a 1 0ershare dividend today4 "hat *as your reali(ed return8 >o* much o f the return came from dividend yield and ho* much came from ca 0ital gain8 '@4 Consider t*o local -an#s4 ;an# A has 1@@ loans outs

tanding7 each for 1 million7 that it e0ects *ill -e re0aid today4 Ea ch loan has a 5D 0ro-a-ility of default7 in *hich case the -an# is n ot re0aid anything4 The chance of default is inde0endent across allthe loans4 ;an# ; has only one loan of 1@@ million outstanding7 * hich it also e0ects *ill -e re0aid today4 It also has a 5D 0ro-a-ilit

y of not -eing re0aid4 E0lain the difference -et*een the ty0e of ri s# each -an# faces4 "hich -an# faces less ris#8 "hy8

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30/36

IN 515 "ee# 5 %ui(

• %uestion 1 )TC C+ Com0any A has a -eta of '44 Com0any ; hasa -eta of 424 Com0any C has a -eta of 4G@4 The ris# free rate is 3Dand the mar#et ris# 0remium is BD4 "hat is the e0ected return ofinvesting in Com0any ;8 .ho* your *or#4 %uestion '4 )TC C+ ourstoc# 0ortfolio consists of only t*o stoc#s4 ou have 2@7@@@ in Co

m0any A and 257@@@ in Com0any ;4 Com0any A has an actual ret urn of D and Com0any ; has a return of 1'D4 "hat is the returnon your 0ortfolio8 .ho* your *or#4 %uestion 24 )TC E+ A com0anyhas a ca0ital structure of B@D de-t and 3@D e=uity4 The TM on th e com0anys -onds is GD7 and the com0anys effective ta rate is B

@D4 The CF has estimated the com0anys "ACC to -e G4G3D4 "ha t is the com0anys cost of e=uity8 .ho* your *or#4



31/36

IN 515 "ee# 3 Course ,roect ' )' $ifferent ,roects+

• This Tutorial contains ' $ifferent Course ,roects .econd ,roect T he 0ur0ose of this 0roect is for you to have some 0ractice *or#ing*ith financial conce0ts in the real *orld4 This *ill involve integratin

g some material from throughout the course4 The 0roect *ill also i nvolve the develo0ment of your o*n a00roach to doing the *or#4

The 0roect does not 0rovide a ste0-yste0 0rocedure for you to f ollo*4 our tas# is to determine the "ACC for a given firm using *h at you #no* a-out "ACC as *ell as data you can find through rese arch4 our delivera-le is to -e a -rief re0ort in *hich you state you r determination of "ACC7 descri-e and ustify ho* you determined

the num-er7 and 0rovide relevant information as to the sources of your data4 Assum0tions As you recall7 the formula for "ACC is r"ACC )E/EO$+ rE O $/)EO$+ r$ )1TC+ The formula for the re=uired ret urn on a given e=uity investment is ri rf O Pi Q )RM#trf+ RM#trf isthe Mar#et Ris# ,remium4 For this 0roect7 you may assume the Ma

r#et Ris# ,remium is BD unless you can develo0 a -etter num-er4 r f is the ris# free rate4 The TM on 1@ year 6. Treasury securities is

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32/36

IN 515 "ee# 3 ,ro-lem .et

• Cha0ter 'G )0ages G2GB+9 14"hat inherent characteristic of cor0 orations creates the need for a system of chec#s on manager -eha vior8 '4 "hat are some eam0les of agency 0ro-lems8 24"hat are t he advantages and disadvantages of the cor0orate organi(ational s tructure8 B4"hat is the role of the -oard of directors in cor0orate g

overnance8 14"hat inherent characteristic of cor0orations createsthe need for a system of chec#s on manager -ehavior8 '4"hat aresome eam0les of agency 0ro-lems8 24"hat are the advantages an d disadvantages of the cor0orate organi(ational structure8 Managi ng Agency Conflict B4.u00ose !oodyear Tire and Ru--er Com0any

is considering divesting one of its manufacturing 0lants4 The 0lant i s e0ected to generate free cash flo*s of 145 million 0er year7 gro *ing at a rate of '45D 0er year4



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IN 515 "ee# $% 1 Industry A00roaches to "or#ing Ca0ital inancing

• Industry A00roaches to "or#ing Ca0ital Financing )graded+ $o som e research on t*o firms in your industry or an industry in *hich yo u are interested4 Can you get an idea of their *or#ing ca0ital mana

gement 0olicies from 0u-licly availa-le information8 >o* do the t *o com0anies differ in their a00arent *or#ing ca0ital managemen

t 0olicies8 "hich 0olicy do you thin# is -etter and *hy8

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35/36

IN 515 "ee# ,ro-lem .et

• 14 Ans*er the follo*ing =uestions9 a4 "hat is the difference -et*ee n a firms cash cycle and its o0erating cycle8 '4 >o* *ill a firms cas h cycle -e affected if a firm increases its inventory7 all else -eing e= ual8 '4 >o* *ill a firms cash cycle -e affected if a firm -egins to ta #e the discounts offered -y its su00liers7 all else -eing e=ual8 B4The

!ree# Connection had sales of 2' million in '@1'7 and a cost of go ods sold of '@ million4 A sim0lified -alance sheet for the firm a00 ears -elo*9 a Calculate The !ree# Connections net *or#ing ca0ita l in '@1'4 '4 greatest8 "hen does it have sur0lus cash8

•



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