Managerial Finance Issues - Essay Example

Managerial Finance Table of Contents Managerial Finance Table of Contents 2 Answer to P6-11. 3 Answer to P9-23 3 Answer to P10-3. 4 Answer to P10-10 5 Answer to P1-4 6 Answer to P1-7 6 Answer to P2-12 6 Answer to P4-4 6 Answer to P4-8 7 Answer to P4-10 7 Answer to P4-19 8 Answer to P5-5 8 Answer to P6-11. a. The dollar price of the given bond was $97.708. b. Current Yield of the bond = 5.7 / 97.708 = 0.0583371 = 5.833709 % c. Here, the bond is found to have a Yield to Maturity = 6.034% and a Current Yield = 5.83%. Clearly, Yield to Maturity > Current Yield of the bond. This fact indicates that the bond actually is characterized by a higher rate of return on maturity than what it is yielding at present. Thus, the bond could be said to be selling at a discount. d. The Current Yield of the bond is found to be 5.83% and its Yield to Maturity is 6.034%. the difference between the two indicates that the bond Answer to P9-23 a. Pay-back Period = Initial Cost of Investment / Expected Returns from the Asset per period. So, for Project A, the pay-back period = $ 80,000 / $ 25,000 = 3.2 years. Again, for Project B, the pay-back period = 3.33 years. b. For project A, NPV = 3,659.68. Similarly, for project B NPV = 2,758.47. c. For project A, IRR = 15% For project B, IRR = 8%. d. The NPV profile finds that Project B is more lucrative over the years than project A. e. There arises no conflict between the NPV rankings and the IRR rankings of the project over the years. Answer to P10-3. a. For project X, initial investment = $ 30,000. Cash flows per period = $ 10,000 The cost of capital = discount rate = 15% = 0.15. Number of periods = 5 Hence NPV = CF/r [1/(1 – r)5] – Initial Investment = $3,062.22 Again for project Y, initial investment = $ 40,000 Cash flows per period = $ 15,000. Discount rate = 0.15 and number of periods = 5. Hence NPV = CF/r [1/(1 – r)5] – Initial Investment = $8,941.15. The projects are acceptable since both of them have positive NPV, indicating that even after discounting, each of them yield positive net returns. For questions b, c, d, data is not adequate. d. The riskiness of a project is calculated by means of the variability in the returns from the project, which again is measured by the variance of returns. So, when the riskiness of two projects has to be compared, their individual variances are considered. But in this case, both projects yield similar returns, implying that the variance of returns for each is 0. Thus, there is no risk element involved in the projects. But, as the NPV for project Y is greater than that for project X, so, it could be said that on a risk-return trade=off ground, project Y is more suitable for investment. Answer to P10-10 a. The NPV of the first project is $3,373.97 b. The NPV of the second project is $4,888.14 c. Lara should choose the second project. d. Since high returns are associated with higher risks, so it could be said that the second project is riskier. Answer to P1-4 a. Over the month of August, Janes total cash inflows = $ 4,950. And Janes total cash outflows = $ 4,357. b. Jane’s net cash inflow over the month of August is $ 593. c. If there is a shortage in the sense that the net cash flows are negative, then Jane can cut down on luxury expenses like dining out or buying clothes frequently. d. If there is a surplus, then Jane can opt to save her money and keep it as bank deposits or invest it in buying some bonds, so that the sum multiplies in future. Answer to P1-7 Reference not provided Answer to P2-12 a. The main problem that Robert will face are 1. The financial ratios will show only the financial aspect of the firms. 2. They are in respect to the conditions prevailing at present in the economy. 3. Incapable of revealing anything about the long run behavior of the firm. b. The electric and fast food companies use a lot of fixed assets and thus have a greater degree of long run costs for which the current and quick ratios are low in their cases. c. The software company is exposed to a lot of risks and thus a large amount of debt for such a company is not a good sign. d. For the reasons of exposure to a higher degree of risk, investors do not invest their whole money in shares of software companies. Answer to P4-4 A. The future value of the project = $ 530.66. B. The future value of the project = $7,712.21 C. The future value of the project = $23,673.64. D. The future value of the project = $78,460.71. E. The future value of the project = $62,347.15. F. The future value of the project = $110,923.15. Answer to P4-8 The compound interest needed for the given sum to yield $ 15,000 at the end of 5 years in each case are as follows – a. The compound interest needed in this case = 8%. b. The compound interest needed in this case = 13%. c. The compound interest needed in this case = 16%. Answer to P4-10 The present value of the returns expected could be calculated using the following formula. PV = FV (1 + r) t. Where, PV = present value, FV = future value, r = opportunity cost and t = period of investment. So, considering the FV to be $ 1 for each individual case, we have, A. PV = (1 + 0.02) 4 = $ 1.0824 B. PV = (1 + 0.1) 2 = $ 1.21 C. PV = (1 + 0.05) 3 = $ 1.1576 D. PV = (1 + 0.13) 2 = $ 1.2769. Answer to P4-19 a. 1) Given the coupon payments, the rate of interest and the period of investment, in case of an ordinary annuity, the present values are – For project A = $33,696.22 For project B = $251,729.55. For project C= $3,386.01. For project D= $850,596.89. For project E = $93,821.97. 2) In case of an annuity due, the present values are – For project A = $31,491.79 For project B = $224,758.53. For project C= $2,821.68. For project D= $810,092.28. For project E = $85,292.70. b. An ordinary annuity is one whose coupon payments are made at the beginning of the year and an annuity due is that whose coupon payments are made at the end of the period. Since the present values of the former are found to be higher, so, it is more preferable than the latter. Answer to P5-5 Reference not provided Read More