ACCT-The Corporation, the Financial Manager and Markets

1. The Corporation, the Financial Manager and Marketsa. By now you must be familiar with the Principal-Agent Problem. What isit and why should shareholders be concerned with it?b. Compare and contrast the Shareholder and Stakeholder Theories ofCorporate Responsibility.2. Investment Vs. Financing Decisiona. What is the difference between the Investment Decision and the FinancingDecision which a firm faces?3. Time Value of Moneya. $1 today is worth more to you than $1 in one year. Why?b. What is the real future value of $10,000 which will sit in a savingsaccount for 20 years, earning 4% interest compounded yearly during aperiod of 4% annual inflation?c. What is the present value of an annuity which makes its first payment in 3years, makes a total of 10 payments of $10,000 each year with an overalldiscount rate of 7%?d. What is the PV of a perpetuity which pays $200 one year from today andthen each year thereafter? Assume a discount rate of 8%.e. What is the nominal future value of $10,000 one year from today if it canbe invested in a portfolio that expects to earn, in real terms, 4% per yearwith inflation of 3% per year?4. Bond and Stock Basicsa. Find the current price of 30 day commercial paper issued with a yield of1.25% and with face value of $100,000.b. Domenic purchases a newly issued 4 year bond priced at $1015 with parvalue of $1000. It pays $100 interest yearly. What is the coupon rate, thecurrent yield and the yield to maturity?c. Domenic also purchases a share of General Electric stock for $14 at thebeginning of the year. During the course of the year he receives dividendstotaling $1.15. He sells the stock to Elliana for $16.75 at the end of theyear. What is his holding period return?d. Elliana buys the stock at $16.75 from Domenic. Using the currentdividend (now time = 0) of $1.15 and a predicted growth rate of 3%, whatis GEs required rate of return, r?e. Instead, just as Elliana purchases the stock, GE announces that it will bedistributing all of its earnings in the form of a dividend (i.e. retaining noearnings). The dividend announced is $2.00. What is the price of thestock now (assume the required rate of return did not change from part c)?5. Project Valuation and Analysis: Suppose a new machine costs $59,000 today. Itwill yield $11,000 in after-tax savings each year for 7 years and you sell themachine for $4,000 in the 7th year.a. Given an opportunity cost of capital of 8%, what is the NPV of thisproject?b. What is the IRR of this project?c. What is the payback period for this project?d. What is the discounted payback period for this project?e. What is the profitability index for this project?6. Recall our discussion of incremental cash flow analysis. What is meant byindirect effects? Define or cite an example7. WACC: Common stock of the company KewCo. has a beta of 1.3. TreasuryBills provide a return of 4% and the market risk premium is 16%. SupposeKewCo. total value is composed of 60% equity and 40% debt (by market value).Debt yields of 8%. There are no shares of preferred stock in circulation.a. Find the cost of equity capital for KewCob. Suppose KewCo. has a total value, V of $1,000,000,000. If there are15,000,000 shares of KewCo stock outstanding, what is the current priceof a share of KewCo equity?c. What is the WACC if the firm faces an average tax rate of 40%d. Suppose KewCo is considering a project with an IRR of 12%, should itaccept the project? Why or why not?e. Suppose KewCo is considering a product line that will provide expectednew net cash flows of $100,000 per year for 4 years. What is themaximum amount KewCo would be willing to pay for this new productline today?8. Venture Capitala. How are profits typically distributed to a Venture Capitalist and itsinvestors, the Limited Partners?b. During class, we discussed three exits for a firm in a VentureCapitalists portfolio. Select one, name and describe it.9. Scenario Analysis: Estimated Cash Flows for the Segway People MoverBaseCaseYear 0Investment- 5,400SalesVariable CostsFixed CostsDepreciationPretax profit.Taxes @ 40%Profit after taxOperating cash flowNet Cash Flow- 5,400Years 1 – 1216,00013,0002,000450550220330780780BicycleScenarioYear 0Investment- 5,400SalesVariable CostsFixed CostsDepreciationPretax profit.Taxes @ 40%Profit after taxOperating cash flowNet Cash Flow- 5,400Years 1 – 12NPV (OCCof 9%) : $185.37NPV (OCCof 9%) : _____Consider the scenario in which a competing form of transportation, the bicycle, causessales to drop to 90% of expected sales from the base case.a. Fill in the table on the right, including NPVb. What is maximum opportunity cost of capital in both the Base Case andthe Bicycle Scenario such that you should undertake the Segway PeopleMover Project?