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FM i Assignment

The document outlines a group assignment for a Financial Management course, consisting of various financial problems related to investment analysis, bond valuation, cash flow calculations, and portfolio performance measures. Students are required to solve problems involving present value, expected returns, cost of debt, and net present value among others. The assignment emphasizes practical applications of financial concepts over a range of scenarios.

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Tuge Ali
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10 views

FM i Assignment

The document outlines a group assignment for a Financial Management course, consisting of various financial problems related to investment analysis, bond valuation, cash flow calculations, and portfolio performance measures. Students are required to solve problems involving present value, expected returns, cost of debt, and net present value among others. The assignment emphasizes practical applications of financial concepts over a range of scenarios.

Uploaded by

Tuge Ali
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ODA BULTUM UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS


DEPARTMENT OF ACCOUNTING AND FINANCE

Financial Management I - Group Assignment (20%)


Submission Date:- ----------------

Group Assignment 1

Part I: Workout
1. Assume that you are the finance manager of limited company .you have $ 10,000 to invest in a
project. The life of the project is 20 years. The project will generate annual cash of $2,400 per
year. What will be the present value?

2. A bond with a face value of $ 100 is currently selling for $ 95 in the market. The coupon rate
of interest is 13 percent and the appropriate discount rate is 15 percent. What will be the value of
the bond?

3. You are offered Birr 1,000 today, Birr 10,000 in 12 years, or Birr 25,000 in 25 years.
Assuming that you can earn 11 percent on your money, which offer should you choose?

4. You now have Birr 2,000,000 in the bank earning interest of .5 percent per month. You need
Birr 3,000,000 to make a down payment on a house. You can save an additional Birr 10,000 per
month. How long will it take me to accumulate the Birr 3,000,000?

5. You have Birr 1,500 to invest today at 7% interest compounded annually. Find how much you
will have accumulated in the account at the end of (1) 3 years, (2) 6 years, and (3) 9 years

What single investment made today, earning 12% annual interest, will be worth Birr 6,000 at the
end of 6 years?

6. You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to
save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank
pays 8 percent interest compounded annually for long-term deposits.
How much will you have to save each year (to the nearest dollar)?
7. Alex J. is considering investing in a security that has the following distribution of possible
one year return.

Probability of occurrence 0.10 0.20 0.30 0.30 0.10


Possible return -10 0 .00 10 0.20 0.30
(a) What is the expected return and standard deviation associated with the investment?
(b) Is there much "downside` risk? How can you tell

8. Consider the following information:

(a) Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the
expected return of the portfolio?
(b) What is the variance of this portfolio? The standard deviation?

9. This problem will give you some practice calculating measures of prospective portfolio
performance. There are two assets and three states of the economy:

State of the economy Probability of the state Rate of return if the state occurs
of economy Stock A Stock B
Recession 0.20 -0.15 0.20
Normal 0.50 0.20 0.30
Boom 0.30 0.60 0.40

What are the expected returns and standard deviations for these two stocks?

10. A portfolio is invested 25 percent in Stock G, 55 percent in Stock J, and 20 percent in Stock
K. The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively.
What is the portfolio’s expected return? How do you interpret your answer?
11. Mikias Cricket Farm issued a 30-year, 6 percent semiannual bond three years ago. The bond
currently sells for 93 percent of its face value. The company’s tax rate is 22 percent.
(a) What is the pretax cost of debt?
(b) What is the after tax cost of debt?
(c) Which is more relevant, the pretax or the after tax cost of debt? Why?

12. Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent
preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is
5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.
a). What is the company’s WACC?
b). The company president has approached you about the company’s capital structure.
He wants to know why the company doesn’t use more preferred stock financing because it costs
less than debt. What would you tell the president?

13. Abdi Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an
initial investment of $100,000. Abdi Geda, president of the company, has set a maximum
payback period of 4 years. The after-tax cash inflows associated with each project are shown in
the following table:

Required: Determine the payback period of each project. Which project should be accepted?
14. OPDIC Industries is considering the replacement of one of its old drill presses. Three
alternative replacement presses are under consideration. The relevant cash flows associated with
each are shown in the following table. The firm's cost of capital is 15%.

Required:

a) Calculate the net present value (NPV) of each press and evaluate the acceptability of each
press.
b) Rank the presses from best to worst using NPV.

14. Moto, Inc., has identified the following two mutually exclusive projects:

a) What is the IRR for each of these projects? Using the IRR decision rule, which
project should the company accept? Is this decision necessarily correct?
b) If the required return is 11 percent, what is the NPV for each of these
projects? Which project will the company choose if it applies the NPV
decision rule?

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