Short Answer Submission Form

Instructions
This Competency includes a Short-Answer Response Assessment. Write your response to each prompt below in the space provided. The Rubric,
which will be used by the Competency Assessor to evaluate your responses, is beneath the prompts. Carefully review the Rubric rows associated
with each prompt to provide a complete response.

When writing your response, begin typing where it reads “Enter Your Response Here.” Write as much as needed to satisfy the requirements of
the prompt (as defined in the Rubric). Be sure to support your responses with connections to professional sources.

Your Assessment responses require references (in APA style) to support your thinking. You will list your references at the end of this template
where “References” are noted.
Review the following example item and response for a sample that meets expectations.

Sample Prompt:
Choose a definition of organizational culture, and explain whether you agree or disagree with the definition. Use examples from your own professional experience to
support your response.

Response:
Whitehurst (2016) explained “organizational culture is defined by how people in an organization interact with each other” (para. 2). While I agree that this is one
aspect of organizational culture, the definition does not capture the complex factors that contribute to organizational culture. When I started my first job after
finishing my undergraduate degree in business, I worked for an organization whose main headquarters were in Dubai. When I traveled to Dubai for the first time, I
realized that the culture of the Dubai office was largely influenced by the society’s culture in Dubai. I found that the organization lacked one cohesive culture and
that, depending on regional locations, each office had its own culture. International organizations often face many challenges in maintaining a cohesive
organizational culture (Watkins, 2013).

References

Watkins, M. D. (2013, May 15). What is organizational culture? And why should we care. Harvard Business Review. Retrieved from https://hbr.org/2013/05/what-is-
organizational-culture

Whitehurst, J. (2016, October 13). Leaders can shape company culture through their behaviors. Harvard Business Review. Retrieved from
https://hbr.org/2016/10/leaders-can-shape-company-culture-through-their-behaviors

Note: References are included at the end of a Short-Answer Assessment but are included here as an example of an accurate APA reference list.

©2015 Walden University 1

1. Time Value of Money: Review the examples of Time Value of Money (TVM) problems in Chapter 5 of the text. (Fundamentals of Financial
Management, 13th Edition)

 Using your own industry as the context, create and solve four of your own original TVM problems: (1) lump-sum present value, (2)
lump-sum future value, (3) present value of an annuity, and (4) future value of an annuity. Your scenarios may be fictitious, but they
should make sense in the real-life context of your industry.
 Write a 1-paragraph summary for each of your scenarios that explains the “real-life” context of these four problems as well your
interpretations of each of the calculations. (4 paragraphs total)

Learning Objective 1.1:

Create and solve TVM problems. Response includes four TVM problems: (1) lump-sum present value, (2) lump-sum future value, (3) present
value of an annuity, and (4) future value of an annuity. TVM problems use plausible numbers/figures for industry application.

Learning Objective 1.2:

Solve TVM problems based on experience in an industry. TVM solutions are accurate. TVM solutions are documented in detail.

Learning Objective 1.3:

Explain how the TVM problems and solutions reflect the real-life business context of a specific industry with which the student is familiar.
Explanation clearly connects the data used in the TVM problems with a real-life industry context.
Explanation of solutions is framed in terms of decision making that could be considered.

Lump-sum present value

Our company plans to invest $700,000 in a project that will pay $3,000,000 after 12 years (no payments during the 12 years will be made). The
cost of capital of our company is 12.50%. The present value calculation of the lump-sum amount to be received is as follows:

PV = FV/(1+r)^n
Inserting the values in the equation

PV = $3,000,000 / (1+12.50%)^12
PV = $3,000,000 / 4.10989
PV = $729,946

©2015 Walden University 2

Interpreting the above calculations, it can be seen that the present value of $3,000,000 to be received after 12 years is $729,946 and that is
greater than the amount of investment of $700,000. If the amount of investment is greater than $729,946 then the PV of the amount to be
received would be a negative figure and the company will most probably suffer a loss. In the same way, if the cost of capital of the company
becomes larger than the present value of the amount to be received at maturity may also cause the company to suffer a loss.

Lump-sum future value

In the same way it can also be assumed that there are two options available in the project. The company can choose to receive $800,000 after
one year or $3,000,000 after 12 years. In this case we need to calculate the future value of $800,000 after a period of 11 years (because the
payment is to be received after one year from today). So, the calculations are as follows:

FV = PV (1+r)^n
Inserting the values in the equation

FV = $800,000 x (1+12.50%)^11
FV = $800,000 x 3.6532
FV = $2,922,589

From the above calculated Future Value, it can be seen that the amount of $800,000 received after one year will grow to $2,922,589 in a
period of 11 years if invested at 12.50%. On the other hand, if the other alternative is chosen and the company decides to receive
$3,000,000 after 12 years from today, it would be better off. Moreover, the company will be able to gain ($3,000,000 - $2,922,589 =
$77,411) additional return on its investment.

Present value of an annuity

The company invests in an annuity with a 12.50% interest rate that generates annual payments of $16,000 for the next 15 years. The present
value of this annuity is? Calculating the present value of the annuity with the following formula:

PV of annuity = Payment {[1 - (1/(1+r)^n)]/r}

Inserting the values into the equation:

PV of annuity = $16,000 x [(1 - (1+12.50%) -15) / 12.50%]

PV of annuity = $16,000 x 6.6329

©2015 Walden University 3

PV of annuity = $106,126

From the above interpretations it can be noted that an interest rate of 12.50% has been used to discount the annuity to its present value.
The present value annuity factor for 15 years is 6.6329 and the present value of the amount of annuity to be received for the next 15 years
is $106,126. Thus, the investment in annuity is a profitable investment and this opportunity should be secured.
The Present Value of Annuity in Excel is calculated as follows:
Present Value of Annuity
Amount $16,000
Interest 12.50%
Term 15 Years
Formul
a PV(rate, nper, pmt, [fv], [type])
 
PV $106,126.31
 
Year Interest Rate Cash Flows Total
0 12.50% ($100,000) ($100,000)
1 12.50% $16,000 $14,222.22
2 12.50% $16,000 $12,641.98
3 12.50% $16,000 $11,237.31
4 12.50% $16,000 $9,988.72
5 12.50% $16,000 $8,878.86
6 12.50% $16,000 $7,892.32
7 12.50% $16,000 $7,015.40
8 12.50% $16,000 $6,235.91
9 12.50% $16,000 $5,543.03
10 12.50% $16,000 $4,927.14
11 12.50% $16,000 $4,379.68
12 12.50% $16,000 $3,893.05
13 12.50% $16,000 $3,460.49
14 12.50% $16,000 $3,075.99
15 12.50% $16,000 $2,734.21
Total $106,126

©2015 Walden University 4

Future value of an annuity
Continuing with the same example for the present value of annuity the company invests in an annuity with a 12.50% interest rate that generates
annual payments of $16,000 for the next 15 years. The future value of this annuity is? Calculating the future value of the annuity with the
following formula:

FV of annuity = Payment {((1+r)^n) - 1)]/r}

Inserting the values into the equation:

FV of annuity = $16,000 x [((1+12.50%)15 - 1) / 12.50%]

FV of annuity = $16,000 x 38.8142

FV of annuity = $621,028

From the above interpretations it can be noted that an interest rate of 12.50% has been used to discount the annuity to its future value. The
future value annuity factor for 15 years is 38.8142 and the future value of the amount of annuity to be received for the next 15 years is
$621,028. The profitability of the investment can be assessed by comparing the future value of the annuity with the future value of
$100,000 at the end of 15 years at a discount rate of 12.50%. Calculations are as follows:

FV = PV (1+r)^n
Inserting the values in the equation

FV = $100,000 x (1+12.50%)^15
FV = $100,000 x 5.8518
FV = $585,178

If $100,000 is invested at a simple interest rate of 12.50%, the investment will grow to only $585,178 in 15 years. Thus, the investment in
annuity is a profitable investment and this opportunity should be secured.

The Present Value of Annuity in Excel is calculated as follows:

©2015 Walden University 5

 Future Value of Annuity
Amount $16,000
Interest 12.50%
Term 15 Years
Formul
a FV(rate, nper, pmt, [pv], [type])
 
FV $621,027.58
 
Year Interest Rate Cash Flows Total
0 12.50% ($100,000) ($100,000)
1 12.50% $16,000 $83,225.29
2 12.50% $16,000 $73,978.03
3 12.50% $16,000 $65,758.25
4 12.50% $16,000 $58,451.78
5 12.50% $16,000 $51,957.14
6 12.50% $16,000 $46,184.12
7 12.50% $16,000 $41,052.55
8 12.50% $16,000 $36,491.16
9 12.50% $16,000 $32,436.58
10 12.50% $16,000 $28,832.52
11 12.50% $16,000 $25,628.91
12 12.50% $16,000 $22,781.25
13 12.50% $16,000 $20,250.00
14 12.50% $16,000 $18,000.00
15 12.50% $16,000 $16,000.00
Total $621,028

©2015 Walden University 6

2. Bond Valuation: Do problem 7-6, Part a, on page 251. (Fundamentals of Financial Management, 13th Edition)

3. Bond Pricing Interpretation: Explain what you see from the pricing calculations. How do the two bonds differ? (1 paragraph)

Learning Objective 2.1: Calculates the prices of two bonds at 0, 1, 2, 3, and 4 years to maturity. Calculation is accurate and complete.
Calculation is documented in detail.

Learning Objective 2.2: Analyze the prices for two bonds at 0, 1, 2, 3, and 4 years to maturity. Analysis accurately describes how the prices trend
over time.

Your Response
2. Problem 7-6

Years to Maturity Price of Bond C Price of Bond Z

4 $1,012.79 $693.04
3 $1,010.02 $759.57
2 $1,006.98 $832.49
1 $1,003.65 $912.41
0 $1,000.00 $1,000.00

The basic difference between the two bonds is the coupon rate. Bond C has a coupon rate of 10% paid annually, while Bond Z is a
zero-coupon bond. Moreover, the yield to maturity of both of the bonds is the same so; the Bond Z being a zero-coupon bond is
more affected than the Bond C.

4. Yield-to-Maturity and Yield-to-Call: Do problem 7-19, Parts a-c, on pages 252–53. (Fundamentals of Financial Management, 13th Edition)

Learning Objective 3.1: Calculate the yield to maturity of a bond. Calculation is accurate and complete. Calculation is documented in detail.

Learning Objective 3.2: Calculate the yield to call of a bond. Calculation is accurate and complete. Calculation is documented in detail.

©2015 Walden University 7

Learning Objective 3.3: Determine the expected yield of a bond. Determination of which yield the investor can expect is accurate and
completely explained.

Yield-to-Maturity and Yield-to-Call

a.

Yield to Maturity
 
Nper 10
Pmt 110
PV ($1,175)
Fv $1,000
Type 0
 
Yield to
Maturity 8.35%

b.

Yield to Call
 
Nper 5
Pmt 110
PV ($1,175)
Fv $1,090
Type 0
 
Yield to
Call 8.13%

©2015 Walden University 8

c. The bond is sold at a premium as the interest rates in section (a) and (b) have dropped. If the yield curve remains constant during the five-year
period, the investors earn the same benefit as the Yield to Call. Thus, the expected return is 8.13%.

5. CAPM and Required Return: Do problems 8-10 and 8-11 on page 291. (Fundamentals of Financial Management, 13th Edition)

Learning Objective 4.1:

Calculate the required return rates for two companies for comparison purposes. Calculations are accurate and complete. Calculations are
documented in detail. Response provides an appropriate interpretation of the difference between the rates of return.

Learning Objective 4.2:

Calculate the required return rate for a company. Calculation is accurate and complete. Calculation is documented in detail.

8-10
CAPM Formula
Expected Return = Risk-Free Rate + Beta(Required return - Risk-Free Rate)
         
Required
return 12.00%
Risk Free Rate 5%
 
  Bradford Co. Farley Industries Difference
Beta 1.45 0.85  
Expected
Return 15.15% 10.95% 4.20%

©2015 Walden University 9

CAPM and Required Return
8-11
Generally, securities in the market are exposed to two kinds of risks. One is systematic risk and the other is the unsystematic risk.
Unsystematic risk is that part that is common to particular firm or industry which can be reduced by way of diversification and is
therefore known as diversifiable risk, whereas the systematic risk is that kind of risk that effect or is common to entire market. This
risk cannot be reduced by way of diversification and hence cannot be diversified; therefore, it is also known as non-diversifiable risk.
Continuing with the same formula (CAPM) as used in the part above. It defines the relationship between the systematic risk and
return.
Manning Enterprises estimates the rate of inflation to be 3.5% in the coming years, real risk-free rate is 2.5%, market risk premium is
6.5%, and the beta is 1.7. First, we need to calculate the nominal risk-free rate as follows:
Nominal risk-free rate = Real risk-free rate + Rate of inflation
= 2.5% + 3.5%
= 6.0%
Substituting the values in the CAPM formula:
Expected Return = Risk-Free Rate + Beta x Market risk premium
Expected Return = 6% + (1.7 x 6.5%)
Expected Return = 17.05%
Therefore, the expected rate of return is 17.05%.

©2015 Walden University 10

6. Constant Growth and Non-constant Growth Valuation: Do problems 9-2 and 9-4, Parts a–c, on page 324. (Fundamentals of Financial
Management, 13th Edition)

Learning Objective 5.1:

Calculate a stock's current value per share using constant growth valuation. Calculation is accurate and complete.Calculation is documented in
detail.

Learning Objective 5.2:

Identify the horizon date for a stock. Identification of the horizon date for a stock is accurate. Date selection is supported by a clear rationale.

Learning Objective 5.3:

Calculate a company’s horizon or continuing value. Calculation is accurate and complete. Calculation is documented in detail.

Learning Objective 5.4:

Calculate a company’s intrinsic value today. Calculation is accurate and complete. Calculation is documented in detail.

Constant Growth and Non-constant Growth Valuation:

9-2
D1 = $0.50, g = 7%, rs = 15%
Current Price of the stock = $0.50 / (15% - 7%)
Current Price of the stock = $6.25
9-4
a) Here, the firm recently paid a dividend of $1.25 which is expected to grow at 20% (non-constant growth rate) for next two
years and then its growth will settle to 5% (constant growth rate) for an indefinite period. The required rate of return on the
stock is 10%.

©2015 Walden University 11

 The terminal date in the stock value is the number of years/periods of non-constant growth. In the given question the period
of non-constant growth is 2 years and hence the terminal date is two years away.
b) The horizon value of stock is the present value of the dividend at the beginning of the constant growth period. The formula
for the computation of the horizon value is provided below:
PN = DN+1/rs - g

= ($1.20 x (1+20%)2 x (1+5%)) / (10% - 5%)

$37.80
Therefore, the horizon value is $37.80.
c) The intrinsic value today is the sum of the present value of the dividend of non-constant growth period and the horizon
value. The formula for the computation of the intrinsic value is as follows:
Po = D1/(1+rs)1 + DN/(1+rs)N + (DN-1/(r-g)) / (1+rs)1

Where,

The dividend is D,

The number of non-constant growth period is N,

The growth rate in constant period is g,

The required rate of return is rs.

Computing the intrinsic value of stock as follows:

= ($1.25 x (1+20%)^1)/(1+10%)^1 + ($1.25 x (1+20%)^2)/(1+10%)^2 + $37.80 / (1+10%)^2

= $34.09

Thus, the intrinsic value of the stock is $34.09.

©2015 Walden University 12

7. Weighted Average Cost of Capital:

Learning Objective 6.1: Calculate a company’s cost of common equity capital. Calculation is accurate and complete. Calculation is
documented in detail.
Learning Objective 6.2: Use a company’s cost of equity capital to compute the company’s WACC. Calculation is accurate and
complete. Calculation is documented in detail.
Learning Objective 6.3: Provide a recommendation based on analysis of a company’s WACC. Recommendation identifies
weaknesses in proposed expansion plan. Recommendation provides a clear rationale.
Learning Objective 6.4: Calculate NPV, IRR, MIRR, payback, and discounted payback. Recommendation identifies weaknesses in
proposed expansion plan. Recommendation provides a clear rationale.
Learning Objective 6.5: Analyze two capital projects and make recommendations based on the qualities of independence and
mutual exclusivity. Analysis and recommendations provided are appropriate for independent and mutually exclusive projects.
Recommendations are supported by clear rationales.

Learning Objective 6.6: Explain the conflict between NPV and IRR for two capital projects that have the same cash flow timing
pattern. Explanation provides an appropriate reason for the conflicting results. Explanation is supported by a clear rationale.
 Do problem 10-8 on page 360. (Fundamentals of Financial Management, 13th Edition)

Weighted Average Cost of Capital

10-8
Dividend growth rate = (g) = 7%
Last Dividend = (Do) = $2.00
Current Stock Price = (Po) = $22.50
Before tax Cost of Debt = (RD) = 12%
Marginal Tax Rate = Tc = 40%

©2015 Walden University 13

First of all, we need to calculate the cost of common equity:
Po = D1 / (R – g)
Manipulating the formula for R, we get
R = (D1 / Po) + g
And D1 = Do(1+g)
D1 = $2.00 x (1 + 7%)
D1 = $2.14
Cost of Common Equity (RE) = ($2.14 / $22.50) + 7%
Cost of Common Equity (RE) = 0.1651 = 16.51%

Weighted average cost of capital of the company is calculated as follows:

WACC = We.ke + Wd.kd(1-Tc)
WACC = 60% x 16.51% + 40% x 12% x (1 – 40%)
WACC = 0.09906 + 0.0288
WACC = 12.78%

8. Imagine you are the manager of operations for a manufacturing company. Your vice president wants to expand production by building a new
facility, and she would like you to develop a business case for the project. Assume that your company’s weighted average cost of capital is
13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work on the business case, you surmise
that this is a fairly risky project because of a recent slowing in product sales. In fact, when using the 13% weighted average cost of capital,

©2015 Walden University 14

you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital.
Your vice president suggests that the project could be financed from a mix of retained earnings (50%) and bonds (50%). She reasons that
retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would
lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Is your vice president’s suggestion to use a mix of 50% retained earnings and 50% bonds a good approach for this expansion? Explain why or
why not. (1 paragraph)

A company’s retained earnings are the residual profits that are retained out of the net incomes of the business. There is no doubt that it is a
good option for the company to utilize its retained earnings as it will not put additional burden on the company to cover its cost of capital, but
there are various shortcomings attached with utilizing the retained earnings [ CITATION MSc17 \l 1033 ]. First of all, it is to be noted that
retained earnings are not accumulated so easily and a long time period (usually years) are needed to build up these. So, if the vice president
wants to use the retained earnings to finance the project, he must be cognizant of the fact that a long time period would be needed to
accumulate the retained earnings again and may be the company will have to wait for long time if additional funds would be needed.
Moreover, it is also to be noted that while utilizing the retained earnings that such funds are going to be used up which the company had
collected to fund its day to day operations. On the other hand, when the firm focuses on growth then there would be huge challenges in
managing day to day operations without having enough funds in the retained earnings [ CITATION Ada19 \l 1033 ]. Thus, in opinion it is not a
good idea at all to utilize retained earnings for funding 50% of the project costs. The vice president should be informed about other ways of
reducing the Weighted Average Cost of Capital (WACC), for example, if there is strong probability of project’s success the firm can increase
the percentage of debt as it will prove to be a cheap source of funding because of the associated benefits in form of tax savings, etc. The
following example illustrates is further:
Assuming, the weightage of retained earnings is 30%, debt is 50%, and preferred stock is 20%. After-tax cost of debt is 7%, and the cost of
preferred stock is 10.5%. If we calculate the WACC in these circumstances:
WACC = (30% x 0%) + (50% x 7%) + (20% x 10.5%)
WACC = 0% + 3.5% + 2.1%
WACC = 5.6%
So, in this way there are different combinations that can be used to achieve a lower WACC than the current WACC of the company. The
major point of concern is that the utilization of retained earnings to fund the project should be minimized.

©2015 Walden University 15

9. Capital Budgeting Criteria:

 Do problem 11-7, Parts a-d, on page 394. (Fundamentals of Financial Management, 13th Edition)
 Which calculation would you recommend in your evaluation—NPV or IRR? Why? (1 paragraph)

Capital Budgeting Criteria

a) WACC = 14%

Project A
Present
Cumulative Value Present Value Cumulative Present
Years Cash Flows
Cash Flows Factor @ of Cash Flows Value of Cash Flows
14%
0 $ (6,000) $ (6,000) 1.0000 $ (6,000.00) $ (6,000.00)
1 $ 2,000 $ (4,000) 0.8772 $ 1,754.39 $ (4,245.6140)
2 $ 2,000 $ (2,000) 0.7695 $ 1,538.94 $ (2,706.6790)
3 $ 2,000 $ - 0.6750 $ 1,349.94 $ (1,356.7359)
4 $ 2,000 $ 2,000 0.5921 $ 1,184.16 $ (172.5754)
5 $ 2,000 $ 4,000 0.5194 $ 1,038.74 $ 866.1619
 
NPV $866.16
IRR 19.86%
MIRR 17.12%
Payback Period in Years 3
Discounted Payback Period in
Years 4.17

Project B
Year Cumulative Present Present Value Cumulative Present
Cash Flows
s Cash Flows Value of Cash Flows Value of Cash Flows

©2015 Walden University 16

 Factor @
14%
$ $
0 (18,000) (18,000) 1.0000 $ (18,000.00) $ (18,000.00)
$
1 $ 5,600 (12,400) 0.8772 $ 4,912.28 $ (13,087.7193)
$
2 $ 5,600 (6,800) 0.7695 $ 4,309.02 $ (8,778.7011)
$
3 $ 5,600 (1,200) 0.6750 $ 3,779.84 $ (4,998.8606)
4 $ 5,600 $ 4,400 0.5921 $ 3,315.65 $ (1,683.2111)
5 $ 5,600 $ 10,000 0.5194 $ 2,908.46 $ 1,225.2534
 
NPV $1,225.25
IRR 16.80%
MIRR 15.51%
Payback Period in Years 3.21
Discounted Payback Period in
Years 4.58

Summary
  Project A Project B
NPV $ 866.16 $ 1,225.25
IRR 19.86% 16.80%
MIRR 17.12% 15.51%
Payback Period in Years 3 3.214285714
Discounted Payback Period in Years 4.17 4.58

b) Being the NPV of both the projects positive, both of the them will create value for the company. The NPV of Project A is $866.16, while
that of Project B is $1,225.25. Therefore, it would be recommended to the company to select both of these projects.

©2015 Walden University 17

c) When the projects are mutually exclusive and only one of these can be selected at a time, I would recommend the company to decide
on the basis of higher NPV. As already discussed, the NPV of Project A is $866.16, while that of Project B is $1,225.25. Therefore, Project
B will be selected.
On the basis of IRR, if the projects are mutually exclusive, and only one of these projects can be selected at a time, then in that case, I
would prefer the project with the higher (IRR). The IRR of project A is 19.86%, while that of Project B is 16.80%. Hence, the Project A
would be selected on the basis of IRR.

d) The cash flows have the same timing pattern in both the projects, but there is a conflict between the Net Present Value and the Internal
Rate of Return.
The major difference is that the initial cash outflows of both the projects and the difference between the cash inflows.
As the project A has lower investment and lower cash inflows, and project B has higher investment and the higher cash flows. Because of
this difference, the time value of money is different in both the projects even after having same discount rate and timing patterns, there
is a conflict between the NPV and the IRR.

©2015 Walden University 18

 References

Hayes, A. (2019, June 30). Internal Growth Rate (IGR) Definition. Retrieved from www.investopedia.com:
https://www.investopedia.com/terms/i/internalgrowthrate.asp

Scilly, M. (2017, September 26). Importance of a Retained Earnings Statement. Retrieved from /bizfluent.com:
https://bizfluent.com/13709431/what-is-diluted-eps

©2015 Walden University 19