Assignment 2 Question 1

1A) Statement of Comprehensive Income

20X2 20X3
Sales 1,656,598 1,987,917.60
COGS 754,469 894562.8
Depreciation 298,188 357,825.24
Interest 44,000 44,000
EBT 568,941 691,529.56
Tax 199,129.35 242,035.35
Net Income 369,811.65 449,494.21
Dividends 110,943.50 134,848.26
Addition to Retained Earnings 258,868.16 314,645.95

Statement of Financial Position

20X2 20X3 20X2 20X3

Assets Liabilities
Cash 140,811 168,93.20 AP 414,150 496,980
AR 496,980 596,376 Notes Pay 50,000 50,000
Inventory 579,809 695,770.80 Total Current 464,150 546,980
Total Current 1,217,600 1,461,119.80 Long Term 500,000 500,000
Fixed 1,987,918 2,385,501.6 Total Liabilities 964,150 1,046,980
Total Assets 3,205,518 3,846,621.40
Owner’s Equity
Common Stock 1,000,000 1,000,000
Retained Earnings 1,241,368 1,556,013.95
Total OE 2,241,368 2,556,013.95
Total Lia & OE 3,205,518 3,602,993.95

3,846,621.40 – 3,602,993.95 = 243,627.45 EFN

1B) Capital intensity = total assets / total equity

=3,205,518 / 2,241,368

=1.4302

The capital intensity ratio is 1.4302

C) Full capacity Sales = 20X2 sales / 0.08

= 1,656,598 / 0.08

= 2,070,747.50

Full capacity sales are $2,070,747.50

1D) Fixed Assets to Sales Ratio

= 1,987,918 / 2,070,747.5

=0.96

Fixed assets needed at project sales = projected 20X3 sales * Fixed asset to sales ratio

=1,987,917.60 * 0.96

=1,908,411.65

Originally projected need: 2,385,501.6

Need @ Full Capacity: 1,908,411.65

= 477,089.95

Full Capacity EFN = Projected EFN – Additional Need @ Full Capacity

= 243,624.45 -477,089.95

= - 233,462.55

No EFN as the result is a negative number

1E) Internal growth rate

P= 369811.65/1656598 = 0.2232356

S=1656598

R=1-0.3=0.7

A= 3205518

G=P(S)R / A-P(S)R

G= (0.2332316)(1656598)(0.7) / 3205518 – (0.2332316)(1656598)(0.7)

G= 258868.155 /3205518 - 258868.155

G= 258868.155 / 29466649.845
= 0.8785

=8.79%

Check: ROA*R/1-ROA*R = 0.115367*0.7 / 1 – 0.115367*0.7 = 0.008785 = 8.79%

Delta’s internal growth rate is 8.79%

1F) Sustainable Growth Rate

P=0.2332316

S/A = 1656598/3205518 = 0.516795725

D/E = 964150/2241368 = 0.430161401

R=0.7

G*=P(S/A)(1+D/E)(R)/1-P(S/A)(1+D/E)R

G* = 0.2332316(0.5167955725)(1+0.430161401)(0.7)/1-(0.2332316)(0.5167955725)(1+0.43016401)(0.7)

G* = 0.120667209 / 1 – 0.120667209

G* = 0.120667209 / 0.879332791

G* = 0.137225872

G*=13.72%

Check: ROE*R/1-ROE*R = 0.164993723*0.7/1-0.164993723*0.7= 0.13057 = 13.06%

Delta’s Sustainable growth rate is 13.06%

1G) EFN = A(g) – P(S)R * (1 + g)

EFN = 3205518(1)-0.2332316(1656598)(0.7) * (1+1)

EFN = 3205518 – 270459.7015 * 2

EFN = 3205518 – 540919.4029

EFN = 2,664,366.67

EFN with 100% sales growth would be $2,664,366.67

Assignment 2 Question 2
The formula sustainable growth rate = p(S/A)(1+D/E)x R / 1-p(S/A)(1+D/E)x R means that sustainable
growth rate depends on the following four variables:

 Profit Margin (p): increases in profit margin increases the firm’s ability to generate funds
internally, increasing the sustainable growth rate
 Dividend policy: a decrease in the dividend payout percentage increases retention ratios ( R )
which in turn increases the internally generated equity, increasing the sustainable growth rate
 Financial Policy: increase in the ratio between debt and equity (D/E) increases leverage, making
additional debt financing available and increasing sustainable growth rate
 Total asset turnover: an increase in the total asset turnover (S/A) increases the sales generated
for each dollar in assets, decreasing the need for new assets as sales grow and increasing the
sustainable growth rate.

Assignment 2 Question 3
3. Present value / Future value

3A) FVt = OV0 x (1+r)

3Ai) r = 3%, t=1 year, PV0=1000, FV=?

FV1 = PV0 (1+r)

FV1= 1000 (1 + 0.03)

FV1 = 1,030.00

The future value in one year is $1,030.00

3Aii)PV0=1000, t=10, r=3%, FV10=?

FV10 = PV0 (1+r)

FV10 = 1000(1+0.03)

FV10 = 1,343.92

The future value in ten years is $1,343.92

3Aiii) FV=?, PV0=1000, t=30, r=3%

FV30=PV0(1+R)^t

FV30=1000(1+0.03)^30

FV30= 2,427.26

The future value in 30 years is $2,427.26

3B) PV = FVt / (1+r)^t

i) PV0=?, FV1=350,000, r=3%, t=1

PV0 = 350000/(1+0.03)^1

PV0= 339,805.83

$339,805.83 must be deposited to buy the house in one year

3Bii) PV0=?, r=3%, t=10, FV=350,000

PV0=350000/(1+0.03)^10

PV0=260,432.87

$260,432.87 must be deposited to buy the house in 10 years

3Biii) r=3%, FV30=350,000, t=30, PV0=?

PV0=FV30/(1+r)^t

PV0=350000/(1+0.03)^30

PV0=144,195.37

$144,195.37 must be deposited to buy the house in 30 years

3C) FV=10,000, r=3%, PV=5000, t=?

t = ln(FVt/PV0) / ln(1+0.03)

t = ln(10,000/5,000) / ln (1.03)

t = 23.4498 years

You can buy the car in 23.5 years

3D) FV=10,000, PV=5,000, r=?, t=2

R = (FVt/PV0) ^(1/t) – 1

R = (10000/5000) ^ (1/0.030 -1

R = 0.4142= 41.42%

You would need an interest rate of 41.42% to buy the car in 2 years

Assignment 2 Question 4
4A) FV Annuity

4Ai) r=12% / 12 = 1%, t=10*12= 120, PMT = 200

FV AF = [(1+r)^t – 1] / r

FV AF = [(1+0.01)^120 – 1] / 0.01

FV AF = 230.04

The future value annuity factor is 230.44

4Aii) r=12% / 12 = 1%, t=10*12= 120, PMT = 200

FV = 200 * (FVAF)

FV = 200 * 230.04

FV = 46,007.74

The future value is $46,007.74

4B) PV Annuity

4Bi) R=12%/12 = 1%, t= 12, PMT = 1000

PV AF = [1-(1/(1+r)^t)]/r

PV AF = [1-(1/(1.01)^12)]/0.01

PV AF = 11.26

The present value annuity value is 11.26

4Bii) R=12%/12 = 1%, t= 12, PMT = 1000

PV = PMT * PVAF

PV = 1000 * 11.26

PV = 11,255.08

The present value is $11,255.08

4Biii) choose $1,000 per month for 12 months

4Biv) find where lump sum = PV Annuity

10000 = 1000 [1-(1/(1+r)^12)]/r

On calculator:

PV= 10,000

N= 12

PMT = -1,000

FV = 0

COMP I/Y = 2.92 * 12 = 35.07%

I would be indifferent at a rate of 35.07%

4Bv) find where lump sum = PV Annuity

10000 = 1000 [1-(1/(1+0.01)^t)]/0.01

On calculator:

PV= 10,000

I/Y = 1

PMT = -1,000

FV = 0

COMP N = 10.58 periods (months)

I would be indifferent at 10.58 payment periods

4Bvi) find where lump sum = PV Annuity

10000 = PMT [1-(1/(1+0.01)^12)]/0.01

10000/[1-(1/(1+0.01)^12)]/0.01 = PMT

PMT = 888.49

On calculator:

PV= 10,000

I/Y = 1

FV = 0

N = 12

COMP PMT = 888.49

I would be indifferent if the payments were $888.49

4C) PMT = -200

R = 0.5

FV = 10000

PV = 0

COMP N = 44.74 / 12 = 3.73 years

It will take 3.73 years

4D) PMT = -200

FV = 30000

PV = 0

N = 120

COMP I/Y = 0.3625 * 12 = 4.35%

The rate must be 4.35%

Assignment 2 Question 5
5A) PMT = 200, t = 12*10=120, r=12%/12 = 1%, PV= ?

PV = 200[1-(1/(1+0.01)^120)] / 0.01

PV = 13,940.10

The current value is $13,940.10

5B) Growing Annuity

T=3 * 2 = 6, g = 0.5%, r = 6%, initial PMT = 300

PV = PMT/(r+g) [1-{(1+g)/(1+r)}^t]

PV = 300/(0.06+0.005) [1-(1.005/1.06)^6]

PV = 4615.384615 * 0.273624512

PV = 1,262.88

The present value is $1,262.88

5C) Perpetuity

PV=PMT / r

PV = 300 / 0.06

PV = 5000

The present value is $5,000

Assignment 2 Question 6
6A) EAR = (1+ (APR/n))^n – 1

EAR = (1 + (0.025/2)^2 – 1

EAR = 0.025156 = 2.52%

The effective annual rate is 2.52%

6B) EBR = (1+0.025156) ^ )1/26) -1

EBR = 0.000956 = 0.1%

The effective biweekly rate is 0.1%

6C) PV = 43000, FV = 0, APR = 2.5 / 26 = 0.096%, n= 5 * 26 = 130.

PV = PMT (1-(1/(1+r)^n)) / r

43000 = PMT (1-(1/(1+0.00096)^130)) / 0.00096

43000 = PMT (0.117573737/0.00096)

43000 = PMT 122.1601427

PMT = 352.00

Ms. Cressida’s payments are $352.00 biweekly

6D) Payments made = 26*3 = 78

Payment amount = 351.996

351.996 * 78 = 27455.68

43000 – 27455.69

= 15,544.31

The current loan balance is $15,544.31

6F) Amortization Table

# Beginning Payment Interest Principal Ending

1 43,000 352 41.28 310.72 42,689.28
2 42,689.28 352 40.98 311.02 42,378.26
3 42,378.26 352 40.68 311.32 42,066.94
4 42,066.84 352 40.38 311.62 41,755.32
5 41,755.32 352 40.09 311.91 41,443.41

126 1,754.53 352 1.68 350.32 1,404.21

127 1,404.21 352 1.35 350.65 1,053.56
128 1,053.56 352 1.01 350.99 702.57
129 702.57 352 0.67 351.33 351.24
130 351.24 352 0.34 351.66 0.42
Assignment 2 Question 7
7A)

T=35 *12= 420, FV = 1000000, r = 12%/12 = 1%

FV = PMT [((1+r)^t)-1]/r

1000000 = PMT [((1+0.01)^420)]/0.01

1000000 = PMT (64.30959471 / 0.01)

1000000 = PMT 6430.949471

PMT = 155.50

After tax monthly income – amount to save

= 3000(1-0.35) – 155.50

= 1950 – 155.50

= 1794.50 available to be spent

Percentage available to spend:

1794.50/1950

= 0.92 = 92% can be spent

92% of your monthly income can be spent, the remainder must be saved

7B) PV = 1000000, t= 20*12 = 240, r = 12% / 12 = 1%,

PV = PMT (1-(1/(1+r)^t))/r

1000000 = PMT (1-(1/(1+0.01)^240))/0.01

1000000 = PMT (0.908194163 / 0.01)

1000000 = PMT (90.81941635

PMT = $11,010.86

$11,010.86 can we withdrawn monthly

Assignment 2 Question 8
8A) 1000/(1+r)^N

=1000 / (1 + 0.0174)

= 982.90

The price of the treasury bill is $982.90

8B) 1000 * 1.0189 = 1,018.90, so YTM must be lower than coupon rate (3%)

Value @ 3% = 1000.00 Value @ 3%= 1000.00

Value @ 2% = 1019.41 desired = 1018.90

Difference 19.41 18.90

R = 3% - [(18.90 / 19.41) * 1%]

R = 0.03 – 0.009737249

R = 0.020262751 = 2.0262751%

Check:

PV(bond) = PV(coupon) + PV(face value)

= 30[1-(1/(1+0.020262751)^2))/0.020262751 + 1000/1.020262751^2

= 58.22440362 + 960.6737802

= 1018.90

Therefore 2.0262751% is correct

The yield to maturity of Coupon Bond A is 2.03%

8C) PV(bond) = PV(coupon) + PV(face value)

PV(bond) = 35[1-(1/(1+0.01255)^2))/0.01255 + 1000/1.01255^2

PV(bond) = 168.5994549 + 939.7770619

= 1,108.38

The price of Coupon Bond B is $1,108.38

8D) Rreal = [(1+Rnom) / (1+inflation)] – 1

Treasury;

Real = [(1+0.0174) / (1+0.015)] – 1

Rreal = 0.002365432 = 0.23%

Coupon A

Rreal = [(1+0.020262751) / (1+0.015)] – 1

Rreal = 0.005157976 = 0.052%

Coupon B

Rreal = [(1+0.0251) / (1+0.015)] -1

Rreal = 0.009950739 = 1.00%

The real rates for the treasury bill, Coupon Bond A, and Coupon Bond B are 0.23%, 0.052%, and 1.00%
respectively

8E) Choose Coupon B as real rate = 1.00%

Assignment 2 Question 9
9A) weight of payment = 100%

100% * 5 years = 5 years

The duration is 5 years. This tells us that the duration of zero-coupon bonds are always equal the
years to maturity

9B) 11% * 2 = 22% coupon

Find PV Cash Flows

Period Cash Flow PV @ 12.1604%

1 220 196.14766
2 220 174.8813841
3 220 155.9207921
4 220 139.0159023
5 1220 687.324909
Total 1,353.2906
Find weight of PV Cash Flows

Period PV (CF) Weight Calculation Weight

1 196.14766 /1353.2906 0.144941271
2 174.8813841 /1353.2906 0.129226778
3 155.9207921 /1353.2609 0.115216046
4 139.0159023 /1353.2906 0.102724354
5 687.324909 /1353.2906 0.507891586
Total 1,353.2906 1.00

Find duration

Period Weight Duration

1 * 0.144941271 0.144941271
2 * 0.129226778 0.258453556
3 * 0.115216046 0.345648138
4 * 0.102724354 0.410897416
5 * 0.507891586 2.539457930
Total 3.7

The duration is 3.7 years. This tells us that duration is less that the years to maturity

9C) 5 * 0.1% = 0.5%

Current price = 1353.2906

New price = 1353.2906 * (1-0.005)

New price = 1,346.52

The price of the bond, if interest rates were raised by 0.1%, would be $1,346.52

9D) PV(bond) = PV(coupon)+PV(face value)

PV(bond) = 220[1-(1/(1+0.122604)^5))]/0.122604 + 1000/1.122604^5

PV(bond) = 787.9613920 + 560.8762795

PV(bond) = 1,348.84

The price would be $1,348.84. I am comfortable with this answer because it is reasonably close
(within $2) of my estimate in 9C
Assignment 2 Question 10
owns: 3000

Quarterly dividend: 0.65/share

R=12% semi annual

10A) EAR = (1+(APR/n))^n – 1

EAR = (1+(0.12/2))^2-1

EAR = 0.1236 = 12.36%

The effective annual rate is 12.36%

10C) Pt = Dt+1 / r

=0.65/0.03

= 21.66

The estimated stock price based on the Constant Dividend model is $21.66

10D) 100*21.66

=2,166.67

Aunt Kathleen could only spend $2,166.67 on the computer

Assignment 2 Question 11
11)

Step 1 : Find Cash Flows

CF1 = D0 * (1 + g)

CF1 = 1(1+0.25)

CF1 = 1.25

CF2 = D1 * (1+g2)

CF2 = D0 * (1 + g ) (1 + g2)
CF2 = 1.25 (1.25)

CF2 = 1.5625

CF3 = D2 * (1+g3)

CF3 = 1.5625 (1.25)

CF3 = 1.953125

CF4 = D3 * (1+g4)

CF4 = 1.953125 (1.15)

= 2.246093750

CF5 = D4 * (1+g5)

CF5 = 2.246093750 ( 1.15)

CF5 = 2.583007813

CF6 = D5 * (1+g6)

CF6 = 2.583007813 (1.15)

CF6 = 2.9704589894

CF7 = D6 * (1+g7)

CF7 = 2.9704589894 (1.07)

CF7 = 3.178391113

Step 2: Find PV Cash Flow

PV(CF1) = 1.25 / 1.16 = 1.077586207

PV(CF2) = 1.5625 / 1.16^2 = 1.161192033

PV(CF3) = 1.95 / 1.16^3 = 1.251284519

PV(CF4) = 2.25 / 1.16^4 = 1.240497583

PV(CF5) = 2.58 / 1.16^5 = 1.229803639

PV(CF6) = 2.97 / 1.16^6 = 1.219201883

PV6(CF7) = 3.18 / (0.16-0.07) = 35.31545681

PV(PV6(CF7)) = 35.315 / 1.16^6 = 14.49495572

Total: 21.67452158

# shares outstanding = 2,000,000

2,000,000 * 21.67452158

= 43,349,043.16

GeoTech can expect to raise $43,349,043.16 from this IPO.