Strategic Corporate Finance
4 assignment requirement. Please utilize 5 sources for each assignment and have at least 10 different in text citations. utilize the template provided. Early submission is appreciated. Please conduct all calculations on excel as described below.
Topic 1: Prof. Ed’s video and image resources. I have put together the following multimedia resources (i.e., videos and images) to help you learn about the concepts we’ll be exploring in this course. You can find them at the hyperlink below:
https://sites.google.com/site/resourcesacctgfinance/home/managerial-finance/ref-fin-501-tr-1038
You are also welcome to visit my entire website devoted to students of Accounting and Finance by visiting http://www.penn-oaks.com/.
Topic 2: Module 1 case 1. Module 1 Case 1 is really designed to give you the opportunity to work with time value of money concepts. I hope that all of you will choose to work them using Excel functions, but you are also welcome to tackle time value of money concepts with Excel formulas, with calculators (either online or physical), or with tables. Ideally, you will all submit your work as an Excel file, but you are welcome to submit your work as a Word or .pdf file as well.
Be sure to take advantage of my video and image (i.e., multimedia) presentations since I work through many time value of money exercises for you.
Topic 3: Finance topics document. Class, I came across this Finance Topics document. It contains many useful concepts related to the topics we explore in this course. I think the most useful part of this document falls under Topic 1.1b, “Ten Principles that form the foundation of Financial Management.” You may find some of these principles helpful to you as you tackle the graded assignments and discussions in this course. You can view and download it from the hyperlink below.
https://drive.google.com/file/d/10XS8riKCGEDZkYn8e4QSDNhTqrteVKAR/view?usp=sharing
Topic 4: Do not post early in the discussions. Our class discussions have starting and ending dates. Posting early is equivalent to speaking to the class before they arrived, just as posting late is equivalent to speaking to the class after everyone has left.
If you have posted early, please be sure to make an EXTRA value-added post, since the post you made early will not count, and please do not post early in all future discussions.
Topic 5: Discussion Expectations. In each graded discussion, I wanted to share my expectations about what I’m looking for.
Keep in mind that you will graded using the discussion grading rubric. I have attached an image of it at the bottom of this post.
I will be looking for a minimum of three discussion posts in each graded discussion (but keep in mind that posting the minimum does not mean that you will earn the maximum score). You can expect to earn the maximum score when you make five or more value-added posts in each graded discussion.
I will be looking to see that you participated on at least three unique days in each graded discussion. If you cannot participate on three unique days, but still make meaningful posts, you can expect to earn a score that will not exceed 89%.
Late discussion participation will earn only partial credit. The discussions are meant for maximum student participation and should take place during the time frame in which they are scheduled. For late posts in our graded discussions, only your original discussion post will be graded (since at the time you will be posting in the discussion all others will have already moved on to a subsequent discussion in a subsequent module). Full credit won’t be possible, since you would not have participated with others on a timely basis (and the discussions are designed for maximum student participation). Expect partial credit for late discussion posts to fall near 70% but no higher.If you do make your original discussion post late in any module, you must contact me to let me know. You can either make a post in the ungraded Questions, Ask area of the Cyber Café, or you can contact me via email at edward.kaplan@trident.edu. If you don’t contact me, I won’t know that you have posted late in an earlier module, since I grade in batch and once I grade, I don’t go looking for late posts.
Single-sentence posts earn no credit, and simple “I agree” or “Nice work fellow student” posts will not earn any credit. It is okay to agree with or compliment your fellow classmates, but you must then follow up with some substantive comments as well.
Posts that are nothing more than the exact words of others earn no credit, even if they appear in quotes and are properly referenced. I think it is great and very beneficial when students discover relevant information to our discussion topics from other sources they have found over the internet. In the discussion threads, the correct way to post information you have found involves summarizing what you have found (in your own words) and then providing the web link to where the source of your summary originated. If the link has a few ideas that you want to quote word for word, you certainly can do that. Just be sure you put those words in quotes so everyone reading your post understands you are quoting the work of others. Your posts should never simply be a cut and paste of someone else’s words–even if it appears in quotes and has the web site listed as a reference. Instead, summarize the main points and provide the web link. That way, it is clear you understand how the topic relates to our discussion and others interested in learning more can visit the web site you have provided.
Posts made early earn no credit and should be avoided.
Module 1 – Case
PRESENT VALUE AND THE RISK/RETURN TRADE-OFF
ASSIGNMENT OVERVIEW
For this assignment, make sure to first carefully review all of the required readings about present value, future value, risk and return, and the CAPM. Once you are relatively comfortable with these concepts, try working through some of the examples in the background readings and try computing the answers on your own. Once you are confident you both understand the concepts and the computational steps, complete the assignment below.
CASE ASSIGNMENT
Present your answers to the problem below in a Word document, and also upload an Excel file with your computations. Excel is required for Questions 2 and 3. Excel is optional for Questions 1 and 4, but you are required to show your steps for all quantitative problems. Even if you get the answer wrong, you can still get partial credit if you show your work.
Calculate the following:
Suppose you wish to raise some money for your favorite local charity. This charity needs $50,000 a year to run its operation and you want to make sure that it is ensured an annual payment of this amount from now on for every year in the foreseeable future. Given an interest rate of 5%, how much would you have to fund this perpetuity to guarantee the charity a payment of $50,000 per year?
You decide to put $1,000 in a new bank account and don’t plan to withdraw the money for 10 years. If your bank does continuous compounding and the interest rate is 1%, what will be the value of this bank account in 10 years?
Suppose you won the lottery but not all of your winnings will come in one year. Instead, you will get a series of annual payments over the next five years. The table below tells you what your payment will be every year for the next five years. Use the information in the table to make the following computations:
The present and future value of your lottery ticket if the interest rate is 8%
The present and future value of your lottery ticket if the interest rate is 10%
Year
Payment
1
5000
2
6000
3
7000
4
8000
5
9000
The table below gives the probability of different returns for three different assets. Using this table, calculate the following:
The expected return of each asset
The standard deviation of returns of each asset
The coefficient of variation of each asset
Based on your answers to B) and C) above, which asset has the highest total risk and highest relative risk?
Asset A
Asset B
Asset C
Probability
Return
Probability
Return
Probability
Return
0.3
5
0.1
25
0.1
4
0.4
8
0.3
20
0.8
5
0.3
9
0.5
15
0.1
6
0.1
14
Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
What is the required return for this stock?
If the beta increases by 50% (but risk-free rate remains 1%), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?
ASSIGNMENT EXPECTATIONS
Answer the assignment questions directly.
Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
For computational problems, make sure to show your work and explain your steps.
For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.
Module 1 – Background
PRESENT VALUE AND THE RISK/RETURN TRADE-OFF
To begin the module, start off with these two videos to give yourself an overview of the main concepts covered in this module. The first video is from Professor Holthausen of the Wharton School of Business at the University of Pennsylvania. He explains the concept of the time value of money and also goes through some calculations using Microsoft Excel. The second video is from Professor Pinder of the University of Melbourne and covers some basic concepts of risk and return.
University of PennsylvaniaHolthausen, R. (2015). Time value of money. Coursera. Retrieved from: https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money
Unversity of Melbourne
Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk
A second video from Dr. Pinder on the capital asset pricing model is highly recommended but not required. A link to Dr. Pinder’s video is included under the optional reading list below.
Once you have finished viewing the videos, take a closer look at the concepts covered in the videos by reading through these book chapters. In addition to reading about the basic concepts, make sure to work through some of the numerical examples as these will help you with your assignments:
time and money scale
Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.
risk and reward tightwire
Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.
If you have any difficulty with the material above, it is highly recommended that you take a look at some of the optional readings below. The materials below cover the same material but sometimes concepts can be absorbed better if you see some explained in a different manner or see additional examples.
Finally, if you don’t have much experience with Microsoft Excel then please take a look at the following videos:
Davis, J. (2013). Present value of a single amount in Excel. Retrieved from: https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s
Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from: https://www.youtube.com/watch?v=kDOIuJbHpLc
Codible. (2012). Future value for a series of annual deposits. Retrieved from: https://www.youtube.com/watch?v=EcfmEVVHDsw
OPTIONAL READING
Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate
Clifford, J. (2014). Time value of money. ACDC Leadership. Retrieved from: https://www.youtube.com/watch?v=nfkqCv3Rd_g
Module 2 – Case
STOCK AND BOND VALUATION
ASSIGNMENT OVERVIEW
Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.
Submit your answers as a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual, no computations are necessary but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.
CASE ASSIGNMENT
Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
- What is the value of this bond?
- Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond?
- What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
- Now suppose the bond still pays an annual coupon of$50 but the interest rate drops to 2%. What is the new value of this bond?
The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:
- Assuming zero growth in dividends, what is the value of each share?
- Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
- Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?
Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
- What is the present value of Acme’s future cash flows using the discounted cash flow model?
- If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?
- Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?
Year
Cash flow
2018
500,000
2019
550,000
2020
620,000
2021
700,000
2022
800,000
Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.
The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.
Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get? Explain your reasoning using references from the background readings.
Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get? Explain your reasoning using references from the background readings.
ASSIGNMENT EXPECTATIONS
Answer the assignment questions directly.
Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
For computational problems, make sure to show your work and explain your steps.
For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal
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