Financial Management In The Public Sector Tools Applications And Cases 1st Edition Xiaohu Wang - Solutions

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2. Zwing-Zook Enterprises has a beta of 1.45. The risk-free rate is 6 percent and the expected return on the market portfolio is 10 percent. The company presently pays a dividend of $2 a share and investors expect it to experience a growth in dividends of 7 percent per annum for many years to come.
c. AU wealth is invested in the market portfolio. Furthermore, you borrow an additional one-third of your wealth to invest in the market portfolio.
b. One-third is invested in the risk-free asset and two-thirds in the market portfolio.
a. All wealth is invested in the risk-free asset.
1. You are able to both borrow and lend at the risk-free rate of 9 percent. The market portfolio of securities has an expected return of 15 percent and a standard deviation of 21 percent. Determine the expected return and standard deviations of the following portfolios.
b. (1) For a zero or less return, standardizing the deviation from the expected value of return one obtains (0 - 20%)/16.43% = -1.217 standard deviations. Turning to Table C at the back of the book, 1.217 falls between standard deviations of 1.20 and 1.25. These standard devia
5.a. By visual inspection of a symmetrical distribution, the expected value of return is seen to be 20 percent. (This can easily be confirmed mathematically.)The standard deviation is
c. P = $100/(1.07)6 = $66.63
b. (1) Setting up this problem again in keeping with Eq. (2-15) and solving for price, we find it to be $104.92. (2) In this case, price is found to be $97.65. (3) Price equals the face value of $100 when yield equals the coupon rate.
2.a. (1) Setting up the problem in keeping with Eq. (2-15) and solving for r, the yield to maturity is found to be 12.36 percent. The yield is less than the coupon rate when the bond trades at a price premium above its face value. (2) The yield here is 15.72 percent. Yield is more than the coupon
b. What is the probability that the return will be greater than (1) 10 percent?(2) 20 percent? (3) 30 percent? (4) 40 percent? (5) 50 percent?
a. What are the chances that the investment will result in a negative return?
18. Shirley Batavia is analyzing an investment in a shopping center. The expected return on investment is 20 percent. The probability distribution of possible returns is a normal bell-shaped distribution with a standard deviation of 15 percent.
Zachery Zorro Company presently pays a dividend of $1.60 per share and the market price per share is $30. The company expects to increase the dividend at a 20 percent annual rate the first 4 years, at a 13 percent rate the next 4 years, and then grow the dividend at a 7 percent rate thereafter.
c. Integrating into retail stores will increase the dividend growth rate to 9 percent and increase the required rate of return to 13 percent.From the standpoint of market price per share, which strategy is best?
b. Expanding timber holdings and sales will increase the expected dividend growth rate to 10 percent but will increase the risk of the company.As a result, the rate of return required by investors will increase to 15 percent.
a. Continuing the present strategy will result in the expected growth rate and required rate of return shown.
c. What would be its common stock and paid-in capital accounts after the financing?The stock of the Health Corporation is currently selling for $20 and is expected to pay a $1 dividend at the end of the year. What will be the rate of return to investors who buy the stock now and sell it for $23
b. If the company were able to sell stock at $19 per share, what would be the maximum amount it could raise under its existing authorization, including Treasury shares?
a. How many shares are now outstanding?
What is the bond's yield to maturity if a semiannual convention to valuation is employed?Caroline Islands Resorts has 1,750,000 shares of authorized common stock having a $1 par value. Over the years it has issued 1,532,000 shares, but presently 63,000 are held as Treasury stock. The paid-in
b. What would be the yield to maturity if the market price were (1) $110?(2) $94?Kerby Manufacturing Corporation sells a zero coupon bond for $38 with 8 years to maturity. At maturity the company will pay the bond's holder $100.
a. What is the bond's market price if the yield to maturity is (1) 11.6 percent?(2) 9.2 percent?
9. Barquez Mines, Inc., is considering investing in Chide. It makes a bid to the government to participate in the development of a mine, the profits of which will be realized at the end of 5 years. The mine is expected to produce $5 million in cash to Barquez at that time. Other than the bid at the
8. Establish a loan amortization schedule for the following loan to the nearest cent. (See Table 2-3 for an example.) This problem should be done only with a< , -, spreadsheet program. Situation: A 36-month loan of $8,000 with equal installment payments at the end of each month. The interest rate
b. Of each payment, what is (1) the amount of interest? (2) the amount of principal?
7. You borrow $10,000 at 14 percent for 4 years. The loan is repayable in four equal installments at year ends., -)a. What is the annual payment that will completely amortize the loan over 4 years? (You may wish to round to the nearest dollar.)
6. On a contract, you have a choice of receiving $25,000 six years from now or$50,000 twelve years hence. What is the implied discount rate that equates these two amounts?
c. If Cohen had $30,000 to put into an annuity, how much would he receive each year if the insurance company used (1) a 5 percent interest rate in its calculations? (2) a 10 percent rate?
b. What would be the purchase price if the interest rate were 10 percent?
a. If Monument Life uses an interest rate of 5 percent in its calculations, what must Cohen pay at the outset for an annuity providing him$10,000 per year? (Assume annual payments are at the end of each of the 15 years.)
5. Selyn Cohen is 70 years old and recently retired. He wishes to provide retirement income for himself and is considering an annuity contract with Monument Life Insurance Company. Such a contract pays him an equal amount each year he lives. For this cash-flow stream, he must put up so much money
4. Graph the present value of $1 per year for 5,10,15,20, and 25 years at 0,10, 20,30, and 40 percent rates of discount. Explain the difference in the slopes of the curves.
c. An investment of $1,000 today will return $1,000 at the end of 1 year,$500 at the end of 2 years, and $100 at the end of 3 years. What is its IRR?d. An investment of $1,000 will return $60 per year forever. What is its IRR?
b. An investment of $1,000 today will return $500 at the end of each of the next 3 years. What is its IRR?
3. The following are exercises on internal rates of return (IRRs).a. An investment of $1,000 today will return $2,000 at the end of 10 years. What is its IRR?
e. Compare your solutions in part c with those in part d and explain the reason for the differences.
d. $1,000 is to be received at the end of 1 year, $500 at the end of 2 years, and $100 at the end of 3 years. What is the aggregate present value of these receipts, assuming a discount rate of (1) 4 percent? (2) 25 percent?
b. What is the aggregate present value of $500 received at the end of each of the next 3 years, assuming a discount rate of (1) 4 percent? (2)25 percent?c. $100 is received at the end of 1 year, $500 at the end of 2 years, and$1,000 at the end of 3 years. What is the aggregate present value of
a. $100 at the end of 3 years is worth how much today, assuming a dis-, -> count rate of (1) 10 percent? (2) 100 percent? (3) 0 percent?
d. At the end of 10 years, how much is an initial deposit of $100 worth, assuming an interest rate of 10 percent compounded (1) annually?(2) semiannually? (3) quarterly? (4) continuously?2. The following are exercises in present values.
c. Why does your answer to part b differ from that to part a?
b. At the end of 3 years, how much is an initial deposit of $100 worth, assuming a quarterly compounded interest rate of (1) 10 percent? (2) 100 percent?
a. At the end of 3 years, how much is an initial deposit of $100 worth, assuming an annual interest rate of (1) 10 percent? (2) 100 percent? (3) 0 percent?
1. The following are exercises in terminal values.
b. Assume that the parameters in part a pertain to a normal probability distribution. What is the probability the return will be (1) zero or less?(2) less than 10 percent? (3) more than 40 percent?
a. What are the expected return and standard deviation?
4. For Delphi Products Corporation in Problem 3, suppose the company were expected to have a price/earnings ratio of 8 times at the end of year 6. Moreover, earnings per share in year 7 are expected to be $7.50. If the present market price per share is $35, what is the expected return on investment?
b. Would your valuation change if you expected to hold the stock only 3 years?
a. What value would you place on the stock if an 18 percent rate of return were required?
3. Delphi Products Corporation currently pays a dividend of $2 per share and this dividend is expected to grow at a 15 percent annual rate for 3 years, then at a 10 percent rate for the next 3 years, after which it is expected to grow at a 5 percent rate forever.
c. Instead of a coupon bond, suppose it were a zero coupon, pure discount instrument. If the yield were 14 percent, what would be the market price? (Assume semiannual compb~ndin~.)
b. (1) If the bond's yield were 12 percent, what would be its price? (2) if it were 15 percent? (3) if it were 14 percent?
a. (1) If the market price of the bond is $104, what is the yield to maturity?(2) If it were $97, what would be the yield? (3) if it were $loo?
2. Sanchez Hydraulics Company has outstanding a 14 percent coupon bond with 3 years to maturity. Interest payments are made semiannually. Assume a face value of $100.
c. Compute the internal rate of return of each stream if the initial investment at time 0 were $600.
b. Compute the present value of each stream if the discount rate is 14 percent.
a. Calculate the terminal value of each stream at the end of year 5 with an interest rate of 10 percent.
3. When the market price equals the face value, the yield to maturity equals the coupon rate
2. When a bond sells at a premium, its yield to maturity is less than the coupon rate.
1. When a bond's market price is less than its face value of $100 so that it sells at a discount, the yield to maturity exceeds the coupon rate.
8. How does the notion of risk and reward govern the behavior of financial managers?
7. As an investor, do you believe that some managers are paid too much? Do not their rewards come at your expense?
6. In recent years, there have been a number of environmental, pollution, hiring, and othe; replations imposed on businesses. In view of these changes, is maximizationof shareholder wealth still a realistic objective?
5. Should the managers of a company own sizable amounts of stock in the company?What are the pros and cons?
4. What are the major functions of the financial manager? What do these functions have in common?
3. Beta-Max Corporation is considering two investment proposals. One involves the development of 10 discount record stores in Chicago. Each store is expected to provide an annual after-tax profit of $35,000 for 8 years, after which the lease will expire and the store will terminate. The other
1. Why should a company concentrate primarily on wealth maximization instead of profit maximization?2. "A basic rationale for the objective of maximizing the wealth position of the stockholder as a primary business goal is that such an objective may reflect the most efficient use of society's
4. Application Using any CAFR that you select, conduct an FCA.
3. Application In the case study, we examined the budgetary solvency in the city of Lucille.Now the city manager wants an analysis of all four dimensions of FCA—cash solvency, budgetary solvency, long-run solvency, and service solvency.Only data from the past five years are available for
2. Calculation Table 12.10 shows expenditure data for the past five years in an urban city.1. Compute the correlation coefficients for these factors.2. Prepare a paragraph interpreting the results. Table 12.10 Expenditure Data (in thousands of dollars) Year 12345 Public safety General government
Define the following Long-term debt ratio Net assets per capita Long-term debt per capita Socioeconomic/organizational factors Theoretical justification of measurement Measurement controllability Warning trends Correlation coefficient Interpretation of correlation coefficient values Exact form of
1. Key TermsService solvency Measurement validity Measurement reliability Measurement affordability Cash ratio Quick ratio Operating ratio Own-source ratio Net asset ratio
1. Key Terms Financial condition analysis (FCA)Purpose of FCA Scope of FCA FCA modeling Financial condition Solvency Cash solvency Budgetary solvency Long-run solvency
Access a state or local government’s CAFR for the last two years.1. Go to the General Fund Balance Sheet (likely included in the Governmental Funds Balance Sheet). Compare key assets, liabilities, and the fund balance for the past two years. Point out any change that causes concern.2. Go to the
1. Key TermsBalance sheet for funds Statement of revenues, expenditures, and changes in fund balance Proprietary funds Enterprise funds Internal service funds Fiduciary funds Pension trust funds Agency funds Investment trust funds Private-purpose trust funds The millage
1. Key Terms Accounting equation for funds Fund balances Governmental funds Measurement focus Income determination (economic resource measurement) focus Current financial resource measurement focus General fund Special revenue funds Capital project funds Debt service funds
2. CAFR Access the CAFR of a government for the last three years. Refer to the statement of activities to compare changes in expenses, program revenues, net(expenses) revenues, general revenues, and changes in net assets. Identify any changes that cause concern.
1. Key Terms Revenues Program revenues General revenues Net (expenses) revenues Special items Transfers Change in net assets Accrual basis Cash basis Modified accrual basis
1. Key Terms Statement of activities Governmental activities Business-type activities Expenses Indirect expenses Direct services
2. Financial Analysis of the CAFR Access the CAFRs of three recent years of a government. Refer to the Statement of Net Assets to conduct an analysis on assets, liabilities, and net assets to identify any changes that cause concern about the financial condition of the government.
1. Key Terms Debit and credit Primary government Component units Monetary denominator Objective evidence Cost convention Conservatism Going concern Materiality Accrual accounting basis
1. Key Terms Accounts receivable Inventory Prepaid expenses Long-term assets or fixed assets Current liability Noncurrent liabilities Accounts payable Long-term debts Deferred revenues Restricted net assets Unrestricted net assets Accounting cycle Accounting journal Accounting ledger Double-entry
1. Key Terms Net assets Current assets Noncurrent assets Cash or cash equivalents Investments
1. Key Terms Net worth Balance sheet Statement of net assets Statement of financial position Statement of activities Fundamental accounting equation Assets Liabilities
3. Do you see any investment opportunities for the foundation’s cash?If yes, develop an investment strategy for the foundation.You are a financial analyst in the Bridgetown Foundation—a public service agency in Chicago that provides specialized mental care services to the poor.The
2. Assuming a lower limit of $1,000,000, a transaction fee of $200, and a 5 percent annual interest rate, use the Miller-Orr model to determine the upper limit and the return point of the cash balance.You are a financial analyst in the Bridgetown Foundation—a public service agency in Chicago that
1. Create a cash budget for the next year. Use the proper forecasting techniques (from Chapter 1) and defend your reasoning for your choice of technique.You are a financial analyst in the Bridgetown Foundation—a public service agency in Chicago that provides specialized mental care services to
2. Assuming a lower limit of $200, a transaction cost of $10, and an annual interest rate of 10 percent, what is the upper limit and what is the return point using the Miller-Orr model? Table 8.6 Cash Flows of Selected Days ($) Day Receipts 1 50 Disbursement 70 10 234567896 90 40 80 80 100 120 70
1. Calculate the variance of net daily cash flows. Table 8.6 Cash Flows of Selected Days ($) Day Receipts 1 50 Disbursement 70 10 234567896 90 40 80 80 100 120 70 140 50 50 80 40 130 110 60 100 110 80
1. Key Terms Return point Transaction cost Daily interest rate Net cash flows Variance of daily net cash flows Decision rules in the Miller-Orr model
1. Key Terms Investment plans Low-risk investments Miller-Orr model Lower limit Upper limit Spread
1. Key Terms Cash safety Liquidity Investment returns Cash budget Cash receipts Cash disbursements Cash balance Optimal cash balance
4. Historical Comparison of the Indicators Make an effort to obtain CAFRs for the past three years, and compare the indicators in Questions 2 and 3 over time. Report your monitoring findings.
Use the information in the above question to compute the following financial indicators. Discuss briefly the meaning of each indicator.1. Total revenue per resident. (Note: To find out the population figure, you may want to check the “Statistical Section” of CAFR, call the organization, or
8. Current liabilities for the primary entity in the Statement of Net Assets(Total Liabilities – Noncurrent or Long-Term Liabilities). The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is the most important section in the
7. Total liabilities for the primary entity in the Statement of Net Assets. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is the most important section in the CAFR. It includes a “Management Discussion and Analysis”
6. Current assets for the primary entity in the Statement of Net Assets(Total Assets – Noncurrent or Capital Assets). The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is the most important section in the CAFR. It
5. Change in net assets for the primary entity in the Statement of Activities. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is the most important section in the CAFR. It includes a “Management Discussion and
4. Total expenses for the primary entity in the Statement of Activities. The CAFR typically has three sections: an introduction, a financial section, and a statistical section. The financial section is the most important section in the CAFR. It includes a “Management Discussion and Analysis”

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Financial Management In The Public Sector Tools Applications And Cases 1st Edition Xiaohu Wang - Solutions

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