ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM

A firm recently paid a dividend of $7/share. Over the next
15 years, they will maintain their dividend at $7/share
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A firm recently paid a dividend of $7/share. Over the next 15 years,
they will maintain their dividend at $7/share. Then afterwards, they
will change their dividends to grow at a constant 6%/year every year,
forever. %.
a. How much dividend is paid in year 31?
b. What is the stock price?
2. A stock will pay the following dividends: $5 in year 1, $6 in year
2, $7 in year 3. After year 3, they will maintain a zero growth
dividend policy. %. Find the stock price.
3. A firm has a zero growth dividend policy and recently paid
$2/share. Next year, they will pay an abnormally large dividend
payment of $10/share. Afterwards, they will continue to pay their
constant dividend payments of $2/share. %. Find the stock price
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ARE 171B Department of Ag and Resource
Important: – You must write your answers on the sheet on pg. 3 of
this assignment and
you must attach explanations and derivations of your answers.
– Please turn your homework in at lecture or directly to your TA.
– Late homeworks will automatically be given a score of zero. In this
homework assignment, you will get some data on the S&P 500
Index and on S&P
500 Index Options from the Internet and evaluate the performance of
the Black-Scholes option
pricing model.
Go to http://finance.yahoo.com. Enter the symbol ^SPX to obtain

information on the S&P
500 index and then click on ―Historical Prices‖. Change the start date
to Jan 01, 2000, the end
date to February 28, 2014, and click on "Monthly" and
then "Get Prices‖. We will only be
interested in the "Close" column, which gives the value of
the S&P 500 at the close of trading
on the last day of each month. Go to the bottom of the page and click
on " Download to
Spreadsheet" and save the data in an Excel file.
Now open up your spreadsheet file. (It will be easiest if you re-order
the data because Yahoo
gives it to you in reverse order - you can use the Sort command in
Excel to do this.) Create a
new column in Excel that measures the change in the natural
logarithm of the S&P 500 from
one month to the next, i.e. the monthly returns on the S&P 500.
Compute the average and standard deviation of returns. (You should
get 0.0017 as the
average return, i.e. 0.17% per month). The variance of returns is the
standard deviation squared.
If you multiply your estimated variance by 12, you will get an
estimate of the annualized return
variance (σ2) that you can use in computing the Black-Scholes option
price.
On the following page, you will find some quotes on S&P 500
options from cboe.com on
March 3. These are European options and represent just some of the
traded options on March
3. Calculate the Black-Scholes price for call options with strike prices
of 1800, 1850, and
1900 that expire in April, May, and June. It is easiest to do this in
Excel. The NORMSDIST
function can be used to get the appropriate values from the cumulative
normal distribution, i.e.
N(d). Compare the predicted Black-Scholes price to the actual price in
the market. You can try

more strike prices if you want to. (The difference between your
answer and the market price
will be quite large in some cases.)
Next, take the Black-Scholes formula and plug in different values of
the variance (σ2)
until the Black-Scholes price equals the market price. The variance
that makes these two equal
is known as the implied volatility.
Finally, use put-call parity to compute the Black-Scholes price of put
options with
exercise prices of 1800, 1850, and 1900 that expire in April, May, and
June. Compare the
predicted Black-Scholes price to the actual price in the market.
Department of Ag and Resource Economics UC Davis S&P 500
Index Options Closing Prices from Monday March 3
April
April
April
April
April
April
April
May
May
May
May
May
May
May
June
June
June
June
June
June
June Strike
Call Price Put Price

1600
246.80
4.25
1725
128.75
10.05
1775
81.40
19.25
1800
63.80
24.80
1850
29.95
41.30
1900
11.25
66.50
2000
0.30
158.40
1600
245.25
7.55
1725
131.85
17.60
1775
90.75
N/A
1800
71.90
32.50
1850
N/A
49.70
1900

16.25
77.40
2000
1.30
161.80
1600
249.60
13.35
1725
140.00
28.75
1775
101.00
39.75
1800
83.00
46.85
1850
51.45
64.90
1900
27.20
90.65
2000
4.25
167.70 Here is some information that you will need:
1) The value of S&P 500 index at the time I pulled these quotes
was: S =1845.73
2) Expiration date: All options expire on the Saturday after the third
Friday of the
month. See http://www.cboe.com/TradTool/2014_CBOEwebsite.pdf
for a calendar
of upcoming expiration dates.
3) The annual risk-free rate: use the yield on 3 month Treasury Bills,
which was
0.04% on March 3 (i.e., 0.0004). Department of Ag and Resource
Economics UC Davis Name: Discussion Time: ARE 171B Answer

Sheet for Homework 6
Winter 2014
Please write your answers to each question on the appropriate line.
The material in bold
on the first page indicates the questions that you need to answer. You
should turn in a
printout of your Excel spreadsheet to show that you have done the
work. (If you do not
turn in such a printout, you will get a zero). Questions (1) – (4) are
worth three points
each. Questions (5) is worth six points and there are seven partial
credit points.
(1) Average Return: Std Deviation: (2) B.S. Call Prices: Apr 1800:
May 1800: Jun 1800: Apr 1850: May 1850: Jun 1850: Apr 1900: May
1900: Jun 1900: Apr 1800: May 1800: Jun 1800: Apr 1850: May
1850: Jun 1850: Apr 1900: May 1900: Jun 1900: A
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ASSESSMENT CASE PAPER ANALYSIS
A report broken down into the following sections:
Summary results and recommendations—up front, concise, and to the
point.
Answers to the 6 questions asked—devote a paragraph to each, with
individual headings
Attached exhibits which are readable and understandable (I suggest
using Calibri font in 11 pitch for the spreadsheet(s), because it is plain
and easy to read)
Spreadsheet printout(s) showing your derivation of
Operating Cash Flows
Incremental Cash Flows, including investment and salvage
Warranty costs
WACC
NPV, IRR, Payback, and Profitability Index
Any other supporting exhibits you feel are relevant

A file containing your spreadsheet file, including all supporting
elements. I want to get a sense of how well you used the power of the
Excel program to make your calculations.
A simple typed report is adequate. I do not need fancy graphics or
covers.
Use 12 pitch, Times Roman font for the body of the report.
Single spacing is preferred, and will allow you more than enough
space to complete your report in less than 10 pages.
You should refer back to your exhibits for data or calculations,
keeping them out of the main body of the report.
Make sure name is listed on a cover sheet, as well as the project title
and the date. The cover page does not count against the 5 page limit.
I am a stickler for grammar, punctuation, and spelling (GPS). Proof
read your document well. Remember, you are selling your
recommendations on this project to the CEO, so presentation is very
important. GPS is worth 15% of the report grade.
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Bayerische Motoren Werke Aktiengesellschaft
Bayerische Motoren Werke Aktiengesellschaft (DB:BMW) >
Financials > Key Stats
In Millions of the trading currency, except per share items. Currency:
Order:
Decimals: Trading Currency
Latest on Right
Capital IQ (Default) Conversion:
Units:
Dilution: Today's Spot Rate
S&P Capital IQ (Default)
Basic Key Financials¹
For the Fiscal Period Ending
Currency 12 months
Dec-31-2012A
EUR 12 months

Dec-31-2013A
EUR 12 months
Dec-31-2014A
EUR 12 months
Dec-31-2015A
EUR LTM²
12 months
Sep-30-2016A
EUR 12 months†
Dec-31-2016E
EUR Total Revenue
Growth Over Prior Year 76,848.0
11.7% 76,059.0
(1.0%) 80,401.0
5.7% 92,175.0
14.6% 94,207.0
4.8% 94,929.46
2.99% Gross Profit
Margin % 14,475.0
18.8% 14,283.0
18.8% 15,766.0
19.6% 16,868.0
18.3% 17,425.0
18.5% 22.67% EBITDA
Margin % 10,585.0
13.8% 10,499.0
13.8% 12,046.0
15.0% 12,801.0
13.9% 12,968.0
13.8% 14,540.5
15.32% EBIT
Margin % 8,174.0
10.6% 7,827.0
10.3% 8,944.0
11.1% 9,308.0
10.1% 9,421.0
10.0% 9,892.61

10.42% Earnings from Cont. Ops.
Margin % 5,111.0
6.7% 5,329.0
7.0% 5,817.0
7.2% 6,396.0
6.9% 6,963.0
7.4% - Net Income
Margin % 5,085.0
6.6% 5,303.0
7.0% 5,798.0
7.2% 6,369.0
6.9% 6,920.0
7.3% 6,756.84
7.12% 7.76
4.1% 8.08
4.2% 8.83
9.3% 9.7
9.8% 10.54
13.3% 10.25
5.64% Diluted EPS Excl. Extra Items³
Growth Over Prior Year ¹All results are taken from the most recently
filed statement for each period. When there has been more than one,
earlier filings can be viewed on the individual statement pages.
²Growth rates for the LTM period are calculated against the LTM
period ending 12 months before.
³All forward period figures are consensus mean estimates provided by
the brokers and may not be on a comparable basis as financials.
†Growth rates for forward periods are calculated against prior period
estimates or actual pro forma results as disclosed on the Estimates
Consensus page.
Latest Capitalization (Millions of EUR)
Currency
Share Price
Shares Out. EUR
84.82
656.8 Market Capitalization
Ordinary Shares Shares Out

* Ordinary Shares Share Price
= Ordinary Shares Market Capitalization
+ Preferred Stock Shares Out
* Preferred Stock Share Price
= Preferred Stock Market Capitalization
- Cash & Short Term Investments
+ Total Debt
+ Pref. Equity
+ Total Minority Interest
= Total Enterprise Value (TEV) 54,863.3
602.0
84.8
51,060.6
54.8
69.4
3,802.7
4,549.0
93,498.0
239.0
144,051.3 Book Value of Common Equity
+ Pref. Equity
+ Total Minority Interest
+ Total Debt
= Total Capital 45,189.0
239.0
93,498.0
138,926.0 **For companies that have multiple share classes that
publicly trade,
we are incorporating the different prices to calculate our company
level market capitalization. Please click on the value to see the
detailed calculation. Prices shown on this page are the close price of
the company’s primary stock class. Shares shown on this page are
total company as-reported share values. Total Liability includes Total
Debt, Minority Interest and Pref. Equity.
Net Liability includes Total Liability, net of Cash and Short Term
Investments.
TEV includes Market Cap and Net Liability.

Total Capital includes Common Equity and Total Liability.
Valuation Multiples based on Current Capitalization
12 months
Dec-31-2015A LTM
12 months
Sep-30-2016A 12 months
Dec-31-2016E 12 months
Dec-31-2017E 12 months
Dec-31-2018E TEV/Total Revenue 1.4x 1.5x 1.52x 1.47x 1.43x
TEV/EBITDA 9.8x 10.7x 9.91x 9.78x 9.38x 13.3x 14.6x 14.56x
14.57x 14.31x P/Diluted EPS Before Extra 8.7x 8.0x 8.28x 8.35x
8.19x P/BV 1.3x 1.2x 1.20x 1.09x 1.00x Price/Tang BV 1.3x 1.3x - -
- For the Fiscal
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Further Exercises Model two (2) Business Processes
3.7 Further Exercises
Model two (2) Business Processes 1. Exercise 3.10 - Handling Down
payments and 2. Exercise 3.11 - Assessing Credit Risk.
1. Please read both Cases carefully to insure proper analysis and
modeling. (Pg. 93)
Then read "Process Discovery" start from Pg. 155 and answer
questions below.
1. Identify the various discovery methods available to an
individual(s) attempting to construct either an "as-is" or "should-
be" process model.
2. Discuss the strengths and limitations of such a "discovery
process" regardless of the methodology.
3. Describe how you might systematically gather the required
pieces of information about "how a book order" is processed by
an on-line retailer.
4. Finally, assuming that you obtained sufficient information to
create an appropriate process model what specific steps would

you use and briefly discuss elements of each step.
5. Create a "As-is", "Should-be" process model for
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Hand in Problem Set 2
Hand in Problem Set 2 Please hand a paper copy of your work to your
class teacher at the beginning of class 8 (week 9).
Thorndike Oil (TO) is a diversified company with two operating
divisions: Oil and Telecom which
represent 70% and 30% of the firm’s value, respectively. TO has no
debt on its balance sheet. To
estimate the cost of capital for each division, TO has identified one
principal competitor for each of its
two divisions. The competitors are pure-plays, i.e., they are not
diversified and operate in only one
industry each. They maintain a constant Debt-Equity ratio at all times.
Assume that the debt of the two
competitors is risk-free, the risk-free interest rate is 1%, the expected
return on the market portfolio is
6% and that the CAPM holds.
Competitor
VP-Oil
AB&B-Telecom Equity Beta
0.8
1.5 D/E
2/6
1/4 a. Estimate the expected return on TO’s equity.
Now assume that TO is considering a change in its capital structure
that will increase its leverage. Two
plans are considered:
1. Issue $55 million immediately in debt and maintain its level in
perpetuity.
2. Issue $90 million immediately in debt, repay $20 million of its
principal in one year, $20

million in two years and maintaining the remaining $50 million in
perpetuity.
Assume that in both plans TO will be able to borrow at the risk-free
interest rate; that all proceeds are
paid out to equity holders and that in Plan 2 the reduction in debt is
financed by issuing equity.
Corporate tax rate is 35% and there are no other markets
imperfections.
b. Which of these two plans would you recommend? Explain.
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lease agreement for production equipment
Multiple Choice
1. On January 1 of the current year, Tire Company enters into a five-
year lease agreement
for production equipment. The lease requires Tire Co to pay $12,500
per year in lease
payments. At the end of the five-year lease term, Tire Co can
purchase the equipment
for $30,000. The fair value of the equipment $75,000. The estimated
useful life of the
equipment is 10 years. The present value of the lease payments is
$50,000. The present
value of the purchase option is $20,000. Tire’s controller believes the
purchase option
price is sufficiently below the expected fair value of the equipment at
the date the
option becomes exercisable to reasonably assure its exercise. Tire Co
would normally
depreciate equipment of this type using the straight-line method.
What amount is the
carrying value of the asset related to this lease at December 31, of the
current year?
A. $40,000

B. $45,000
C. $56,000
D. $63,000
2. A company leases trucks and properly classifies the leases into
capital leases. The
leases have a ten-year term and the lease calculations were done three
years ago when
interest rates were lower. Which of the following is the appropriate
accounting
treatment, if any, for the application of the fair value option to lease
transactions?
A. Leases are not eligible for the fair value option.
B. Recognize the change to fair value accounting with a cumulative
adjustment to
beginning retained earnings.
C. Recognize the change to fair value accounting with an unrealized
loss in the
income statement.
D. Recognize the change to fair value accounting with an unrealized
loss in
accumulated other comprehensive income.
3. An asset group is being evaluated for an impairment loss. The
following financial
information is available for the asset group:
Carrying Value:
$100,000,000
Sum of the undiscounted cash flows
95,000,000
Fair value
80,000,000
What is the value of the impairment loss?
A.
B.
C.
D. $0
$5,000,000
$15,000,000

$20,000,000 1 4. A company has an operating lease for its office
space. The lease term is 120 months and
requires monthly rent of $15,000. As an incentive for the company to
enter into the
lease, the lessor granted the first eight months’ rent at no cost. What
amount of monthly
rent/lease expense should be recognized over the life of the lease?
A.
B.
C.
D. $14,000
$14,062
$15,000
$16,000 5. Sean’s trial balance has the following selected items:
Cash (includes $10,000 in a bond sinking fund
for long-term bond payables)
Accounts receivable
Allowance for doubtful accounts
Deposits received from customers
Merchandise inventory
Unearned rent
Investment in Trading Securities $50,000
20,000
5,000
3,000
7,000
1,000
2,000 What amount should Sean report as total current assets in its
balance sheet?
A. $64,000
B. $67,000
C. $72,000
D. $74,000 6. A note payable was issued in payment for services
received. The services had a fair
value less than the face amount of the note payable. The note payable
has no stated
interest rate. How should the note payable ne presented in the balance

sheet?
A. At the face amount.
B. At the face amount with a separate deferred asset for the discount
calculated at
the imputed interest rate.
C. At the face amount with a separate deferred credit for the discount
calculated at
the imputed interest rate.
D. At the face amount minus a discount calculated at the imputed
interest rate. 2 7. Based on the stock transactions below, what is the
weighted average number of shares
outstanding as of December 21, Year 1, that should be used in the
calculation of basic
earnings per share in the financial statements issued on March 1, Year
2?
Date
January 1, Year 1
April 1, Year 1
June 1, Year 1
February 15, Year 2
March 15, Year 2 A.
B.
C.
D. Transactions
Beginning Balance 100,000
Issued 30,000 shares for cash
50% stock dividend
2-for-1 stock split
Issued 40,000 shares for cash 147,500
183,750
295,000
367,500 8. On January 1, 2016, a company’s new president was
awarded a $200,000 bonus that would be paid out in two $100,000
installments in 2018 (year 3) and 2019 (year 4) of
employment, contingent on employment through the year ending
December 31, 2017.
How much should the company expense for this bonus in 2017 and

2018?
A. $0 for 2017; $100,000 for 2018
B. $100,000 for 2017 and $0 for 2018
C. $100,000 for 2017 and $100,000 for 2018
D. $200,000 for 2017 and $0 for 2018
9. A company, upon initial recognition of an asset retirement
obligation, should not take
which of the following actions?
A. Allocate asset retirement cost to expense over the useful life of the
related asset.
B. Measure the asset retirement cost at fair value.
C. Capitalize the asset retirement cost by increasing the carrying
amount of the
related asset.
D. Capitalize the asset retirement cost at its undiscounted cash flow
value 3 10. On January 1, 2016, Olson Inc. issued stock options for
200,000 shares to a division
manager. The options have an estimated fair value of $6 each. To
provide additional
incentive for managerial achievement, the options are not exercisable
unless divisional
revenue increases by 6% in three years. Olson initially estimates that
it is probable the
goal will be achieved. Ignoring taxes, what is reduction in earnings in
2016?
A. $0
B. $200,000
C. $400,000
D. $1,200,000
11. On December 31, 2015, the Meisenhelder Company had 250,000
shares of common
stock issued and outstanding. On March 31, 2016, the company sold
50,000 additional
shares for cash. Meisenhelder’s net income for the year ended
December 31, 2016 was
$700,000. During 2016, Meisenhelder declared and paid $80,000 in
cash dividends on

its nonconvertible preferred stock. What is the 2016 basic earnings
per share
(rounded)?
A. $2.16.
B. $3.50.
C. $3.10.
D. $2.80. 12. The following information pertains to Hurce Company's
outstanding stock for 2016:
Common Stock, $1 Par
Shares Outstanding , 1/1/2016
2 for 1 stock split, 4/1/2016
Shares Issued, 7/1/2016
Preferred Stock, $100 par, 7% cumulative
Shares outstanding, 1/1/2016 10,000
10,000
5,000
4,000 What is the number of shares Hurce should use to calculate
2016 basic earnings per
share?
A. 20,000.
B. 22,500.
C. 25,000.
D. 27,000. 4 13. Velasco Co. changed from straight-line to DDB
depreciation. The journal entry to
record the change includes:
A. A credit to accumulated depreciation.
B. A debit to accumulated depreciation.
C. A debit to a depreciable asset.
D. The change does not require a journal entry.
14. During 2016, Hutton Co. decides to use FIFO to account for its
inventory
transactions. Previously, it had used LIFO.
A. Hutton is not required to make any accounting adjustments.
B. Hutton has made a change in accounting principle requiring
retrospective
adjustment.
C. Hutton has made a change in accounting principle requiring

prospective application.
D. Hutton needs to correct an accounting error.
15. Hepburn Company bought a copyright for $90,000 on January 1,
2012, at which
time the copyright had an estimated useful life of 15 years. On
January 5, 2015, the
company determined that the copyright would expire at the end of
2018. How much
should Hepburn record as amortization expense for this copyright for
2015?
A. $14,400.
B. $7,200.
C. $18,000.
D. $12,000.
16. Cooper Inc. took physical inventory at the end of 2015. Purchases
that were
acquired FOB destination were in transit, so they were not included in
the physical
count.
A. Cooper needs to correct an accounting error.
B. Cooper has made a change in accounting principle, requiring
retrospective
adjustment.
C. Cooper is required to adjust a change in accounting estimate
prospectively.
D. Cooper is not required to make any accounting adjustments.
17. Heuer Company's prepaid insurance was $8,000 at December 31,
2015, and
$10,000 at December 31, 2016. Heuer reported insurance expense of
$15,000 on the
2016 income statement. What amount would be reported in the
statement of cash flows
as insurance paid using the direct method?
A. $13,000.
B. $17,000.
C. $15,000.
D. $23,000. 5 18. Which of the following circumstances creates a

future taxable amount?
A. Service fees collected in advance from customers: taxable when
received,
recognized for financial reporting when earned.
B. Accrued compensation costs for future payments.
C. Straight-line depreciation for financial reporting and accelerated
depreciation for tax
reporting.
D. Investment expenses incurred to obtain tax-exempt income (not tax
deductible).
19. During the current year, Stern Company had pretax accounting
income of $45
million. Stern's only temporary difference for the year was rent
received for the
following year in the amount of $15 million. Stern's taxable income
for the year would
be:
A. $30 million.
B. $60 million.
C. $50 million.
D. $45 million. 6 20. Gotting Company bought a copyright for
$90,000 on January 1, 2012, at which time
the copyright had an estimated useful life of 15 years. On January 5,
2015, the company
determined that the copyright would expire at the end of 2016. How
much should
Gotting record retrospectively as the effect of change?
A. $0.
B. $12,000.
C. $8,000.
D. $14,400. Problems
Information for Problems 1 and 2:
Drake, Inc. has two loans recorded on its books. Loan 1 was obtained
on January 1, Year 1,
and Loan 2 was entered into on January 1, Year 2. Drake’s year end is
December 31. For the
two situations related to the loans below, prepare the appropriate

journal entries. Each loan
should be accounted for independent of the other loan. Round
numbers to the nearest dollar.
1. Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest
due and paid
annually on December 31. Drake records interest annually on
December 31. Drake
incorrectly recorded the journal entry for the Year 1 interest expense
and payment as a
debit to accrued interest payable and a credit to cash. Prepare the net
journal entry
(entries) to correct Year 1 and properly record the interest attributable
to the loan as of,
and for the year ended December 31, Year 2. Account Name Debit
Credit 7 2. Loan 2 is an 8%, $1,000,000 loan with interest due
annually on December 31. Drake
did not record or pay the required Year 2 interest payment until
January 1, Year 3.
Prepare the journal entry (entries) Drake should record at December
31, Year 2.
Account Name Debit Credit 3. On January 1, 2016, Shelley
Corporation signed a ten-year noncancelable lease for
certain machinery. The terms of the lease called for Shelley to make
annual payments
of $100,000 at the end of each year for ten years with title to pass to
Shelley at the end
of this period. The machinery has an estimated useful life of 15 years
and no salvage
value. Shelley uses the straight-line method of depreciation for all of
its fixed assets.
Shelley accordingly accounted for this lease transaction as a capital
lease. The lease
payments were determined to have a present value of $671,008 at an
effective interest
rate of 8%. With respect to this capitalized lease, Shelley should
record interest and
depreciation expense for 2016:

Interest expense: _____________
Depreciation expense: _____________ 8 4. The following
information is for Moyano, Inc. for the year ended December 31,
2016.
Moyano had a cash and cash equivalents balance of $5,200 on
January 1, 2016, and $2,320 on
December 31, 2016. Required: Prepare a statement of cash flows in
good form for the year using the direct
method for operating activities.
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Practice Set Chapters 21 and 25
Practice Set Chapters 21 and 25 1. Name: B Corporation is
considering a copy machine that can be leased for $4,000 a year for 6
years. The company's marginal tax rate is 27 percent and the yield to
maturity on the company's debt is 5.9 percent. Compute the cost to
lease if lease payments and associated tax savings are at the  
a. beginning of each year Cost to lease = Present value of future cash
flows
= 4000 + 4000/1.059 + 4000/1.059^2 + 4000/1.059^3 + 4000/1.059^4
+ 4000/1.059^5 + 4000/1.059^6
= $ 
b. end of each year 
Cost to lease = Present value of future cash flows =
= 12000/1.059 + 12000/1.059^2 + 12000/1.059^3
+
12000/1.059^4 + 12000/1.059^5 + 12000/1.059^6+12000/1.059^7
= $ 2. You want a new automobile for personal use. Neither
depreciation nor interest payments will be tax deductible. You can
buy
the automobile with a $2,000 down payment and a 9 percent, forty-
eight month loan. The monthly payments will be $665.
Alternately, you can lease the automobile with; a $2000 NON –

refundable deposit, a $1600 refundable security deposit and
lease payments of $617 at the beginning of each month for 48 months.
Using a 9 percent annual required return to evaluate
the salvage value, what must the car be worth at the end of 48 months
for the purchase to be more attractive than the lease?
What is the indifference point? Hint-- You will need to find the cost
of own and the cost to lease – then you will need to run
a goal-seek or manually change the foregone salvage value to find the
foregone salvage value that sets the cost to lease
equal to the cost to own (by changing the salvage value).
First, it is important to discover the present value of money paid by
buying the car
Monthly Rate = 0.09/12 = 0.0075
Net Present Value = 2000 + 665 (1/1.0075 +1/1.0075^2
+...+1/1.0075^48)
= 2000 + 665 x (1/0.0075)[1 - (1/1.0075^48)] =
=
The value for buying at the end of 48 month assuming 9% =
= ____ x (1.0075)^48
=
********************************************************
*****************************************
For the lease present value = 2000 +1600 + 617 x (1/0.0075)[1 -
(1/1.0075^48)]
=
Value of this lease at the end of 48 months = ____ x (1.0075^(48))
= 34,748.12
********************************************************
*****************************************
Hence to find the minimum salvage value so that buying is more
attractive than leasing i.e. to find indifference point.
The value at the end of 48 months buy buying = The value at the end
of 48 months by leasing + Salvage value That is ____ = ____ +
Salvage value
As a result, the minimum salvage value
=
Salvage value more than this salvage value will make buying more

attractive
3. T Corporation is considering the acquisition of M Corporation. M
Corporation generates earnings before interest and tax of $2.75
million a year, and asset replacement cost approximately equals
depreciation. Alternative minimum tax is not an issue, there are no
synergistic beneNits, and cash Nlows are expected to continue forever
and are not expected to grow in the future. Assuming a 25 percent tax
rate and a 8 percent after-tax required return, what is net cash Nlow?
Assuming year-end cash Nlows, what is the value of M Corporation’s
capital? If M Corporation has long-term debt of $3 million, what is
the value of the equity of M Corporation? Answer: EBIT =
$2,750,000
Tax Expenses = 25% x 2,750,000 = 687,500
EBT = 2,750,000 - 687,500 = 2,062,500
Since, asset replacement cost approximately equals depreciation
Net Cash flow remain same as EBT i.e. $2,062,500
Net Cash flow = $2,062,500
Assuming year-end cash flows, what is the value of M Corporation’s
capital?
Answer:
Value of M Corporations capital = 2,062,500/0.09
Value of M Corporations capital = $22,916,666.70
If M Corporation has long-term debt of $3 million, what is the value
of the equity of M Corporation? 4. Answer:
Value of the equity of M Corporation = $22,916,666.70 - $3,000,000
Value of the equity of M Corporation = $19,916,666,70 N
Corporation is considering the acquisition of A Corporation. A
Corporation has earnings before interest and tax of $4.75 million, and
asset replacement cost approximately equals depreciation.
EfNiciencies gained through the merger will reduce A’s operating
costs by $1,820,000. Cash Nlows occur at year-end. a. Assuming a 25
percent tax rate and a 12 percent required return, what is the value of
A’s capital without a merger? b. 5. Assuming a 25 percent tax rate
and a 12 percent required return, what is the value of A’s capital after
a merger? F Corporation is considering the acquisition of T
Corporation. Without the merger, T Corporation’s cash Nlow to
capital is expected to be $6 million next year and is expected to grow

at a constant 4 percent a year thereafter. With a merger, T
Corporation’s constant growth rate will be increased to 6 percent. The
tax rate is 40 percent and the after-tax required return is 10 percent.
Assume year-end cash Nlows. a. What is the value of T’s capital if T
is not acquired by F Corporation? Cash &low in year (I) = 6
million x (1+0.04)i After tax Cash flow in year (I) = $6 million x
(1+0.04)i x (1-0.4)
= 2.1 million x (1+0.04)i
PV = $2 million / {1 - (1.04/1.12)}
= 2 x 1.12/0.08
= $28 million b. What is the value of T’s capital if T is acquired by F
Corporation? Merger
Cash flow in year (i) = 6 million x (1+0.06)i
After tax Cash flow in year (i) = $6 million x (1+0.06)i x (1-0.3)
= 2.1 million x (1+0.06)i
PV = $2 million / {1 - (1.06/1.12)}
= 2 x 1.12/0.06
= $37.33 million 6. (Stock for Stock Merger) A Corporation is
considering the acquisition of X Corporation. Each corporation has
the following data: Existing Income Number of Shares A Corporation
$8,200,000 621,000 X Corporation $4,200,000 365,000 Synergistic
additional beneNits from the combination are $1,800,000. What is the
minimum exchange ratio is necessary to keep the X shareholders
whole in terms of earnings per share? What is the maximum exchange
ratio would the A Corporation shareholder accept in taking over X
Corporation and remain whole in terms of earnings per share? (note
you will need to use the formulas in the book to solve this) 7. (Cash
for Stock Merger) This problem requires that you integrate the
material learned in prior chapters. You have been given the job of
evaluating the following merger candidate. You have collected the
following cash Nlow estimates for the acquisition candidate for the
proposed merger (in millions): Year 1 2 3 4 5__ Cash Nlows now for
the target 60 80 100 125 150 Additional cash Nlows (synergy) 40 70
100 125 150 Total cash Nlows from target (after merger) 100 150 200
250 300 Risk free rate of return Beta for this project (the company
after merging) Market risk premium Pre-tax cost of debt Marginal
after tax rate Number of shares outstanding for the target company

(millions) Current market price per share for the target company
Percentage of the acquisition Ninanced with debt Percentage of the
acquisition Ninanced with common equity 4% 1.07 5% 8% 20% 14
$51 34% 66% What is the after tax cost of debt for this merger (as we
did in chapter 16)? What is the after tax cost of common equity for
this merger (as we did in chapter 16)? What is the weighted average
cost of capital for this acquisition candidate (as we did in chapter 16)?
Please run a net present value using the WACC calculated above with
the total cash Nlows from the target (given above) to determine the
maximum price per share you are willing to pay for this target
candidate? Based what you calculated and the current market price,
would you pursue this candidate?
------------------------------------------------------------------------------------
The Bureau of Economic Analysis
To answer this question, you must obtain data from the Bureau of
Economic Analysis (BEA),http://www.bea.gov, on the U.S. balance
of payments (BOP) tables. You can either use theinteractive tables or
the "US International Transactions" pre-formatted tables released
onDecember 15, 2016, (link). Obtain the following annual data
for United States in 2015
.1. Based on table 1.1, what is the trade balance (TB) for goods,
services, and total?
2. Based on table 1.1, what is the net factor income from abroad
(NFIA), net unilateraltransfers (NUT), and the current account (CA)?
3. Based on table 1.2, what is the most important component of net
factor receipts fromabroad and net factor payments abroad?
4. Based on table 1.1., what is the balance of the financial account
(FA) as defined in thetextbook?
5. Based on table 1.1., what is the component that accounts for the
largest increase inforeign assets owned by the United States
(abstracting from "other investment assets")?What is the component
that accounts for the largest increase in liabilities owed by theUnited
States?3

6. Based on table 1.1., explain how the balance of payments identity
(CA+FA+Capitalaccount=0) is satisfied after the statistical
discrepancy adjustment.
7. Download "Table 1.1. U.S. Net International Investment Position at
the End of thePeriod", from the BEA website. Plot in one figure the
total U.S. Assets, Liabilities,and Net Investment Position (or External
wealth) between 1976 and 2015 (at an annualfrequency).
------------------------------------------------------------------------------------
The Finance Department of Zeta Auto Corporation
Introduction:
You have recently been hired as a Financial Analyst in the Finance
Department of Zeta Auto Corporation which is seeking to expand
production. The CFO asks you to help decide whether the firm should
set up a new plant to manufacture the roadster model, the Zeta
Spenza.
Deliverable:
Write a report providing the CFO with your recommendation whether
Zeta should set up the plant to produce the Spenza’s and support your
recommendation by in-depth analysis in Excel. In your report, explain
the results of each portion of your analysis (represented by the tabs on
the Excel template). Submit all the completed Excel worksheets with
the completed responses to the questions posed to support your report
and recommendation. Provide a one-page Executive Summary
summarizing the results of your analysis and recommendation.
Steps to Completion:
Capital Investment Data
To assess the suitability of the project you begin by listing the various
cash flows. A consultant has been paid $50,000 to do a market
survey. She reports back that Zeta can sell 7,000 Spenza’s for
$80,000 each in years 1 and 2, and 4,000 Spenza’s for $80,000 each
in years 3 and 4. The consultant also estimates that the increased
sales of the Spenza will cannibalize the sale of an existing model, the

Zeta Monza, resulting in 1,000 fewer units of the Monza sold in each
of the 4 years. Monza’s are priced at $65,000.
After 4 years it is expected the Spenza will be phased out, and the
plant will be put to other uses generating $15 M annually. However,
this decision can be reevaluated at the end of year 3, based on new
information which will become at that time. Your consultant has
prepared her estimates of what this new information might be. These
estimates are given in the attached Excel spreadsheet.
The cost of setting up the plant is to be $250 M with annual
manufacturing capacity of 10,000 cars. In addition, at the beginning
of each year the plant will require the Net Working Capital outlay
equal to 4.75% of direct manufacturing costs (excluding labor and
overheads) in the coming year. The NWC outlay will be recovered
after 4 years.
The CFO provided you with historical information about Monza’s
cost structure (Excel sheet attached) and noticed that Spenza will have
the following differences:
 Spenza’s body will be made from reinforced carbon, which
makes the car lighter, thus significantly improving mileage
range per battery charge. 80% of the carbon cost is the cost of
energy and the estimated carbon cost body per car of $14,000 is
based on electricity cost of 7 cents /per kWh, which is the
current cost of electricity in Michigan, where the plant will be
located. This cost is 70% of the average nationwide retail
electricity price. EIA electricity cost projections are provided in
the Excel sheet.
 Battery Pack cost for Spenza is $15,000 per car.
 Cost of materials for engine and other parts will be identical to
Monza’s.
 Labor cost of $4,000 per car is based on annual production of
10,000 Spenza’s. Labor is unionized; number of workers and
wages do not depend on the number of units produced.
 Overheads at the new plant will be identical to total overheads at
the existing Monza plant.
IRS allows you to straight line depreciate the cost of the plant over 4
years for tax purposes (equal depreciation in all years and not an

accelerated schedule of depreciation). You have a choice to use 3 year
MACRS depreciation schedule (see the Excel sheet attached)
If you recommend setting up the plant, you should also consider that
the plant will require land which the firm can put to other uses. These
alternative uses will earn the firm $15 M annually.
Modeling Financial Metrics and Cash FlowsDepreciation
You have to decide whether Zeta should set up the plant to produce
the Spenza’s by answering the following series of questions. After
having enumerated the various cash flows you are now ready to
analyze the project using capital budgeting techniques and project
analysis methods.
 What will be the depreciation for tax purposes from the
investment in the Spenza plant using the straight line method?
What will be the depreciation using MACRS? Which schedule
would you recommend to use?
EBIT
 What will be the costs and revenues for the first four years?
What will be the incremental EBIT (Earnings before Interest
and Taxes) each year?
Interest and Taxes
You now have to need to determine interest costs and taxes. Assume
that the cost of setting up the plant will be 50% financed by debt with
an interest rate of 7%.
At this point you are getting closer to the cash flows the project will
produce, and need to determine the tax rate. You research tax rates
and determine that the appropriate tax rate is 40%.
 What incremental taxes Zeta will pay if the Spenza plant is set
up?
Net Income
 What will be the incremental Net Income for Zeta from the
project each year?
Incremental OCF
Now you can calculate the net increase in cash flows from the project.
 What will be the incremental OCF (Operating Cash Flow) each
year?
Free Cash Flow

The next step will be calculating FCF taking into account OCF and
other incremental cash flows, including opportunity costs! At this
point we are still assuming that the project will last only for four
years.
 What will be the FCF (Free Cash Flow) each year?
WACC and CAPM
The next step will be estimating WACC. Using Yahoo Finance! or
other financial sources available on the course website find auto-
making industry’s beta, market risk premium and the risk free rate.
 Estimate the WACC using the earlier assumption about the
project’s financing and the CAPM equation for the cost of
equity.
Decision Criteria – NPV and IRR
Now you are ready to calculate the first criterion that is used to assess
projects.
 What will be the Net Present Value of the project?
You should also calculate another widely used criterion.
 What will be the IRR of the project?
Analyzing Risk using Scenario Analysis
You consider the electricity cost as one of the major factors affecting
your variable costs and would like to perform some additional
analysis to check the project’s sensitivity to electricity costs. As was
mentioned EIA has several electricity cost projections (Excel sheet,
tab Energy Prices Forecast). First you decide to see how your
recommendations might change under different cost scenarios.
 Perform scenario analysis on the electricity cost and present the
summary of results.
Break-even Analysis
Next, you would like to find the maximum electricity cost in year 1 at
which the project would still be advisable. For simplicity assume
0.5% annual growth of electricity costs.
 Find the break-even value for the electricity cost in year 1.
Monte Carlo Simulation
Finally, you would like to perform a Monte Carlo simulation. Possible
distribution assumptions are provided in Excel Spreadsheet tab
―Crystal Ball Simulation,‖ but you are welcome to make (and

explicitly state) your own and use Random Numbers generator in
Data Analysis Pack.
 Based on your analysis, what is the probability that the project
will be profitable?
[Crystal Ball] You also want to estimate the sensitivity of your project
to different factors.
 Using Crystal Ball, please create a Tornado Diagram and
discuss its results.
------------------------------------------------------------------------------------
what percentage of all jobs in the United States?
1. The service sector makes up approximately what
percentage of all jobs in the United States? a. 12% b.
40% c. 66% d. 79% e. 90%
2. Which is not true regarding differences between goods
and services? a. Tangible goods are generally
produced and consumed simultaneously; services are not.
b. Most goods are common to many
customers; services are often unique to the final customer.
c. Services tend to have a more inconsistent
product definition than goods. d. Services tend to have
higher customer interaction than goods. e. All of
the above are true.
3. Which is not true regarding differences between goods
and services? a. Services are generally
produced and consumed simultaneously; tangible goods
are not. b. Services tend to be more
knowledge-based than goods. c. Services tend to have a
more inconsistent product definition than
goods. d. Goods tend to have higher customer interaction
than services. e. None of the above is true.
4. Which of the following services is least likely to be
unique, i.e., customized to a particular individual’s
needs? a. dental care b. hairdressing c. legal services d.

elementary education e. computer consulting
5. Which of the following is not a typical service attribute?
a. intangible product b. easy to store c.
customer interaction is high d. simultaneous production
and consumption e. difficult to resell 6 Final
Examination BAM421 Operations Management
6. Which of the following attributes is most typical of a
service? a. production and consumption occur
simultaneously b. tangible c. mass production d.
consistency e. easy to automate
7. Experience differentiation ________________. a.
isolates the consumer from the delivery of a service
b. is an extension of product differentiation in the service
sector c. uses only the consumer’s senses of
vision and sound d. keeps consumers from becoming
active participants in the service e. is the same as
product differentiation, but applied in the service sector
8. Franz Colruyt has achieved low-cost leadership through
________________. a. effective use of voice
mail b. plastic, not paper, shopping bags c. background
music that subtly encourages shoppers to buy
more d. converting factories, garages and theaters into
retail outlets e. exclusive use of the Euro
9. A firm producing a good is more likely to have which
set of the following characteristics compared to a
firm providing a service? a. many subjective quality
standards, tangible product and locate away from
customers b. many subjective quality standards, intangible
product and locate away from customers c.
many objective quality standards, tangible product and
locate near customers d. many objective quality
standards, tangible product and locate away from
customers e. many objective quality standards,
intangible product and locate away from customers
10. Which of the following influences layout design? a.
inventory requirements b. capacity needs c.
personnel levels d. technology decisions e. All of the

above influence layout decisions.
11. The largest contributor to productivity increases is
________________, estimated to be responsible
for _______________ of the annual increase. a.
management; over one-half b. Mr. Deming; one-half c.
labor; two-thirds d. capital; 90% e. technology; over one-
half
12. Which of the following is not true when explaining
why productivity tends to be lower in the service
sector than in the manufacturing sector? a. Services are
typically labor-intensive. b. Services are often difficult to
evaluate for quality. c. Services are often an intellectual
task performed by professionals. d.
Services are difficult to automate. e. Service operations are
typically capital intensive.
13. Three commonly used productivity variables are
________________. a. quality, external elements
and precise units of measure b. labor, capital and
management c. technology, raw materials and labor d.
education, diet and social overhead e. quality, efficiency
and low cost
14. Firm A operates 10 hours each day, producing 100
parts/hour. If productivity were increased 20%,
how many hours would the plant have to work to produce
1000 parts? a. less than 2 hours b. between 9
and 10 hours c. between 2 and 6 hours d. between 6 and 8
hours e. between 8 and 9 hours
15. A cleaning company uses 10 lbs each of chemicals A,
B and C for each house it cleans. After some
quality complaints, the company has decided to increase
its use of chemical A by an additional 10 lbs for
each house. By what % has productivity (houses per pound
of chemical) fallen? a. 0% b. 10% c. 15% d.
------------------------------------------------------------------------------------
Zeta Spenza Project Given MACRS Schedule

ntroduction:
You have recently been hired as a Financial Analyst in the Finance
Department of Zeta Auto Corporation which is seeking to expand
production. The CFO asks you to help decide whether the firm should
set up a new plant to manufacture the roadster model, the Zeta
Spenza.
Deliverable:
Write a report providing the CFO with your recommendation whether
Zeta should set up the plant to produce the Spenza’s and support your
recommendation by in-depth analysis in Excel. In your report, explain
the results of each portion of your analysis (represented by the tabs on
the Excel template). Submit all the completed Excel worksheets with
the completed responses to the questions posed to support your report
and recommendation. Provide a one-page Executive Summary
summarizing the results of your analysis and recommendation.
Steps to Completion:
Capital Investment Data
To assess the suitability of the project you begin by listing the various
cash flows. A consultant has been paid $50,000 to do a market survey.
She reports back that Zeta can sell 7,000 Spenza’s for $80,000 each in
years 1 and 2, and 4,000 Spenza’s for $80,000 each in years 3 and 4.
The consultant also estimates that the increased sales of the Spenza
will cannibalize the sale of an existing model, the Zeta Monza,
resulting in 1,000 fewer units of the Monza sold in each of the 4
years. Monza’s are priced at $65,000.
After 4 years it is expected the Spenza will be phased out, and the
plant will be put to other uses generating $15 M annually. However,
this decision can be reevaluated at the end of year 3, based on new
information which will become at that time. Your consultant has
prepared her estimates of what this new information might be. These
estimates are given in the attached Excel spreadsheet.
The cost of setting up the plant is to be $250 M with annual
manufacturing capacity of 10,000 cars. In addition, at the beginning
of each year the plant will require the Net Working Capital outlay
equal to 4.75% of direct manufacturing costs (excluding labor and

overheads) in the coming year. The NWC outlay will be recovered
after 4 years.
The CFO provided you with historical information about Monza’s
cost structure (Excel sheet attached) and noticed that Spenza will have
the following differences:
· Spenza’s body will be made from reinforced carbon, which makes
the car lighter, thus significantly improving mileage range per battery
charge. 80% of the carbon cost is the cost of energy and the estimated
carbon cost body per car of $14,000 is based on electricity cost of 7
cents /per kWh, which is the current cost of electricity in Michigan,
where the plant will be located. This cost is 70% of the average
nationwide retail electricity price. EIA electricity cost projections are
provided in the Excel sheet.
· Battery Pack cost for Spenza is $15,000 per car.
· Cost of materials for engine and other parts will be identical to
Monza’s.
· Labor cost of $4,000 per car is based on annual production of 10,000
Spenza’s. Labor is unionized; number of workers and wages do not
depend on the number of units produced.
· Overheads at the new plant will be identical to total overheads at the
existing Monza plant.
IRS allows you to straight line depreciate the cost of the plant over 4
years for tax purposes (equal depreciation in all years and not an
accelerated schedule of depreciation). You have a choice to use 3 year
MACRS depreciation schedule (see the Excel sheet attached)
If you recommend setting up the plant, you should also consider that
the plant will require land which the firm can put to other uses. These
alternative uses will earn the firm $15 M annually.
Modeling Financial Metrics and Cash FlowsDepreciation
You have to decide whether Zeta should set up the plant to produce
the Spenza’s by answering the following series of questions. After
having enumerated the various cash flows you are now ready to
analyze the project using capital budgeting techniques and project
analysis methods.
· What will be the depreciation for tax purposes from the investment
in the Spenza plant using the straight line method? What will be the

depreciation using MACRS? Which schedule would you recommend
to use?
EBIT
· What will be the costs and revenues for the first four years? What
will be the incremental EBIT (Earnings before Interest and Taxes)
each year?
Interest and Taxes
You now have to need to determine interest costs and taxes. Assume
that the cost of setting up the plant will be 50% financed by debt with
an interest rate of 7%.
At this point you are getting closer to the cash flows the project will
produce, and need to determine the tax rate. You research tax rates
and determine that the appropriate tax rate is 40%.
· What incremental taxes Zeta will pay if the Spenza plant is set up?
Net Income
· What will be the incremental Net Income for Zeta from the project
each year?
Incremental OCF
Now you can calculate the net increase in cash flows from the project.
· What will be the incremental OCF (Operating Cash Flow) each
year?
Free Cash Flow
The next step will be calculating FCF taking into account OCF and
other incremental cash flows, including opportunity costs! At this
point we are still assuming that the project will last only for four
years.
· What will be the FCF (Free Cash Flow) each year?
WACC and CAPM
The next step will be estimating WACC. Using Yahoo Finance! or
other financial sources available on the course website find auto-
making industry’s beta, market risk premium and the risk free rate.
· Estimate the WACC using the earlier assumption about the project’s
financing and the CAPM equation for the cost of equity.
Decision Criteria – NPV and IRR
Now you are ready to calculate the first criterion that is used to assess
projects.
· What will be the Net Present Value of the project?

You should also calculate another widely used criterion.
· What will be the IRR of the project?
Analyzing Risk using Scenario Analysis
You consider the electricity cost as one of the major factors affecting
your variable costs and would like to perform some additional
analysis to check the project’s sensitivity to electricity costs. As was
mentioned EIA has several electricity cost projections (Excel sheet,
tab Energy Prices Forecast). First you decide to see how your
recommendations might change under different cost scenarios.
· Perform scenario analysis on the electricity cost and present the
summary of results.
Break-even Analysis
Next, you would like to find the maximum electricity cost in year 1 at
which the project would still be advisable. For simplicity assume
0.5% annual growth of electricity costs.
· Find the break-even value for the electricity cost in year 1.
Monte Carlo Simulation
Finally, you would like to perform a Monte Carlo simulation. Possible
distribution assumptions are provided in Excel Spreadsheet tab
―Crystal Ball Simulation,‖ but you are welcome to make (and
explicitly state) your own and use Random Numbers generator in
Data Analysis Pack.
· Based on your analysis, what is the probability that the project will
be profitable?
[Crystal Ball] You also want to estimate the sensitivity of your project
to different factors.
· Using Crystal Ball, please create a Tornado Diagram and discuss its
results.
------------------------------------------------------------------------------------

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