Managerial Finance Capital Markets

Question: Discuss about the Managerial Finance for Capital Markets? Answer: Equity = Total liabilities and equity Debt Total liabilities and equity = 9,500 + 8% (9500) = 10,260. Debt = 4500 + 8% (4500) = 4,860. Equity = 10,260 4,860 = 5,400 Increase in equity = 5,400 -5,000 = 400 Net income = 5,600 + 8% (5600) = 6,048 Net income is 6,048 but equity increased only by 400, so dividend of 5,648 (6048-400) has been paid. An increase of sales to $28,800 is an increase of: % increase in sales = ($28,800 23,100) / $23,100 = 0.25 or 25% Assuming costs and assets increase proportionally Pro formaincome statement Pro forma Balance sheet Sales $ 28,800 Assets $ 151,250 Debt $ 37,600 Costs 19,875 Equity $87,193 EBIT $ 8925 Total $ 151,250 Total $ 124,793 Taxes (35%) 3124 Net income $ 5,801 The payout ratio is constant: Dividends = ($1,620 / $4,680)($5,801) Dividends = $2,008 The addition to retained earnings is: 5801 2008 = $3,793 New equity balance = 83400 + 3793 = $87,193 External financing need = Total assets Total liabilities and equity = 151250-124793 = $26,457 3: Full capacity sales = $520,000/0.83 = $626,506 Capital intensity ratio = $421,200/$626,506 = 0.6723 Fixed asset need = ($701,687 x 0.6723) - $421,200 = $50,544 A) Retention ratio: b= 1 $9,300 / $14,800 b= 0.3716 ROE (Return on Equity) ROE= $14,800 / $51,000 ROE= 0.2902, or 29.02% Sustainable growth rate= (ROE b) / [1 (ROE b)] Sustainable growth rate=[0.2902(0.3716)] / [1 0.2902(0.3716)] Sustainable growth rate= 0.1209, or 12.09% B) New Total Assets = 1.1209($68,000 + 51,000) = $133,384.62 New Total Debts = [Debts / (Debts + Equity)](Total assets) = [$68,000 / ($68,000 + 51,000)]($133,384.62) = $76,219.78 Additional borrowing = $76,219.78 68,000 = $8,219.78 C) (Return on Assets) ROA = $14,800 / ($68,000 + 51,000) ROA = .1244, or 12.44% The growth rate that can be supported with no outside financing = (ROA b) / [1 (ROA b)] = [.1244(.3716)] / [1 .1244(.3716)] = .0485, or 4.85% If you retire in 25 years, the account will have an ending value of 1500 * (1 + 0.087)25 = $12,073. If you wait 5 years to contribute, it will remain in the account for 20 years; the ending value of the account will be: 1500 * (1 + 0.087)20 = $5,242 A) The APR is the interest rate per week times 52 weeks in a year, so: APR = 52(8%) = 416%, EAR = (1 + 0.08)52 1 = 53.7 or 5,370% B) Calculation of APR 416 % / (1-0.08) = 452.1739 % Now rate per week = 452.1739 / 52 = 8.6956 % per week EAR = (1+0.0869)52- 1 = 75.38 or 7,538% C) PVA = $63.95 = $25[{1 [1 / (1 + r)]4}/ r ]; using trial and error or a financial calculator gives r = 20.63% per week APR = 52(20.63%) = 1,072.90%; EAR = 1.206352 1 = 1,722,530.00% We need to find the lump-sum payment into the retirement account. The present value of the desired amount of retirement is PV = FV (1+r)n PV = 5000000 / (1+0.10)40 PV = $110474.64 This is the value today. Since the savings are in the form of a growing annuity, we can use the growing annuity equation solve for the payments, doing so we get PV= C {1-[(1+g)/(1+r)]40} / (r-g) 110474.64 = C {1-[(1+0.03)/(1+0.10)]40} / (0.10 0.03) 110474.64 = C {1-[(1.03/1.10)]40} / (0.07) 110474.64 = C {1- 0.072074} / 0.07 110474.64 = C x 0.927926 / 0.07 C = $ 8333.89 This is the amount you need to save next year, so the % of your salary is = $ 8333.89 / 50000 = 0.1667 or 16.67 % The PV of the two options is equal to each other to be indifferent, PV = $25,000/r And the PV of the annuity is: PVA = $35,000 [{1 [1/(1 +r)15]}/r] Setting them equal and solving for, we get: $25,000/r=$35,000[{1[1/(1+r)15]}/r] $25,000/$35,000=1[1/(1+r)15] 0.92 = 1/1+r R = 0.087 or 8.7% A) Annual payments (A): PV (withdrawals) = PV (savings) 1/(1.07)30[125,000/0.07(1/{1-1/1.0720})] = A/0.07(1-1/1.0730) 0.13[1,785,714(1.35)]=12.43A A = $25,213 B) The present value of 20 instalments of 125,000 at 7% = 125,000 * 10.594 = $1,324,250 The lump sum payment needed is the present value of $1,324,250 discounted back 31 years at 7%: 0.1228 * $1,324,250 = $162,618 C) Present value of fund required on 65 th birthday (as calculated in b) = $ 1,324,250 Future Value of the employer's contribution, on 65th birthday = (3500/7 %) x [(1.07)30-1] = $ 330,613 Future Value of the distribution, on 65th birthday = 175000 x (1.07)10= $344251 Net fund required on 65th birthday= 330613+ 344251 = $ 649,386 Deposits to be made annually = (649386 x 7 %) / [(1.07)30 -1] = $ 6875 Dividends for the first 4 years is Year 1 = 2.50 + 18% (2.50) = $2.95, Year 2 = 2.95 + 18% (2.95) = $3.481 Year 3 = 3.481 + 18% (3.481) = $4.108 Year 4 = 4.801 + 18% (4.801) = $4.847 P4 = 4.847 (1 + 0.03)/ (0.08 0.03) = $98.9 P0 = 2.95/1.08 + 3.481/1.082 + 4.108/1.083 + 4.847/1.084 + 98.9/1.084 = 2.73 + 2.98 + 3.8 + 3.56 + 72.69 = $85.76 Po = 1.45 * 1.06 /.11-.06 = $30.74 PV3= 30.74 N= 3 r = 6%, FVIF = 1.191, FV = 30.74(1.191) = $36.61 PV15= 30.74 N= 15 r = 6%, FVIF = 1.558, FV = 30.74(1.558) = $47.89 Let the face value of both the bonds X and Y be $1000 P = C(PVIFAR%,t) + $1,000(PVIFR%,t) X: P0 = $90(PVIFA7%,13) + $1,000(PVIF7%,13) = $1,167.15 P1 = $90(PVIFA7%,12) + $1,000(PVIF7%,12) = $1,158.85 P3 = $90(PVIFA7%,10) + $1,000(PVIF7%,10) = $1,140.47 P8 = $90(PVIFA7%,5) + $1,000(PVIF7%,5) = $1,082.00 P12 = $90(PVIFA7%,1) + $1,000(PVIF7%,1) = $1,018.69 P13 = $1,000 Y: P0 = $70(PVIFA9%,13) + $1,000(PVIF9%,13) = $850.26 P1 = $70(PVIFA9%,12) + $1,000(PVIF9%,12) = $856.79 P3 = $70(PVIFA9%,10) + $1,000(PVIF9%,10) = $871.65 P8 = $70(PVIFA9%,5) + $1,000(PVIF9%,5) = $922.21 P12 = $70(PVIFA9%,1) + $1,000(PVIF9%,1) = $981.65 P13 = $1,000 All else held equal, the premium over par value for a premium bond declines as maturity approaches, and the discount from par value for a discount bond declines as maturity approaches. This is called pull to par. In both cases, the largest percentage price changes occur at the shortest maturity lengths. Also, notice that the price of each bond when no time is left to maturity is the par value, even though the purchaser would receive the par value plus the coupon payment immediately. This is because we calculate the clean price of the bond. References Frank J. Fabozzi, Pamela Peterson Drake. (2009). Capital Markets, Financial Management and Investment Management. New Jersey. John Wiley Sons. Fanck Leonard, Basiliki Loli, Blaz Kralj, Vasileios Vlachos. (2012). Investment and Valuation of firms. Kristina Levisauskaite. (2010). Investment Analysis and Portfolio Management. Frank K. Reilly, Keith C Brown. (2012). Investment Analysis and Portfolio Management. Texas. Reilly Brown. V Pattabhi Ram, S D Bala. (2012). Strategic Financial Management. Chennai, India: Snow white prime knowledge series. Eugene F. Brigham. (2005). Financial Management: Theory and Practice. 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