FINANCE FINAL PROJECT DETAILS

GROUP MEMBERS: WAJEEH, ASFAND, SHAKEEL

CHAPTER:1
1. How does the notion of risk and reward govern the behavior of financial
managers?
2. CSR- a case study of Uniliver.

CHAPTER:3
1. You need to have $50,000 at the end of 10 years. To accumulate this sum, you
have decided to save a certain amount at the end of each of the next 10 years
and deposit it in the bank. The bank pays 8 percent interest compounded
annually for long-term deposits. How much will you have to save each year (to the
nearest dollar)?
2. Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded
daily.
a. Based on the EAR (or EFF%), which bank should you use?
b. Could your choice of banks be influenced by the fact that you might want to withdraw your
funds during the year as opposed to at the end of the year? Assume that your funds must be
left on deposit during an entire compounding period in order to receive any interest.

CHAPTER:5
1. Schmendiman, Inc., is the sole manufacturer of schmedimite (an inflexible, brittle
building material made of radium and asbestos). Assume that the company’s
common stock can be valued using the constant dividend growth model (also
sometimes known as the “Gordon Dividend Growth Model”). You expect that the
return on the market will be 14 percent and the risk-free rate is 6 percent. You
have estimated that the dividend one year from now will be $3.40, the dividend
will grow at a constant 6 percent, and the stock’s beta is 1.50. The common stock
is currently selling for $30.00 per share in the marketplace.
a. What value would you place on one share of this company’s common stock
(based on
a thorough understanding of Chapter 5 in the book)?
b. Is the company’s common stock overpriced, underpriced, or fairly priced? Why?

2. ECRI Corporation is a holding company with four main subsidiaries. The percentage
of its business coming from each of the subsidiaries and their respective beta are as
follows.

Subsidiary Percentage of Business Beta

Electric utility 60% .70
Cable company 25% .90
Real Estate 10% 1.30
International/special project 5% 1.50
(A) What is the holding company beta
(B) Assume that the risk free rate is 6% and the market risk free premium is 5% what
is the holding company’s required rate of return
CHAPTER:6
1. Selected financial ratios for RMN, Incorporated, are as follows:
20X1 20X2 20X3
Current ratio 4.2 2.6 1.8
Acid-test ratio 2.1 1.0 0.6
Debt-to-total-assets 23% 33% 47%
Inventory turnover 8.7 5.4 3.5
Average collection period 33 days 36 days 49 days
Total asset turnover 3.2 2.6 1.9
Net profit margin 3.8% 2.5% 1.4%
Return on investment (ROI) 12.1% 6.5% 2.8%
Return on equity (ROE) 15.7% 9.7% 5.4%

a. Why did return on investment decline?

b. Was the increase in debt a result of greater current liabilities or of greater long-term
debt? Explain.

2. Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock,
which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from
now, its net income will be $3.25 million. Over the next year, it also anticipates issuing an additional
150,000 shares of stock so that 1 year from now it will have 650,000 shares of common stock.
Assuming Fontaine’s price/earnings ratio remains at its current level, what will be its stock price 1 year
from now?

CHAPTER:20
1. How does an income bond differ from a mortgage bond issue?
2. What are “junk bonds”? How might they be used in financing a corporation?