Group Members:  ________

  1. You have recently been hired as a consultant for a personal financial planning firm.  One of your first projects is creating a retirement plan for a couple, Tom and Helena Keeley.  They have just celebrated their 35th birthdays and they have decided to get serious about saving for retirement.

      Tom and Helena hope to retire 30 years from now (on their 65th birthdays), and they expect to live until age 85.  Their hope is to be able to withdraw $150,000 a year from their retirement account – the first withdrawal will occur on their 65th birthdays, and the 20th and final withdrawal will occur on their 84th birthdays.  On their 85th birthdays, the account is expected to have a zero value (i.e., they don’t expect to have any remaining funds left for their children’s inheritance).

     Tom and Helena currently have $100,000 saved in a retirement account, which consists of a portfolio of mutual funds that is expected to produce an annual return of 8%.  To accomplish their goals, they would like to deposit an equal annual amount into their account starting one year from today (on their 36th birthdays) and continue to make those deposits through age 65.  (Again, the account has an expected annual return of 8%.)  Thus, they will make 30 annual end-of-year deposits to this account.

  1. How much do Tom and Helena need to contribute to the account at the end of each of the next 30 years to accomplish their goals?  (4 points)
  2. If they wanted to have $500,000 available for inheritance at age 85, how much would they need to contribute to the account at the end of each of the next 30 years?  (Assume everything else stays the same.)  (4 points)
  3. Tom and Helena have one last concern.  They recognize that the value of their $150,000 annual withdrawals during retirement will steadily decline because of expected inflation.  Assume that they want to have the value of these withdrawals increase by 5% a year during retirement to account for expected inflation.  In other words, they want to withdraw $150,000 at age 65, $157,500 at age 66, and $157,500 × 1.05 at age 67, etc.  Going back to the other original assumptions (8% return and no expected inheritance), how much would they need to contribute to the account at the end of each of the next 30 years to meet this revised goal which protects them against rising inflation?  Set up this problem using Excel, refer to the Growing Annuity Example spreadsheet on the class web page.  Refer to Week 2.  (7 points)
  • The 2022 and 2021 balance sheets for Tarpon Industries are provided below.  The company’s 2022 sales were $1,188 million, and EBITDA was 18% of sales.  Furthermore, depreciation amounted to 12% of net fixed assets, interest expense was $12 million, the corporate tax rate was 25%, and Tarpon pays out 45% of its net income as dividends.  Tarpon’s after-tax cost of capital was 13%.  Based upon this information, answer the following five questions.
  1. What was the company’s 2022 net income? (5 points)
  2. What was the company’s 2022 net operating working capital (NOWC)? (5 points)
  3. What was the company’s 2022 free cash flow? (5 points)
  • Using the Financial Industry Regulatory Authority website (, click on the search tab, and enter Nike Inc in the Issuer Name dialog box, and then click on the Show Results tab.  Use your results to answer the following questions:
  • What is Nike Inc.’s (NKE) Standard and Poor’s bond rating?  (2 points)
  • What is the coupon rate and price on a Nike bond with a remaining 10-year maturity?  In other words, the bond will mature in 2033.  (If there is not a Nike bond with a remaining 10-year maturity, select one closest to having a remaining 10-year maturity.)  Please note that the prices are quoted assuming that the bond has a face value of $100 (not the $1,000 used in class or the text).  (2 points)
  • What is the YTM on the Nike bond selected in part b?  (The bond’s YTM is indicated by the “last sale yield” on the FINRA quote sheet.)  (2 points)
  • Is the selected Nike bond selling at par, at a discount, or at a premium?  What has happened to interest rates since this bond was issued?  (2 points)
  • Assume you are now considering an investment in two different bonds.  One bond matures in 7 years and has a face value of $1,000.  The bond pays an annual coupon of 6% and has a 7.5% yield to maturity.  The other bond is a 6-year zero coupon bond with a face value of $1,000 and has a yield to maturity of 7.5%.  What is the duration of each bond?  Refer to the Duration materials on the course website.  (Refer to Week 3 and Web Appendix 7B.)  (7 points)
  • You are a financial planner, who is helping a client that has $25,000,000 invested in the following five stocks:
  1. Fill in the estimated beta for each of the client’s stocks.  To find the estimated beta for any given stock, go to Yahoo Finance and enter the company’s ticker symbol.  From there you will see some summary information which includes each company’s beta.  Only use Yahoo Finance, don’t use any other sources.  (3 points)
  2. What is the beta of your client’s portfolio?  (3 points)
  3. Assume that the risk-free rate, rRF, is 4.0%.  The market risk premium, (rM – rRF), is 6.0%.  What is the required rate of return on the client’s investment portfolio?  Carry your answer out to 4 decimal places.  (3 points)
  4. Now assume that your client sells 60% of her holdings in Disney and uses the proceeds to buy $4,500,000 worth of an exchange traded fund (ticker symbol SPY) that tracks the overall S&P 500 (and therefore has an estimated beta = 1.0).  Following this shift, what would be the required rate of return on her portfolio?  Carry your answer out to 4 decimal places.  (3 points)
  5. If the overall stock market declines this year, would you expect this new portfolio to do better or worse than the original portfolio?  (i.e., Which portfolio would be less hurt by the declining market?)  Very briefly explain your answer.  (3 points)
  • A recent investment analyst’sreport for Caterpillar Inc. (CAT) provided the following information:

      Beta = 1.01                 Risk-free rate, rRF = 3.0%          Market risk premium, RPM = 5.0%

      Forecasted 2023 Dividend (D1) = $4.80

      Based on the information in this report, use the nonconstant dividend growth model to estimate CAT’s intrinsic stock value.  More specifically:

  1. Based on the data given above, what is the required return on CAT’s stock?  Use the CAPM to estimate the firm’s required return.  (4 points)
  2. Assume that today is January 1, 2023, and that at t = 1 the company will pay the dividend per share given above.  (That is, assume that this forecasted 2023 dividend is D1, and that this is the first cash flow you receive as an investor.)  Assume that the dividend growth rate for the three years after 2023 (2024-2026, which correspond to Years 2, 3, and 4) is 12%.  Assume that after 2026 (after Year 4), the dividend grows at a long-run constant growth rate of 5.5% per year.
  3. Given these assumptions, what is your estimate of the stock’s intrinsic value?  (11 points)
  4. Compared to its current stock price, would you conclude that the stock is undervalued or overvalued?  Provide a brief explanation.  (1 point)
  5. Set up a simple Excel data table where you show how the estimated intrinsic value varies as the long-run growth rate varies over the following range (4.00%, 4.25%, 4.50%, 4.75%, 5.00%, 5.25%, 5.50%, 5.75%, 6.00%, and 6.25%) – assuming everything else stays constant.  Note that when you use the Excel Data Table feature, you can easily change assumptions about input values within your model and the Data Table values will simultaneously update.  You may create your own table with Excel formulas to get the correct answers—but it is much easier to use the Excel Data Table feature.  (4 points)
  • A stock market analyst is evaluating the common stock of Heuser Family Corporation. (HFC). She estimates that the company’s operating income (EBIT) for the next year will be $315 million.  Furthermore, she predicts that next year HFC will require $180 million in capital expenditures and depreciation expense will be $24 million, so net capital expenditures for next year will be $156 million.  Changes in net operating working capital (NOWC) for next year are expected to be $15 million.  Free cash flow is expected to grow at a constant annual rate of 5% per year and the company’s WACC is 10%.  The company has $205 million of debt (market value equals book value), $50 million of preferred stock (market value equals book value), and it has 50 million shares of common stock.  The firm’s tax rate is 25%.
  1. What is the estimated value of free cash flow the first year?  (That is, what is FCF1?)  (10 points)
  2. Using the free cash flow valuation method, what is its expected stock price today?  (10 points)

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