finance

need in 4 hours

Q1: (2.5 points): An upward sloping yield curve presents clear arbitrage
opportunities and mispricing of the bonds; one can exploit it by investing in high yield
long-term bonds, while borrowing at the lower short term interest rate.
a) True
b) False
Explain your answer:
True: Usually, yield curve tends upward; as period to maturity rises, so
does corresponding interest rate. Reasoning for this is since borrowing over longer
term usually bears a higher risk due to the higher probability of inflations or default
over longer term. As a result, borrowers (debt holders) normally expect a greater rate
of yield (higher rate interest) for long-term debt.
Q2: (2.5 points): The average annual inflation-adjusted return on gold is historically
only 1.1%, while being 7.4% for equities. The volatility of gold is also 50% higher
than that of stocks. Gold is dominated in both risk and return by stocks, and
therefore, should never be a part of an optimal portfolio.
a) True
b) False
Explain your answer:
False: For sense, this is relevant to note that 'optimal' corresponds to one best
alternative cantered on a variety of previous predictions. First, the probability is
measured utilizing backward-looking results. Second, covariance matrix or
investment ann-movements usually use backward-looking records as a reference
point. Third, projections of potential returns, which reflect a base case in portfolio
optimization process, are highly uncertain. Thus, here gold is more volatile and
having more risk but return is higher than Stock so gold should be part of optimum
portfolio.
Question 3:
In late December 2020, Steven Wiese, the founder and CEO of Steven’s Bicycle
Corporation (SBC), had to make an important decision about how to manage the
international operations of his high-end bicycle business. Should he try to boost
international sales by signing an endorsement contract with cyclist Anna van der
Breggen?
Overseas sales were conducted through local distributors, with SBC receiving
licensing royalties from them. These international royalties incurred negligible SG&A
beyond what was required for UK operations.
With no change in operations (i.e. no signing of Anna van der Breggen), in its
baseline scenario SBC expected that domestic sales and international royalties
would grow at 5% per year until the end of 2026, after which they would grow at a
rate of 3% per year. In this baseline scenario, capital expenditures were expected to
grow at a steady rate of 3%. Depreciation on all capital expenditures (current and

past) was taken over five years on a straight-line basis, starting in the year after the
capital expenditure.
Wiese expected that COGS, SG&A, and Net Working Capital would continue at the
same percentage of sales as the average of the last five years (2016-2020). The
average was 60.9% for COGS, 30% for SG&A, and 10.8% for NWC respectively.
Net working capital is Accounts Receivable plus Inventories less Accounts Payable
(i.e. cash is excess cash).
For all the calculations: Assume a discount rate of 8% and a tax rate of 40%.
Exhibit 1A 2016 2017 2018 2019 2020
U.S. Sales 24,352 27,786 31,370 34,632 38,050
International Royalties 1,374 1,478 1,580 1,684 1,792
U.S. Cost of Goods Sold 14,904 16,616 18,978 21,368 23,288
SG&A 7,282 8,392 9,474 10,320 11,378
Depreciation 1,062 1,094 1,126 1,160 1,196
Earnings from Operations 2,478 3,162 3,372 3,468 3,980
Taxes 991 1,265 1,349 1,387 1,592
Net Income 1,487 1,897 2,023 2,081 2,388
International Sales 27,132 32,400 33,372 34,372 35,404
All units are in thousands
GBP £.
Exhibit 1B 2016 2017 2018 2019 2020
Cash 680 2,612 4,520 840 2,782
Accounts Receivable 3,434 3,090 3,326 3,568 4,034
Inventory 1,826 1,944 2,040 2,182 2,512
Net PP&E 5,280 5,346 5,414 5,482 5,554
Assets 11,220 12,992 15,298 12,070 14,880
Accounts Payable 2,070 1,944 2,228 2,320 2,740
Equity 9,150 11,048 13,070 9,750 12,140
Liabilities & Equity 11,220 12,992 15,298 12,070 14,880
CAPEX 1,126 1,160 1,194 1,230 1,266
All units are in thousands

GBP £.
Note: In your answers to Parts A)-G) assume that the business goes on as
usual (baseline scenario without the endorsement contract).
Part A (5 points): What is the annual EBIAT (equals Earnings from Operations less
Taxes) from 2021-2028 in the baseline scenario?
Year EBIAT Year EBIAT
2021 1545.014 2025 1944.494
2022 1637.047 2026 2058.356
2023 1734.126 2027 2120.107
2024 1836.515 2028 2183.71
Sketch out your steps
Exhi
bit
1A
20
16
20
17
20
18
20
19
20
20
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
U.S.
Sales
24,
35
2
27,
78
6
31,
37
0
34,
63
2
38,
05
0
399
52.
5
419
50.
13
440
47.
63
462
50.
01
485
62.
51
509
90.
64
525
20.
36
540
95.
97
Inter
natio
nal
Royal
ties
1,3
74
1,4
78
1,5
80
1,6
84
1,7
92
188
1.6
197
5.6
8
207
4.4
64
217
8.1
87
228
7.0
97
240
1.4
51
247
3.4
95
254
7.7
U.S.
Cost
of
Good
s
Sold
14,
90
4
16,
61
6
18,
97
8
21,
36
8
23,
28
8
254
76.
97
267
50.
82
280
88.
36
294
92.
77
309
67.
41
325
15.
78
334
91.
26
344
95.
99
SG&
A
7,2
82
8,3
92
9,4
74
10,
32
0
11,
37
8
125
50.
23
131
77.
74
138
36.
63
145
28.
46
152
54.
88
160
17.
63
164
98.
16
169
93.
1
Depr
eciati
on
1,0
62
1,0
94
1,1
26
1,1
60
1,1
96
123
1.8
8
126
8.8
36
130
6.9
01
134
6.1
09
138
6.4
92
142
8.0
87
147
0.9
29
151
5.0
57
Earni
ngs
from
Oper
ation
2,4
78
3,1
62
3,3
72
3,4
68
3,9
80
257
5.0
23
272
8.4
12
289
0.2
09
306
0.8
58
324
0.8
23
343
0.5
94
353
3.5
12
363
9.5
17

s
Taxe
s
99
1
1,2
65
1,3
49
1,3
87
1,5
92
103
0.0
09
109
1.3
65
115
6.0
84
122
4.3
43
129
6.3
29
137
2.2
37
141
3.4
05
145
5.8
07
Net
Inco
me
1,4
87
1,8
97
2,0
23
2,0
81
2,3
88
154
5.0
14
163
7.0
47
173
4.1
26
183
6.5
15
194
4.4
94
205
8.3
56
212
0.1
07
218
3.7
1

Part B (5 points): What is the amount of annual depreciation each year from 2021-
2028 in the baseline scenario?
Year Depreciation Year Depreciation
2021 1231.88 2025 1386.492
2022 1268.836 2026 1428.087
2023 1306.901 2027 1470.929
2024 1346.109 2028 1515.057
Sketch out your steps
Years 2021 2022 2023 2024 2025 2026 2027 2028
Depreciat
ion (3%
increase)
1231.
88
1268.8
36
1306.9
01
1346.1
09
1386.4
92
1428.0
87
1470.9
29
1515.0
57
Part C (5 points): What is the amount of annual CapEx from 2021-2028 in the
baseline scenario?
Year CapEx Year CapEx
2021 1303.98 2025 1467.641
2022 1343.99 2026 1511.67
2023 1383.392 2027 1557.02
2024 1424.894 2028 1603.731
Sketch out your steps
Years 2021 2022 2023 2024 2025 2026 2027 2028
CAPEX
(3%
increas
e)
1303.
98
1343.0
99
1383.3
92
1424.8
94
1467.6
41
1511.
67
1557.
02
1603.7
31

Part D (5 points): What is the amount of the annual change in net working capital
each year from 2021-2028 in the baseline scenario? Note: project net working capital
and then take the annual change.
Year Change in
NWC
Year Change in
NWC
2021 712 2025 262
2022 226 2026 275
2023 237 2027 173
2024 249 2028 178
Sketch out your steps
Accounts
Receivable
3,434 3,090 3,32
6
3,568 4,034
Inventory 1,826 1,944 2,04
0
2,182 2,512
Less: Accounts
Payable
2,070 1,944 2,22
8
2,320 2,740
Net Working
Capital
3,190 3,090 3,13
8
3,430 3,806
Years 2021 2022 2023 2024 2025 2026 2027 2028
10.8%
of sales
4518 4,744 4,981 5,230 5,492 5,766 5,939 6,118
Change
in NWC
712 226 237 249 262 275 173 178
Part E (3 points): What are the annual free cash flows from 2021-2028 in the
baseline scenario?

Year FCF Year FCF
2021 1435 2025 1821
2022 1524 2026 1931
2023 1617 2027 1989
2024 1716 2028 2048
Sketch out your steps
Years 2021 2022 2023 2024 2025 2026 2027 2028
Net Income 1545.
014
1637.
047
1734.
126
1836.
515
1944.
494
2058.
356
2120.
107
2183.
71
Less: Capex less Dep
Capex 1303.
98
1343.
099
1383.
392
1424.
894
1467.
641
1511.
67
1557.
02
1603.
731
Dep 1231.
88
1268.
836
1306.
901
1346.
109
1386.
492
1428.
087
1470.
929
1515.
057
Capex less
dep
72 74 76 79 81 84 86 89
Less: Change
in Working
Capital
38 39 40 42 43 44 45 47
FCF 1,435 1,524 1,617 1,716 1,821 1,931 1,989 2,048
Part F (5 points): The present value for all the future cash flows, starting from 2028,
in today’s GBP value is 813.29.
Show your work.
2048 / (1.08)13 = 813.29

Part G (2 points): The overall present value of the SBC’s baseline business is
9903.093.
Show your work.
FCF 1,435 1,524 1,617 1,716 1,821 1,931 1,989 2,048
PVF
@
0.9259
26
0.8573
39
0.7938
32
0.7350
3
0.6805
83
0.6301
7
0.5834
9
0.5402
69
PV of
FCF
1328.6
42
1306.2
97
1283.8
98
1261.4
78
1239.0
68
1216.6
96
1160.3
67
1106.6
47
Total 9903.0
93
Question 4 (10 points): What is the NPV of signing the endorsement contract?
Should Weise sign it?
Endorsement contract: Van der Breggen had expressed interest in an SBC
sponsorship, after Wiese had spent considerable effort and money developing a
relationship with Van der Breggen. Overall, Wiese had spent £26,000 on developing
this relationship.
Van der Breggen and Wiese had informally discussed the terms of a contract that
Van der Breggen would sign. The proposed contract would give the cyclist a
payment of 10% share of international revenues for five years (2022-2026). These
payments would be made at the end of each year and treated as an expense for
income tax purposes. SBC estimated that the contract with Van der Breggen would
significantly increase international sales. International sales would experience a one-
time permanent jump of 30% in 2022, meaning that overall 2022 international sales
growth would be 36.5% (= 1.05 x 1.30 – 1). Wiese thought that any increase in
international sales achieved would persist beyond the life of the contract. Wiese’s
market research department asserted that the U.K. sales would not be impacted by
the contract.
In order to realize the 30% bump in international sales, Wiese would also need to
directly control its international sales and distribution. This would allow Wiese to

receive international sales directly, rather than receiving royalties from overseas
local distributors. International sales are in Exhibit 1A. This required an immediate £5
million capital expenditure that would be depreciable over five years on a straight-
line basis, with depreciation beginning in 2021. Ongoing maintenance capital
expenditures for international operations were not expected.
Should Wiese sign the endorsement contract with Anna van der Breggen?
The NPV of signing the contract with Van der Breggen is 14276.15
Should Weise sign the contract with Anna van der Breggen.
Show your work.
Exhi
bit
1A
20
16
20
17
20
18
20
19
20
20
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
U.S.
Sales
24,
35
2
27,
78
6
31,
37
0
34,
63
2
38,
05
0
519
38.
25
545
35.
16
572
61.
92
601
25.
02
631
31.
27
662
87.
83
682
76.
47
703
24.
76
Intern
ation
al
Royal
ties
1,3
74
1,4
78
1,5
80
1,6
84
1,7
92
188
1.6
197
5.6
8
207
4.4
64
217
8.1
87
228
7.0
97
240
1.4
51
247
3.4
95
254
7.7
U.S.
Cost
of
Good
s
Sold
14,
90
4
16,
61
6
18,
97
8
21,
36
8
23,
28
8
327
76.
29
344
15.
1
361
35.
86
379
42.
65
398
39.
78
418
31.
77
430
86.
73
443
79.
33
SG&
A
7,2
82
8,3
92
9,4
74
10,
32
0
11,
37
8
161
45.
96
169
53.
25
178
00.
92
186
90.
96
196
25.
51
206
06.
78
212
24.
99
218
61.
74
Depr
eciati
on
1,0
62
1,0
94
1,1
26
1,1
60
1,1
96
123
1.8
8
126
8.8
36
130
6.9
01
134
6.1
09
138
6.4
92
142
8.0
87
147
0.9
29
151
5.0
57
Earni
ngs
from
Oper
ation
s
2,4
78
3,1
62
3,3
72
3,4
68
3,9
80
366
5.7
26
387
3.6
5
409
2.7
1
432
3.4
83
456
6.5
79
482
2.6
38
496
7.3
17
511
6.3
37
Taxe
s
99
1
1,2
65
1,3
49
1,3
87
1,5
92
146
6.2
91
154
9.4
6
163
7.0
84
172
9.3
93
182
6.6
32
192
9.0
55
198
6.9
27
204
6.5
35
Net
Inco
1,4
87
1,8
97
2,0
23
2,0
81
2,3
88
219
9.4
232
4.1
245
5.6
259
4.0
273
9.9
289
3.5
298
0.3
306
9.8

me 36 9 26 9 48 83 9 02
Net Income 2199.
436
2324.
19
2455.
626
2594.
09
2739.
948
2893.
583
2980.
39
3069.
802
Less: Capex less Dep
Capex 1303.
98
1343.
099
1383.
392
1424.
894
1467.
641
1511.
67
1557.
02
1603.
731
Dep 1231.
88
1268.
836
1306.
901
1346.
109
1386.
492
1428.
087
1470.
929
1515.
057
Capex less
dep
72 74 76 79 81 84 86 89
Less: Change
in Working
Capital
38 39 40 42 43 44 45 47
FCF 2,089 2,211 2,339 2,474 2,616 2,766 2,849 2,934
PVF @ 0.925
926
0.857
339
0.793
832
0.735
03
0.680
583
0.630
17
0.583
49
0.540
269
PV of FCF 1934.
589
1895.
411
1856.
648
1818.
319
1780.
441
1743.
03
1662.
334
1585.
375
Total 14276
.15
Question 4:
Morton Gage (his best friends call him Mort) is a loan officer at a large bank in Kent.
He has been discussing the terms of a twenty-year mortgage his bank is prepared to
offer to Savi Baurer. Morton is offering Savi a 20 year mortgage having a 5.5% APR
(with monthly compounding) and monthly payments equal to £4,471.27. According to
the mortgage contract, Savi would need to make 240 monthly payments, each equal
to £4,471.27.
Part A (5 Points): Given that the twenty-year loan has a 5.5% APR with monthly
compounding and the monthly payments are £4,471.27, what is the amount Morton’s
bank is loaning Savi? In other words, what is the loan value?
The loan value is: 820852.56
_____________________________________ __________________________
Show all your work:
Rate = 5.5% yearly i.e. [(5.5)1/12 – 1 ] *100 = 2.70%
4471.27 * 12 * PVAF (2.70%,20) = 4471.27 * 12 * 15.2986 = 820852.56
Question 5: (5 Points): Savi tells Morton that she would like to make higher monthly
payments in the first ten years so that she can make lower payments in the last ten.

She is proposing that her first 120 payments be set at £5,200 and is asking Morton
what this will mean for the level of her last 120 payments. To be precise, she is
proposing that her first 120 payments be set at £5,200 and her last 120 be set at £X.
She wants to know what £X will be, so that making 120 payments at £5,200 followed
by 120 payments at £X is the same as making 240 payments at £4,471. The APR is
still 5.5%. What is the monthly payment level Savi must make in the last ten years if
she pays £5,200 in the first ten?
Savi’s monthly payment for the last ten years will be:
1640.38__________________________________
Show all your work:
First 120 * 5200 = 624000
Left Amount = 820852.56 – 624000 = 196852.56
Last 120 payments = 196852.56 /12 = 1640.38