Solution: MBA 643 Managerial Finance Problem Set 1, Spring 2020

This document presents a comprehensive solution to Problem Set 1 for an MBA-level Managerial Finance course. The assignment addresses various corporate finance topics, including retirement planning, investment analysis, and capital budgeting techniques. The solution begins by calculating the required monthly investment for Lady Gaga to achieve her retirement goals, considering her desired withdrawals and future property value. It then analyzes two job offers, calculating the present value of each to determine the financial implications of choosing one over the other. The solution also includes a capital budgeting analysis using the Net Present Value (NPV) method for a proposed project, determining its feasibility. Furthermore, it covers bond valuation, calculating market prices and analyzing credit ratings. Finally, the assignment examines dividend policy, assessing the impact of changes in payout ratios and growth strategies on shareholder value.

Running Head: CORPORATE FINANCE 1
CORPORATE FINANCE

Running Head: CORPORATE FINANCE
Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................4
Question 4........................................................................................................................................6
Part A...........................................................................................................................................6
Part B............................................................................................................................................6
Question 5........................................................................................................................................7
Part A...........................................................................................................................................7
Part B............................................................................................................................................7
Part C............................................................................................................................................7
References........................................................................................................................................9

Running Head: CORPORATE FINANCE
Question 1
Present value of goals at the time of retirement
PV of donation (3000000/(1+15%)^10
$741554.1184
Future value of house property at age 65 (7500000*(1+1%)^35)
$10624520.67
Less: Withdrawals $2250000
Total value $1287452.67
PMT $20367.89
The above value defines the amount which is required to be deposited by Lady Gaga, on
monthly basis to achieve her goals and desires until retirement. This means she has to input
$20367.89 on monthly basis to get what she wants, which also includes the amount of the
withdrawals for expenses of clothing and make up (Muda & Hasibuan, 2017).
Question 2
Years Job Offer 1
Discounting
factor Present value
1
$
80,000.00 0.893
$
71,428.57
2
$
80,000.00 0.797
$
63,775.51
3
$
80,000.00 0.712
$
56,942.42
4
$
80,000.00 0.636
$
50,841.45
5
$
80,000.00 0.567
$
45,394.15
6
$
80,000.00 0.507
$
40,530.49

Running Head: CORPORATE FINANCE
Total
$
480,000.00
$
328,912.59
Years Job Offer 2
Discounting
factor Present value
1
$
65,000.00 0.893
$
58,035.71
2
$
50,000.00 0.797
$
39,859.69
3
$
50,000.00 0.712
$
35,589.01
4
$
50,000.00 0.636
$
31,775.90
5
$
60,000.00 0.567
$
34,045.61
6
$
60,000.00 0.507
$
30,397.87
Total
$
335,000.00
$
229,703.80
Loss incurred
$
145,000.00
$
99,208.78
As per the above analysis it is evident that if second offer is accepted the loss that I have
it bear is $99208.78. The change that can be proposed for the second job offer could be
indifferent with respect to the present one only when the annual cash flows are equal to $480000
in total and the bonus shall be increased to 15000 and the annual cash flows shall also increase
by 30000 for year 3 4 and 5 and by 20000 for year 5 and 6 respectively (Muda & Hasibuan,
2017).
Question 3
Particulars Amount
Initial
Investment
$
(400,000.0

Running Head: CORPORATE FINANCE
0)
Particulars/
Years 0 1 2 3 4 5
Sales
Unit Price 40 40 40 40 40
Unit 20000 20000 20000 20000 20000
Production
Costs
Unit price 15 15 15 15 15
Units sold 20000 20000 20000 20000 20000
Total sales
$
800,000.0
0
$
800,000.00
$
800,000.00
$
800,000.00
$
800,000.0
0
Total
production
costs
$
300,000.0
0
$
300,000.00
$
300,000.00
$
300,000.00
$
300,000.0
0
Contribution
$
500,000.0
0
$
500,000.00
$
500,000.00
$
500,000.00
$
500,000.0
0
Less: Rental
Expenses
$
24,000.00
$
24,000.00
$
24,000.00
$
24,000.00
$
24,000.00
Less: Fixed
costs
$
150,000.0
0
$
150,000.00
$
150,000.00
$
150,000.00
$
150,000.0
0
Less:
depreciation
$
64,000.00
$
64,000.00
$
64,000.00
$
64,000.00
$
64,000.00
Profits before
tax
$
262,000.0
0
$
262,000.00
$
262,000.00
$
262,000.00
$
262,000.0
0
Less: Tax @
40%
$
104,800.0
0
$
104,800.00
$
104,800.00
$
104,800.00
$
104,800.0
0
Profit after
tax
$
157,200.0
0
$
157,200.00
$
157,200.00
$
157,200.00
$
157,200.0
0
Add:
depreciation
$
64,000.00
$
64,000.00
$
64,000.00
$
64,000.00
$
64,000.00
Add: Salvage
value
$
80,000.00

Running Head: CORPORATE FINANCE
Annual Cash
Flows
$
(400,000.0
0)
$
221,200.0
0
$
221,200.00
$
221,200.00
$
221,200.00
$
301,200.0
0
Net present
value
$
786,000.0
0
Under the capital budgeting techniques, the net present value method is of core
significance and hence, the same has been applied for this project as well. The above table
explains, the initial investment made by Mason and his friend on the cumulative project shall be
accepted as the net present value is positive at $786000 and it will be feasible choice for future
growth and hence the project shall be accepted (Iqbal, 2016).
Question 4
Part A
Particulars
YTM 3.50%
Coupon 12%
Par value $ 1,000.00
Years of maturity 5
Coupons 120
Market price $ 1,383.78
(C8+((1-(1+C4)^-C7)/C4)+(C6/(1+C4)^C7))
Hence, the market value of the bond is $1383.78 at present
Part B
Particulars
YTM 3.80%

Running Head: CORPORATE FINANCE
Coupon 12%
Par value $ 1,000.00
Years of maturity 5
Coupons 120
Market price $ 334.28
(C8+((1-(1+C4)^-C7)/C4)+(C6/(1+C4)^C7))
At the end of the year the market price is $334.28. Strong capacity to meet financial
obligations, but somewhat susceptible to adverse economic conditions and changes in
circumstances when the bond is rated as A credit rating and on the other hand if the bond will
fell down to ‘BBB’ grade, in that scenario, the price of the bond at the end of the year will be
$334.28. This also reflects the company might have adequate capacity but it is subjective to
adverse economic conditions (Binici & Hutchison, 2018).
Question 5
Part A
Price per share Dividend
Cost of equity - Growth rate
15*0.08-15X
0.5
Growth rate 4.67%
Part B
Dividend payout ratio
Total dividends 35
Net income 100
Earnings per share= (Dividend per
share /Dividend payout ratio) 1.429
P/E RATIO Market Price

Running Head: CORPORATE FINANCE
EPS
15
1.429
P/E RATIO 10.5
Part C
If the management changes the strategy, the payout ratio will be reduced to 20% from
35% and this indicates that the growth strategy will also reduce to 7% from 12%. This clearly
implies that shareholders will have to bear enough losses and this will not at all maximize the
shareholder value, instead will reduce it. The dividend payout ratio which determines how much
value will be returned to the respective shareholders if fells down, it has a negative image on
mindset of shareholders and hence, this is not at all good strategy for MC, Company (Fitri,
Hosen & Muhari, 2016).

Running Head: CORPORATE FINANCE
References
Binici, M., & Hutchison, M. (2018). Do credit rating agencies provide valuable information in
market evaluation of sovereign default Risk?. Journal of International Money and
Finance, 85, 58-75.
Fitri, R. R., Hosen, M. N., & Muhari, S. (2016). Analysis of factors that impact dividend payout
ratio on listed companies at Jakarta islamic index. International Journal of Academic
Research in Accounting, Finance and Management Sciences, 6(2), 87-97.
Iqbal, M. M. (2016). Two Flaws of the Net Present Value Criterion. Journal of Business &
Economics, 8(1).
Muda, I., & Hasibuan, A. N. (2017). Public Discovery of the Concept of Time Value of Money
with Economic Value of Time. Proceedings of MICoMS, 251-257.