Tag Archives: Financial Education

Solution to Management Science Series #162: Project Evaluation and Beta 🧮

Assume that Hyrule Electronics is an all-equity firm producing and marketing video game consoles and software. Hyrule has a beta of 1.35. The market risk premium is 7.2% and the risk-free rate is 3.5%.

There are three projects Hyrule is considering investment. Projects have the same beta as that of the firm. What should the discount rate be for these projects?

Also, each project requires an investment of $1,000,000 and lasts for a single year after the initial investment. Project A’s expected cash flows next year is $1,500,000, B’s $1,250,000, and C’s $1,050,000.

Calculate each project’s IRR and NPV!

Which projects should Hyrule invest considering that each project is independent? Plot the security market line (SML), label the regions within which you should accept or reject a project, also show each project on that plot!

How to account for the changes in depreciation estimates 🧮

How to account for the changes in depreciation estimates 🧮

Assume that Sega purchased an arcade cabin production machinery for $80,000,000 with an estimated useful life of 15 years and estimated residual value of $5,000,000. Shortly after the start of Year 6, Sega changed the initial estimated life to 10 years and lowered the estimated residual value to $7,500,000.

What will be the depreciation expense that needs to be recorded by Sega from Year 6 onwards?

Statistical modeling in corporate finance: Determining beta 🔮

Statistical modeling in corporate finance: Determining beta 🔮

As a statistical measure, beta estimation is prone to measurement error.

Which of the following inputs do affect beta estimates?

-Time period observed

-Time interval used

-Market portfolio against which the individual stock is benchmarked

-Whether close or adjusted close values are used

Solution to ‘Understanding Inventory Valuation for Automakers, a real-world example: Medium From the courses I have been teaching 📖

Understanding Inventory Valuation for Automakers, a real-world example: Medium
From the courses I have been teaching 📖

The following note was contained in a recent Ford Motor Company annual report:

Inventory Valuation–Automotive.

Inventories are stated at the lower of cost or market. The cost of most US inventories is determined by the last-in, first-out (“LIFO”) method. The cost of the remaining inventories is determined substantially by the first-in, first-out (“FIFO”) method.

If FIFO were the only method of inventory accounting used by the company, inventories would have been $1,235 million higher than reported this year and $1,246 million higher than reported last year.

1. Determine the ending inventory that would have been reported in the current year if Ford had used only FIFO.
2. The cost of goods sold reported by Ford for the current year was $74,315 million. Determine the cost of goods sold that would have been reported if Ford had used only FIFO for both years.
3. If the company had always used FIFO, what would have been the effects on taxes and retained earnings? Assume 30% marginal tax rate.

Management Science Series #156: Solution to the Understanding Receivables and Revenue Recognition: Medium

Refer to Amazon 10-K for the year 2020.

Record summary journal entries related to the allowance for doubtful accounts for the current year!

What was the effect of bad debt expense entry on “Income before income taxes?” What was the effect on “Net cash provided by operating activities?”

What was the effect of the write-off entry on “Income before income taxes?” What was the effect on “Net cash provided by operating activities?”

Did bad debt expense as a percentage of Net revenues increase or decrease from 2019 to 2020?
Did management disclose any information indicating the reason for the increase or decrease?
—
Assume that all of Amazon’s sales to customers are on account. Its 10-K indicates that $1 billion bad (trade) accounts receivable were written-off in 2020 and there were no reinstatements. Bad debt expense for the period were recorded by debiting “General and Administrative Expenses” and crediting the “Allowance for doubtful accounts.” What amount of bad debt expense was recorded in 2020?

Assuming all sales revenues were on account, what were collections on accounts receivable during 2020?

Solution to Management Science Series-3: Learn Finance💹

Learn Finance. 💹

At least the basics.

Whether you use it for your retirement, financial independence or investment plans, you are required to know the basics of finance. 💰

Up for a quick test ⬇️

-You plan to retire within 20 years from now.

-You need to cover first 5 years of your retirement through your own savings.

-You think that during these first 5 years of your retirement, your expenses will run $200,000 per year.

-You have found an investment vehicle that will help you earn 9% annually on your savings throughout the following decades.

Question:

How much money should you save each year on average, i.e. in terms of equal amounts per year, until your retirement so that you will solely rely on these savings without running out of money throughout the first 5 years of your retirement?

Management Science Series #155: Solution to the Introduction to Portfolio Theory: Part 19 Hard 🧠

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9% and a standard deviation of 13%.

The risk-free rate is 5% and the expected return on the market portfolio is 14%.

Assume that the CAPM holds in that market!

What expected return should a security earn if it has a 0.53 correlation with the market portfolio and a standard deviation of 61%?

Management Science Series #154: Solution to the Introduction to Portfolio Theory: Part 18 Medium 🧠

Introduction to Portfolio Theory: Part 18 Medium 🧠

Could you answer the following questions correctly?

-According to the CAPM, can a stock have a negative expected return?

-Why would you invest in a risky security with an expected return that is lower than the risk-free rate?

-Can a security have a low beta and a high standard deviation?

-What would you say about the expected return on a security with low beta and high SD?

Management Science Series #153: Solution to the Introduction to Portfolio Theory: Part 17 Medium 🧠

Introduction to Portfolio Theory: Part 17 Medium 🧠

Calculate the expected return on Walmart stock, using CAPM!

Rely on the publicly available information to calculate the necessary input values!

1-Y US Treasury bill will be the proxy for the risk-free asset.

The relevant market will be S&P 500!

Use the information for the last 3 years!