Wednesday, June 29, 2011
The Anatomy of Peace
This book hits very close to home and has provided a lot of self-reflection since I started reading it. The highlight for me, so far, is a story told about 50 pages in:
Lou had grown up in Athens, New York, a picturesque town located on the Hudson River 120 miles north of Manhattan and 30 miles south of Albany. His father was an apple farmer who worked around the clock seven days a week to eke out a meager living. They lived in a Civil War-era white clapboard farmhouse that sat only fifty yard off the west bank of the Hudson. Their farm was a rather modest ten acres, but it was the prettiest parcel in Greene County, occupying a peninsula that jutted out into the Hudson. From the top floor of the farmhouse, one could see the Catskill Mountains rising above the trees to the west. The setting was so beautiful that Lou's father could never bring himself to leave, even though he could have run a far grander operation elsewhere.
Through Lou's youth, the family had owned only one vehicle-a red 1942 farm truck with a matching red four-foot-tall wooden bay on the flatbed. The truck rattled and coughed like a ninety-year-old chain-smoker. Lou grew up thinking that the shoulder of the road was merely a second lane, as his father nearly always hugged the grasses that lined the streets in order to let other vehicles pass.
It was no small thing, then, when the Herberts purchased a new car. Lou was sixteen at the time, and he was eager to show the car to his friends in town. The day after his father brought it home, Lou asked if he could take it for some errands. Sensing his son's excitement, Lou's father readily agreed.
Lou ran out to the driveway and started it up. The low hum of the engine exhilarated him and he stroked the dash in anticipation. Just then he remembered he had left his wallet in the house and ran in to get it. When he raced back out, to his horror, the car had vanished! Lou remembered his feeling of panic, and then the awful thought that the car might have rolled down the slope of the approach and spilled off the driveway adn into the Hudson.
Didn't I put it back in park? Lou had screamed in his mind as he ran down the drive. Didn't I set the brake?
Where the lane turned, sure enough, fresh tire tracks headed down the hill toward the river. Lou sprinted to the edge of the bluff and looked some twenty feet down. There looking back at him were the headlights of his father's car. He stood frozen as the water slowly sucked the car under the surface and out of sight.
Lou remembered walking numbly up to the house, wondering how he could break the news to his father. He entered the farmhouse and saw his father facing away from him in his favorite wingback chair. He was reading the newspaper. For a moment, Lou considered quietly exiting, and his mind raced with thoughts of running away.
"Forget something else?" his father had asked without turning around.
"No," Lou had responded, feeling cornered. There was no avoiding it now, as his father knew he was in the house. There was nowhere to hide.
"Dad," he had said, his voice breaking. "I-" He couldn't go on. "I-"
He gasped for air and the courage to tell what happened.
"Dad, I - the car - " he stammered as his chest heaved between words. "I think I must have forgotten to set the brake," he blurted. "It's in the river, Dad. The car is in the river! I'm so sorry," he said, bursting into sobs. "I'm so sorry!"
What happened next seared itself so deeply into Lou's memory he was sure that should he ever get Alzheimer's or some similar disease, this would be the last memory to leave him.
He remembered trembling while waiting for his father to respond. His father didn't turn to him but still sat holding the newspaper wide before him. He then slowly reached his left hand to the top corner of the right-hand page and turned it to continue reading. And then he said it, the sentence Lou would never forget. He said, "Well, I guess you'll have to take the truck then."
Lou had grown up in Athens, New York, a picturesque town located on the Hudson River 120 miles north of Manhattan and 30 miles south of Albany. His father was an apple farmer who worked around the clock seven days a week to eke out a meager living. They lived in a Civil War-era white clapboard farmhouse that sat only fifty yard off the west bank of the Hudson. Their farm was a rather modest ten acres, but it was the prettiest parcel in Greene County, occupying a peninsula that jutted out into the Hudson. From the top floor of the farmhouse, one could see the Catskill Mountains rising above the trees to the west. The setting was so beautiful that Lou's father could never bring himself to leave, even though he could have run a far grander operation elsewhere.
Through Lou's youth, the family had owned only one vehicle-a red 1942 farm truck with a matching red four-foot-tall wooden bay on the flatbed. The truck rattled and coughed like a ninety-year-old chain-smoker. Lou grew up thinking that the shoulder of the road was merely a second lane, as his father nearly always hugged the grasses that lined the streets in order to let other vehicles pass.
It was no small thing, then, when the Herberts purchased a new car. Lou was sixteen at the time, and he was eager to show the car to his friends in town. The day after his father brought it home, Lou asked if he could take it for some errands. Sensing his son's excitement, Lou's father readily agreed.
Lou ran out to the driveway and started it up. The low hum of the engine exhilarated him and he stroked the dash in anticipation. Just then he remembered he had left his wallet in the house and ran in to get it. When he raced back out, to his horror, the car had vanished! Lou remembered his feeling of panic, and then the awful thought that the car might have rolled down the slope of the approach and spilled off the driveway adn into the Hudson.
Didn't I put it back in park? Lou had screamed in his mind as he ran down the drive. Didn't I set the brake?
Where the lane turned, sure enough, fresh tire tracks headed down the hill toward the river. Lou sprinted to the edge of the bluff and looked some twenty feet down. There looking back at him were the headlights of his father's car. He stood frozen as the water slowly sucked the car under the surface and out of sight.
Lou remembered walking numbly up to the house, wondering how he could break the news to his father. He entered the farmhouse and saw his father facing away from him in his favorite wingback chair. He was reading the newspaper. For a moment, Lou considered quietly exiting, and his mind raced with thoughts of running away.
"Forget something else?" his father had asked without turning around.
"No," Lou had responded, feeling cornered. There was no avoiding it now, as his father knew he was in the house. There was nowhere to hide.
"Dad," he had said, his voice breaking. "I-" He couldn't go on. "I-"
He gasped for air and the courage to tell what happened.
"Dad, I - the car - " he stammered as his chest heaved between words. "I think I must have forgotten to set the brake," he blurted. "It's in the river, Dad. The car is in the river! I'm so sorry," he said, bursting into sobs. "I'm so sorry!"
What happened next seared itself so deeply into Lou's memory he was sure that should he ever get Alzheimer's or some similar disease, this would be the last memory to leave him.
He remembered trembling while waiting for his father to respond. His father didn't turn to him but still sat holding the newspaper wide before him. He then slowly reached his left hand to the top corner of the right-hand page and turned it to continue reading. And then he said it, the sentence Lou would never forget. He said, "Well, I guess you'll have to take the truck then."
Saturday, June 25, 2011
Austin's Recital
Before Austin's recital began, Mom was telling him about a time when Sara really botched a song at a recital, simply stopped playing, announced to the audience "Now I'm going to play this song the way it really goes" and started over. Austin did great - and made Sara feel better by doing the same thing. ;)
Thursday, June 23, 2011
Happy Thanksgiving
So, Mom and Dad Morris just bought us a family vacation - a 7 day cruise in the Western Caribbean over Thanksgiving. I can't hardly wait. And you should see what this ship offers...holy smokes! It will be a great trip - very exciting.
Friday, June 17, 2011
Hey, Good Lookin'!
Behold, Tanner.
Tanner is our little firecracker, always bursting with energy. Just when you think you're angry enough to scream at him, he does the funniest things.
Cases in point:
1. One day Mary walked down into the kitchen to find him sitting in the kitchen sink, filled with water. She asked what he was doing and he said he got cold, so he filled it up with warm water to get warm.
2. For his birthday, Tanner wanted muffins. Mary made them then ran to get ready while they were cooking. He went upstairs while she was blowdrying her hair and told her "Mom - beep beep!" The timer was going off. :) By the time she got downstairs, he had taken them out of the oven. Yes, 3-year-old Tanner got the oven mitts, opened the oven, lifted out the muffins and set them on the ground. He was so proud to tell her he helped her.
3. Unless you've seen it, you may not believe it, but Tanner screams "NO, I LOVE YOU!!" at the top of his lungs, most notably to Paige, his best friend. The attached videos are of our Tanner - one is him saying "Hey, good lookin'!" (I have no idea who taught him this :) but I love it) and the second is of him singing Lexi's song - "Everybody look at Lex - whoo, whoo! Whoo, whoo!"
Tanner is our little firecracker, always bursting with energy. Just when you think you're angry enough to scream at him, he does the funniest things.
Cases in point:
1. One day Mary walked down into the kitchen to find him sitting in the kitchen sink, filled with water. She asked what he was doing and he said he got cold, so he filled it up with warm water to get warm.
2. For his birthday, Tanner wanted muffins. Mary made them then ran to get ready while they were cooking. He went upstairs while she was blowdrying her hair and told her "Mom - beep beep!" The timer was going off. :) By the time she got downstairs, he had taken them out of the oven. Yes, 3-year-old Tanner got the oven mitts, opened the oven, lifted out the muffins and set them on the ground. He was so proud to tell her he helped her.
3. Unless you've seen it, you may not believe it, but Tanner screams "NO, I LOVE YOU!!" at the top of his lungs, most notably to Paige, his best friend. The attached videos are of our Tanner - one is him saying "Hey, good lookin'!" (I have no idea who taught him this :) but I love it) and the second is of him singing Lexi's song - "Everybody look at Lex - whoo, whoo! Whoo, whoo!"
Friday, June 10, 2011
Family
I adore my family. Sheri just showed me these darling pictures from her wedding. This is my family, oldest to youngest (except Sheri, who for some reason excluded herself. Hm.). Enjoy! :)
Thursday, May 5, 2011
Finals are Finished
I know I should be feeling a wave of relief right now, but I know I failed my final for Financial Management. Here's a peek at a few of the problems I spent over 20 hours on (enjoy doing them, Robert):
2. (16 points). The standard deviation of returns on Carlson company’s common stock is 37%, and Carlson’s beta coefficient is 0.9. Currently, yields on Treasury Bills are 5.5%, while the average yield on Treasury Bills over the past seventy years has been 3.7%. The standard deviation of market returns is 22%. The return on the overall market last year was 10.2%, while the average market return over the past seventy years has been 12.2%.
(a) (8 points) Provide an estimate of the expected return on Carlson common stock, and explain the reasoning behind the estimate.
(b) (8 points) Carlson has 2.2 million shares of common stock outstanding. The common stock has a book value of $9 per share, and sells in the market for $12 per share. Carlson also has debt with a face value of $18 million outstanding. The debt pays coupon interest rate of 9.5%, but sells in the market for 110% of its face value, and has a yield-to-maturity of 8.8%. Carlson’s corporate income tax rate is 35%. Compute Carlson’s weighted average cost of capital (WACC).
5. (14 points) TLP corporation had operating cash flow of $3.20 per share last year, and has 1.5 million shares outstanding. Given TLP’s existing asset base, this level of cash flow can be sustained forever. TLP has existing liabilities with a market value of $3 million.
(a) (5 points) If TLP has no other assets, and a discount rate of 13% per year is appropriate, what is the fair market value of a share of TLP stock?
(b) (9 points) Assume now that TLP has just made a breakthrough in biomedical engineering. The new project will require an immediate capital expenditure of $2.5 million, plus another $2.5 million outlay after one year. At the end of the second year the project will generate positive cash flow of $1.1 million. Subsequent cash flows from the project will grow by 4% per year in perpetuity. Given that TLP has made this breakthrough, and still assuming a 13% discount rate, what is the fair market value of a share of TLP stock?
7. (20 points) Jensen Company owns a building in a suburban industrial park. It purchased the building four years ago for $3 million. It is now deciding whether to lease the building or to use it as a distribution center. It could be rented immediately. Given today’s market conditions, rental income of $120,000 per year would be expected. To convert the building to make it useful as a distribution center would require an immediate expenditure of $400,000. Having the distribution center at this location would provide Jensen with $140,000 per year in cost savings, at today’s prices. The cash flows associated with this decision are not very risky, so a real discount rate of just 3% per year is required.
For simplicity, assume that: (i) there are no taxes, (ii) the building could be rented or used as a distribution center forever, (iii) ongoing cash flows, including rents and distribution cost savings, would increase with the overall inflation rate, and (iv) all cash flows except the initial $400,000 would occur at year end. (the last assumption implies that one year of inflation would affect the first lease payment and distribution cost saving)
(a) (4 points) The inflation rate is forecast to be 4% per year. What nominal discount rate is appropriate for this project?
(b) (8 points) Provide a NPV analysis and a recommendation of how the building should be used.
(c) (4 points) Is the outcome of your NPV analysis sensitive to changes in the assumed inflation rate? (An intuitive answer without numbers is OK).
(d) (4 points) Based on the information provided, is it possible to estimate the current market value of the building? If so, provide an estimate.
2. (16 points). The standard deviation of returns on Carlson company’s common stock is 37%, and Carlson’s beta coefficient is 0.9. Currently, yields on Treasury Bills are 5.5%, while the average yield on Treasury Bills over the past seventy years has been 3.7%. The standard deviation of market returns is 22%. The return on the overall market last year was 10.2%, while the average market return over the past seventy years has been 12.2%.
(a) (8 points) Provide an estimate of the expected return on Carlson common stock, and explain the reasoning behind the estimate.
(b) (8 points) Carlson has 2.2 million shares of common stock outstanding. The common stock has a book value of $9 per share, and sells in the market for $12 per share. Carlson also has debt with a face value of $18 million outstanding. The debt pays coupon interest rate of 9.5%, but sells in the market for 110% of its face value, and has a yield-to-maturity of 8.8%. Carlson’s corporate income tax rate is 35%. Compute Carlson’s weighted average cost of capital (WACC).
5. (14 points) TLP corporation had operating cash flow of $3.20 per share last year, and has 1.5 million shares outstanding. Given TLP’s existing asset base, this level of cash flow can be sustained forever. TLP has existing liabilities with a market value of $3 million.
(a) (5 points) If TLP has no other assets, and a discount rate of 13% per year is appropriate, what is the fair market value of a share of TLP stock?
(b) (9 points) Assume now that TLP has just made a breakthrough in biomedical engineering. The new project will require an immediate capital expenditure of $2.5 million, plus another $2.5 million outlay after one year. At the end of the second year the project will generate positive cash flow of $1.1 million. Subsequent cash flows from the project will grow by 4% per year in perpetuity. Given that TLP has made this breakthrough, and still assuming a 13% discount rate, what is the fair market value of a share of TLP stock?
7. (20 points) Jensen Company owns a building in a suburban industrial park. It purchased the building four years ago for $3 million. It is now deciding whether to lease the building or to use it as a distribution center. It could be rented immediately. Given today’s market conditions, rental income of $120,000 per year would be expected. To convert the building to make it useful as a distribution center would require an immediate expenditure of $400,000. Having the distribution center at this location would provide Jensen with $140,000 per year in cost savings, at today’s prices. The cash flows associated with this decision are not very risky, so a real discount rate of just 3% per year is required.
For simplicity, assume that: (i) there are no taxes, (ii) the building could be rented or used as a distribution center forever, (iii) ongoing cash flows, including rents and distribution cost savings, would increase with the overall inflation rate, and (iv) all cash flows except the initial $400,000 would occur at year end. (the last assumption implies that one year of inflation would affect the first lease payment and distribution cost saving)
(a) (4 points) The inflation rate is forecast to be 4% per year. What nominal discount rate is appropriate for this project?
(b) (8 points) Provide a NPV analysis and a recommendation of how the building should be used.
(c) (4 points) Is the outcome of your NPV analysis sensitive to changes in the assumed inflation rate? (An intuitive answer without numbers is OK).
(d) (4 points) Based on the information provided, is it possible to estimate the current market value of the building? If so, provide an estimate.
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