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.

Wish Me Well

Because of the way my semesters are structured, I'm only in two classes at any given time and have finals every 5 or 10 weeks. For the next week, however, I have take home finals in both of my classes (Financial Management and Data Analysis/Statistics). I have a love/hate relationship with take home finals, but mostly a hate relationship, as they are always far more difficult than any exam in class would be. The students last year spent about 20 hours on the Financial Management final - ouch. Where on earth am I going to find 20 hours, especially over an inventory weekend?

I need to get a B- in both classes to not have to retake - wish me well. I really don't want to redo these ones.

Laurel Reunion

I grew up in a fabulous ward. We moved in when I was five and for the most part of the past twenty years I've lived there. I know everyone, and they know me. I know everyone's kids, and their careers. And I grew up with an absolutely fabulous group of girls - I feel lucky to have such happy memories with the girls that I spent all those years with.

Sometime last year I realized that it had been a number of years since I've had any contact with some of them - as long as 5-7 years for a few. Because becoming fixated on things is something I excel at, I got the idea to put together a reunion with the girls and wouldn't let it rest. I did wait some months to take it up (poor TJ has been begging in his prayers for me not to take up any new stressful things...) but I finally started what ended up being a six-week adventure to make contact with 28 girls that were within 4 years of my age. Two days before the reunion was scheduled, I did it.

Turns out I belong to a mighty impressive group of girls. I put together a silly little "Guess Who?" game for everyone to do while chatting. We live across the nation, from New York to Oregon, doing everything from running spas to facilitating adoptions. We have an event planner and an insurance agent, a prosthetic rep and a business owner. A number of us are college graduates, from colleges around the state, including USU, UVU, the U of U, BYU and CEU. One of us is in Pharmacy school, another is a tree farmer's wife. The group has seen many countries around the world, from China and Mexico to Italy and Spain. A number are married, and several have children. Many are single, and some are dating. We have four girls that have gone through divorces, one who's had a daughter pass away, and a few who struggle with infertility. Each has gone their own way - all have their own success and triumphs, as well as their struggles and failures. But I feel confident saying that each of us appreciates the strong roots that we have, and in every instance that I'm aware of, we have all stayed strong with our testimonies and our faith - and there is not a feeling in the world that compares to that.

Evie and Grady

This is maybe like stalking, but we couldn't help but grab some pictures of Evie and Grady as they played in the snow a couple weeks ago. It was one of the surprise storms, where we'd had sun for 4-5 days and then we got slammed with snow and they were so excited they went to play in it in their pajamas - the snow was sticking to their pants and everything, but they were having a grand time. They made snow angels, jumped on the tramp, rolled onthe ground, and carried this enormous tree together to the trampoline.


We took pictures so that in 10 years when we tell them about the things they did, they'll believe us. :)

Date #7: Adobo's

Jenni's dad is from Puerto Rico, so she has a special love for island food. :) She found this great spot (Adobos) that we did a triple date to. It was great! The food was wonderful and the company was fantastic. So glad we went.


Mike and Megan (with her adorable hair cut):



Mike and Jenni:


TJ and me (hope you can see us in there):


TJ and I arrived first and had abuelo come talk to us. We asked him what was good and, like any good restaurant owner, he told us anything. :) It was a family-run restaurant, which TJ especially loved. We had a great time.

St. Patrick's Day

This is how we celebrated - pancakes and eggs. :) I tried to make them festive. TJ was very nice about saying how wonderful they are.


Please don't let the eggs gross you out - I wanted to put them in a lucky shape. :)

LUCKY US!

Austin's Game

Sadly, we only made it to one of Austin's indoor games, but I'm glad we went.


At one point when they were down and things were looking grim, they put Austin and his friend Ethan in - I smiled at TJ and said "They're putting in the big guns." They did great together.


Here's the whole gang - a good looking group, no?