Problem 1

Suppose that VINAMILKs balance sheet at December 31, 2012 shows the following:
Current assets
Cash

$4,000

Marketable securities

8,000

Accounts receivable

100,000

Inventories

120,000

Prepaid expenses
Total current assets

1,000
$233,000

Current liabilities
Note payable

$5,000

Accounts payable

150,000

Accrued expenses

20,000

Income taxes payable

Total current liabilities
Long term liabilities

1,000
$176,000
$340,000

1. Calculate net working capital

2. Calculate current ratio
3. Calculate quick ratio
4. Does VINAMLK have good or poor liquidity if industry average for current ratio is 1.29 and
quick ratio is 1.07?

SOLUTION
1.Net working capital

= current assets current liabilities

= $233,000 $176,000
= $57,000

2.Current ratio =

current assets
= current liabilities
$233,000
= $176,000
1.32

3.Quick ratio =
current assets inventories prepaid expenses
current liabilities
=
$233,000 $120,000 $1,000
$176,000
= 0.64
4. In comparison with the average current ratio of the same industry, Vinamilk has good liquidity
(1.32 1.29 = 0.03). However, in terms of quick ratio, Vinamilk has difficulty paying for
coming due loans (0.64<1), so Vinamilk has poor liquidity.

Problem 2
Suppose that you are working as a bank staff and offer a loan for your customer to buy a
good house located in the center of Hochiminh City. The house price is USD 5 millions but
your client does not have enough money and he has to borrow from your bank a fourth of this
amount of money. Set up an amortization schedule for this loan to be repaid in equal
installments at the end of each of the next 10 years. The interest rate is 10%.
2

SOLUTION
PVA = $ 5,000,000 = $1,250,000
4
PVA = PMT x

1 (1+ i)n
i

$1,250,000 = PMT x1 (1 + 0.1)10

0.1
=> PMT = $203,431.7436
The amortization schedule:
Year BEG. BALANCE
1
1,250,000.00
2
1,171,568.26
3
1,085,293.34
4
990,390.93
5
885,998.28
6
771,166.36
7
644,851.25
8
505,904.64
9
353,063.36
10
184,937.95
Total

PMT

203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
203,431.74
$2,034,317.44

INT

PRIN. PMT

125,000
117,156.83
108,529.33
99,039.09
88,599.83
77,116.64
64,485.13
50,590.46
35,306.34
18,493.80
$784,317.45

78,431.74
86,274.92
94,902.41
104,392.65
114,831.91
126,315.10
138,946.62
152,841.28
168,125.40
184,937.95
$1,250,000.00

END. BALANCE

1,171,568.26
1,085,293.34
990,390.93
885,998.28
771,166.36
644,851.25
505,904.64
353,063.36
184,937.95
0.00

Case study
Recently after graduating from Local Business College (LBC), you have started your own
investment consultancy firm Prudent Consultants (PCs) to earn your livelihood. Mr. Son, a
regular investor approaches you to get some financial advice on different intended stocks. On
the basis of his preliminary research, Son is curious in reaping the risk and returns associated
with these stocks. For your convenience, he has also brought necessary information regarding
these stocks along with him:
- MAQ Motors possible returns on investment of $10,000 in common stock, over the coming
year is as follows:
3

Economic conditions
Recession

Probability (p)
0.20

Returns (r ) in USD
- 1, 000

Normal

0.60

1, 500

Boom

0.20

2, 500

- Wahid Consultant Company, on its stock, is currently paying $ 2 per share

as dividend, which is expected to grow at a constant rate of 7 percent per year.
- Zahoor Companys stock Y is expected to pay a dividend of $ 57; while, stock Z is expected to
pay a dividend of $ 54 in the upcoming year. The expected growth rate of dividends for both
stocks is 7%.
- Ideal Contractors common stock (a very long term investment) is also available. Mr. Sons
required return on this investment (based on risk) is 25%. The present dividend offered by the
Company is $10; while, the par value of each stock is $ 100.
Based on provided information:
a) You need to calculate the expected return, standard deviation of returns and coefficient of
variations for MAQ Motors investment opportunity.
b) You are expected to analyze the price of Wahid Consultant Companys stock in case Mr. Son
requires a rate of return of 16 percent to invest in this stock with this degree of riskiness.
c) You need to identify which stock of Zahoor Company has higher intrinsic value; in case, Mr.
Son wishes to earn a return of 9% on each stock.
d) You are supposed to determine the dividend yield pricing for common stock of Ideal
Contractors using both: Zero Growth Pricing plus Constant Growth Pricing Models (where:
g=10%). Also compare & interpret the result.

SOLUTION
r

a) Calculate the expected return ( ), standard deviation of returns () and coefficient of

variations (CV) for MAQ Motors investment opportunity:
Economic conditions

The rate of return (ri )

4

Recession

r1 =

= -10%

$ 1,500

Normal

r2 = $ 10,000 = 15%
$ 2,500

Boom

r3 = $ 10,000 = 25%

Expected return

$ 1,000
$ 10,000

= P1 x r1 + P2 x r2 + P3 x r3

= 0.2 x (- 0.1) + 0.6 x 0.15 + 0.2 x 0.25 = 12 %

Standard deviation of returns ()

= (r1 -

r) 2

x P1 + (r2 -

r) 2

x P2 + (r3 -

r) 2

x P3

= (-0.1 0.12)2 x 0.2 + (0.15 0.12)2 x 0.6 + (0.25 0.12)2 x 0.2

= 11.66 %

Coefficient of variations (CV)

CV

0.1166 %
0.12%

= 0.97

b) Analyze the price of Wahid Consultant Companys stock in case Mr. Son requires a rate
of return of 16 percent to invest in this stock with this degree of riskiness.
D1 = D0 x (1 + g)
= 2 x (1 + 0.07)
= 2.14
The price of Wahid Consultant Companys stock:
5

P0

2.14
D1
= rs - g =0.16 0.07 = $23.78

c) Identify which stock of Zahoor Company has higher intrinsic value; in case, Mr. Son
wishes to earn a return of 9% on each stock (rS = 9%)
Stock Y :

P0

D1
= rs - g

57
= 0.09 0.07 = $2,850

Stock Z:

P0

54
D1
= rs - g = 0.09 0.07 = $2,700

=> Stock Y has higher intrinsic value than stock Z.

d) Determine the dividend yield pricing for common stock of Ideal Contractors using
both: Zero Growth Pricing plus Constant Growth Pricing Models (where: g=10%).
rS = 25%
D0 = $10
- Zero Growth Pricing:
The future dividends remain constant D0 = D1 = = Dn = $10

P0

D1
r Sg =

Dividend yield =

$ 10
25 0 = $40
D1

$ 10

= $ 40

= 25%

- Constant Growth Pricing Models (where: g=10%):

D1 = D0x (1+g) = $10 x (1 + 10%) = $11

P0

D1
r Sg =

$ 11
25 10

= $73.33

 Dividend yield =

D1

$ 11

= $ 73.33

= 15%

Based on the results of the intrinsic value and dividend yield of common stock of Ideal
Contractors using Zero Growth Pricing and Constant Growth Pricing Models, we can see the
intrinsic value of stock when using Zero Growth Pricings Model is lower than when using
Constant Growth Pricing Model ($40 < $73.33). But dividend yield of stock when using Zero
Growth Pricings Model is higher than when using Constant Growth Pricing Model (25% >
15%).
Due to the par value of each stock is $100, so when using Zero Growth Pricing, this is
basically the same formula used to calculate the value of a perpetuity, which is a bond that
never matures, pays a dividend that is a specified percentage of its par value and both the
capitalization rate and dividend that is a specified percentage of its par value and both the
capitalization rate and dividend growth rate remains the same every year, then the denominator
doesnt change. Against when using Constant Growth Pricings model, an intrinsic value of the
stick using the average of the dividend growth and projecting that average to future dividend
increases. Therefore, dividend yield of stock when using Zero Growth Pricings Model is higher
than using Constant Growth Pricings model (25%>15%)