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Noah Hernandez: Homework Problem Set 1

(Answers in Bold)

1.1 Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal
year 2021 (filed in October 2021). Answer the following questions from their balance sheet:

a. How much cash did Costco have at the end of the fiscal year?
○ 11,258
b. What were Costco’s total assets?
○ 59,268
c. What were Costco’s total liabilities? How much debt did Costco have?
○ Total Liabilities: 41,190
○ Debt: 7,491
d. What was the book value of Costco’s equity?
○ 18,078

1.2 Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal
year 2021 (filed in October 2021). Answer the following questions from their income
statement:
a. What were Costco's revenues for fiscal year 2021? By what percentage did revenues
grow from the prior year?
○ 195,929
○ Percentage Growth: 17.49%
b. What was Costco's operating income for the fiscal year?
○ 6,708
c. What was Costco's average tax rate for the year?
○ 23.96%?
d. What were Costco's diluted earnings per share in fiscal year 2021? What number of
shares is this EPS based on?
○ Diluted Earnings Per Share: 11.27
○ The share number EPS is based on: 444,346

1.3 Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal
year 2021 (filed in October 2021). Answer the following questions from their cash flow
statement:
a. How much cash did Costco generate from operating activities in fiscal year 2021?
○ 8,958
b. What was Costco depreciation and amortization expense?
○ 1,781
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c. How much cash was invested in new property and equipment (net of any sales)?
○ 3,588
d. How much did Costco raise from the sale of shares of its stock (net of any purchases)?
○ It looks like they didn’t raise any money because they didn’t issue shares this
year.
○ 0

1.4

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Use
the data from the balance sheet and cash flow statement in 2019 to determine the following:
a. How much cash did Mydeco have at the end of 2018?
○ To figure out this problem you would have to look at the 2019 cash on the cash
flow statement, and the net change in cash on the cash flow statement.
○ 48.8(balance sheet)-18.1(cash flow statement)
○ 2018: 30.7
b. What were Mydeco’s accounts receivable and inventory at the end of 2018?
○ Accounts Receivable: 88.6+3.9=92.5
1. This is because the reduction in accounts receivables means we earned
more cash because this is cash that was paid to us from the accounts
receivable which is going to reflect a positive number on the cash flow
statement.
○ Inventory: 33.7-2.9 =30.8.
1. This is because since our change in inventory is (-2.9) that means that we
spent that much in cash to buy more inventory, which although is reflected
as a higher number in the next year on the balance sheet of inventory,
means we lost cash buying that extra inventory.
c. What were Mydeco’s total liabilities at the end of 2018?
○ Look at changes in accounts payable (2.2) subtract from 2019 total liabilities
○ In order to figure this out we must look at Mydeco’s total liabilities in 2019,
which was 525.4.
○ Then we must look at the cash flow statement to account for any changes that
would affect Mydeco’s total liabilities.
○ For example, categories like “Chgs in Payables & Accrued Comp.” and “Debt
Issuance” on the cash flow statement would affect the total liability because these
are payments/debts they owe.
○ Chgs in Payables & Accrued Comp increased by 2.2 in 2019
○ Debt Issuance in 2019 was 0.
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○ Therefore since we increased our debt by 2.2 in 2019, this means that Mydeco’s
total liabilities were 2.2 lower than 2019.
○ 525.4-2.2=523.2
○ Total Liabilities in 2018=523.2
d. Assuming goodwill and intangibles were equal in 2018 and 2019, what was Mydeco’s net
property, plant, and equipment at the end of 2018?
○ They can buy more stuff (capital expenditures) can increase PPE
1. Subtract it from the total PPE
○ And depreciation will lower IT
1. ADD 27.3 BACK TO 2018
○ 2019 PPE=245.3
○ Therefore now we must look at the cash flow statement to find categories that will
affect the total PPE value.
○ The categories on this balance sheet that are listed that can have a direct effect on
the net value of total PPE is “capital expenditures” and “Depreciation”
○ Capital Expedniutres in 2019= -25.0
○ Depreciation in 2019= 27.3
○ Therefore, 245.3-25.0+27.3=247.6
○ Net PP&E=247.6
○ You add the deprecation increase to the total PPE in 2019 because this means that
the Total PPE in 2018 had a higher value of 27.3 but then a year later it
depreciated by 27.3 which means depreciation increased a year later, so a positive
number in 2019 would reflect this.
○ You subtract the decrease in capital expenditures in 2019 because a decrease in
capital expenditures in 2019 indicates that the company invested less in new
assets that year, and you want to account for this reduction when estimating the
PPE value for 2018. So, therefore this means that
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○
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1.5

In early 2022, United Airlines (UAL) had a market capitalization of $26.1 billion,
debt of $12.3 billion, and cash of $18.4 billion. United also had annual revenues of
$24.6 billion. Southwest Airlines (LUV) had a market capitalization of $26.1 billion,
debt of $12.3 billion, cash of $15.5 billion, and annual revenues of $15.8 billion.
a. Compare the market capitalization-to-revenue ratio (also called the price-to-sales ratio)
for United Airlines and Southwest Airlines.
○ United Airlines market capitalization-to-revenue ratio=($26.1 billion/$24.6
billion)=1.06
○ The MCR formula=Market Capitalization/Annual Revenue or Total Sales
■ Revenue and total sales are the same thing
○ Southwest Airlines market capitalization-to-revenue ratio=($26.1 billion/$15.8
billion)=1.65
○ Therefore, United Airlines has a lower MCR than Southwest.
b. Compare the enterprise value-to-revenue ratio for United Airlines and Southwest
Airlines.
○ United Airlines enterprise value-to-revenue ratio=(26.1+12.3-18.4/24.6)=0.813
○ The enterprise value-to-revenue-ratio=Enterprise value/revenue
■ Enterprise Value=Market capitalization+Total Debt-Total Cash
○ Southwest airlines enterprise value-to-revenue ratio=(26.1+12.3-15.5/15.8)=1.449
○ Southwest Airlines has a higher enterprise value-to-revenue ratio than United
Airlines.
c. How do these two measures differ? (Hint: Think about two firms with identical assets and
sales, but differing amounts of leverage)
○ Both of these measures are utilized to evaluate a company’s valuation
compared to its revenue. However, the MCR is limited in its scope of
valuation because it only considers the equity value of the company. While on
the other hand, EVR provides a more detailed valuation because it considers
equity, debt, and cash which is a more holistic view of the company’s capital
structure. Therefore, the main differences between these two ratios are in
their scope of capital structure used in relation to their revenues.

1.6

When you purchased your house, you took out a 30-year annual-payment mortgage with an interest rate
of 6% per year. The annual payment on the mortgage is $12,000. You have just made a payment and have
now decided to pay the mortgage off by repaying the outstanding balance. What is the payoff amount if

a. You have lived in the house for 12 years (so there are 18 years left on the mortgage)?
○ Use the Present value annuity formula
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○ C=12,000; R=0.06; n=18

○ After using the formula, the present value of the remaining balance on the mortgage with
18 years left on the mortgage and a 6% interest rate is $129,931

b. You have lived in the house for 20 years (so there are 10 years left on the mortgage)?
○ Use the present value annuity formula.
○ C=12,000; R=0.06; n=10
○ After using the formula, the present value of the remaining balance on the mortgage with
10 years left on the mortgage and a 6% interest rate is $88,321

c. You have lived in the house for 12 years (so there are 18 years left on the mortgage) and you
decide to pay off the mortgage immediately before the twelfth payment is due?
○ Use the present value annuity formula
○ C=12,000; R=0.06; n=19
○ After using the formula, the present value of the remaining balance on the mortgage with
19 payments left on the mortgage and a 6% interest rate is $133,897

1.7

You are running a growing Internet company. Analysts predict that its earnings will grow at 30% per year
for the next five years. After that, as competition increases, earnings growth is expected to slow to 2% per
year and continue at that level forever. Your company has just announced earnings of $1,000,000. What is
the present value of all future earnings if the interest rate is 8%? (Assume all cash flows occur at the end
of the year.)

● First, you must use the formula for the Present Value of a Growing annuity since it’s only a 5-year
term and is not an infinite term period that which your earnings will grow by 30 percent.
● C=1,000,000; G=0.30; R=0.08 N=5
● Therefore the Present Value of the growing annuity is $6,940,717
● Now we must calculate the present value of the growing perpetuity
● C=1,000,000; G=0.02; R=0,08
● Therefore, the Present Value of the growing perpetuity is $16,666,666
● Now we must add the present value of the growing annuity and the present value of the growing
perpetuity.
● $6,940,717+ $16,666,666
● Present Value of all future earnings= $6,940,717+ $16,666,666=$23,607,383

1.8

Ten years ago Diana Torres wrote what has become the leading Torts textbook. She has been receiving
royalties based on revenues reported by the publisher. These revenues started at $1 million in the first
year, and grew steadily by 5% per year. Her royalty rate is 15% of revenue. Recently, she hired an auditor
who discovered that the publisher had been underreporting revenues. The book had actually earned 10%
more in revenues than had been reported on her royalty statements.
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a. Assuming the publisher pays an interest rate of 4% on missed payments, how much money does
the publisher owe Diana?
○ First we must figure out the correct cash flow to input in our future value growing
annuity formula
■ 1,000,000 ✖ 0.15 ✖ 0.10 = 15,000
■ This is because she was getting 15 percent of 1000000 and now to figure out the
cash flow number, you must multiply it by 0.10 because that will give us 10
percent of 250,000. And 250,000 is what she got in the first year, but she was
underpaid by 10 percent of the total revenue
○ Now we use the future value growing annuity formula
■ C: 15000 R: 0.04 G: 0.05 N: 10
○ After inputting the numbers in to this formula, the publisher owes Diana, $222, 975
■ This is the future value of what he owes to Diana.
○ We can also calculate the present value growing annuity formula to see how much the
publisher owes Diana today if he were to pay the future value all in the present.
■ C: 15000 R: 0.04 G: 0.05 N: 10
○ The Present value of this growing annuity is $150, 634. So this is how much he would
have to pay her right now to pay off what he owes her.
b. The publisher is short of cash, so instead of paying Diana what is owed, the publisher is offering
to increase her royalty rate on future book sales. Assume the book will generate revenues for an
additional 20 years and that the current revenue growth will continue. If Diana would otherwise
put the money into a bank account paying interest of 3%, what royalty rate would make her
indifferent between accepting an increase in the future royalty rate and receiving the cash owed
today.
○ 1ST: To figure this out you would use the present value growing annuity formula
○ R: 0.03; G:0.05; C: (1,100000)(1.05)^10; N: 20
○ After putting these numbers into the present value growing annuity formula, we get

➗
42023304
○ Now we must take 222,975 and divide it by 42,023,304→222,975 42,023,304 to give
us the royalty rate
○ This gives us 0.005305984478→0.5305984478%
○ And we can check our work by multiplying 0.005305984478 ✖ $42,023,304=$222,975
○ So therefore a royalty rate of 0.5305984478% would make her indifferent

1.9

Your brother has offered to give you $100, starting next year, and after that growing at 3% for the next 20
years. You would like to calculate the value of this offer by calculating how much money you would need
to deposit in the local bank so that the account will generate the same cash flows as he is offering you.
Your local bank will guarantee a 6% annual interest rate so long as you have money in the account.

a. How much money will you need to deposit into the account today?
○ Here we would use the present value growing annuity formula to figure out how much
this annuity is worth today, to determine the amount needed to deposit.
■ C: 100 R: 0.06 G: 0.03 N: 20
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○ After inserting the numbers, the amount of money he would need to deposit/PV of
growing annuity is $1,456
b. Using an Excel spreadsheet, show explicitly that you can deposit this amount of money into the
account, and every year withdraw what your brother has promised, leaving the account with
nothing after the last withdrawal.

1.10

Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of
$1034.74.
a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?
○ The bond’s yield to maturity is 3.58% expressed as a 6 month rate on the excel
spreadsheet. 3.58% is the answer because this is the percentage that makes the sum(pv)
equal to the price.
○ Expressed as an APR with semiannual compounding, just multiply 3.58✖2=7.16
○ 7.16 APR with semiannual compounding
○ I used goal seek to find the rate.
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○
b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?
○ If the bond’s yield to maturity changes to 9% APR, the bond’s price will be $960.44
○ I arrived at this price by changing the rate to 4.50% in the box an it will then change the
Sum(PV) to represent the price
■ 4.50 is 9/2.
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1.11

Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell
it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you
purchased and sold the bond:
a. What cash flows will you pay and receive from your investment in the bond per $100 face value?
○ To answer this you must build a spreadsheet using the units given us to above.
○ Maturity=10; Face Value=100; YTM=5% Annual Payments/Frequency: 1
○ Insert these numbers into the excel sheet
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○ The amount paid for the bond/cash flow paid is $107.72

○ The amount you will receive if you hold the bond for four years and sell it immediately
after receiving the fourth coupon is $105.08
■ This price is just the price of the remaining cash flows of the bond starting
immediately after the 4th year (so years 5-10).

○
b. What is the rate of return of your investment? (Hint: Find the interest rate that makes the present
value of the cash flows received equal to the price paid)
○ The rate of return on this investment should be 5%.

1.12

Suppose the current yield on a one-year, zero coupon bond is 3%, while the yield on a five-year, zero
coupon bond is 5%. Neither bond has any risk of default. Suppose you plan to invest for one year. You
will earn more over the year by investing in the five-year bond as long as its yield does not rise above
what level (by the end of the first year)? (You can assume the face value is $100).

● First we must figure out the price of each zero coupon bond.
● The price of a zero coupon bond is calculated by the formula Price=Face Value/(1+YTM)^n
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●
● Price of 5 year coupon:
○ Therefore for the Five Year Coupon Bond: P=100/(1+0.05)^5→$78.4
● Price of 1 year coupon:
○ Therefore for the one year coupon bond: P=100/(1+0.03)^1→$97.1
● Now we must do (100/78.4)-1 which now gives us 0.275 which equals 27.5 percent.
● Meaning as long as the five year bond’s yield does not rise above 27.5% you will earn more by
the end of the first year than the one year bond.

1.13

Troubled Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors believe
there is a 20% chance that Troubled will default on these bonds. If Troubled does default, investors expect
to receive only 50 cents per dollar they are owed. If investors require a 6% expected return on their
investment in these bonds, what will be the price and yield to maturity on these bonds? Face value =100

● (0.20)✖50+(0.80)(100)=
○ 0.20 reflects the 20 percent chance of the default rate
○ 0.80 reflects the 80 percent chance it does not default
○ Multiply 0.20 by 50 because that is the value of the bond if it defaults
○ Multiply 0.80 by 100 because that is the value of the bond if it does not default
● (0.20)✖50+(0.80)(100)=90
● So we expect to receive 90 dollars from this bond
● Price of bond 90/1.06=84.9
○ What about the length of the bond? Are we supposed to raise it to the 5th power?
● Now we have the price, we can use that to calculate the YTM of this bond.

● YTM=
● YTM=100/84.9-1=17.8
● Price: 84.9
● Yield to Maturity: 17.8%

OR

● Price=90/1.06^5→67.3
● YTM=100/67.3-1 → 48.6%
○ When I try to check my work by utilizing the price formula with using the
YTM value, I don’t get the 67.3 as the price
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