Question

Excel Hydro took a loan contract which requires a payment of $40 million plus interest two years after the contract's date of issue. The interest rate on the $40 million face value is 9.6% compounded quarterly. Before the maturity date, the original lender sold the contract to a pension fund for $43 million. The sale price was based on a discount rate of 8.5% compounded semi-annually from the date of sale.

Excel Hydro is also considering building a nuclear power plant, which will be ready for production in 2030. The country's governing body is also considering a decommissioning liability law for the operator to put aside $1 million every month towards decommissioning cost. If the production life of the plant is 60 years and the operator puts the money at the end of the month in a savings account, earning 7.25% compounded monthly.

During the 60 years of production life of the plant, the operator will put $1 million at the end of the month in a savings account, earning 7.25% compounded monthly. At the end of the production life of the plant, there are no more contributions and the money is expected to grow at the rate of 6% compounded quarterly for the next 30 years.

Six years ago, Excel Hydro Inc. purchased a mailing machine at a cost of $368,000. This equipment is currently valued at $172,200 on today's statement of financial position but could actually be sold for $211,400. This is the only fixed asset the firm owns. Net working capital is $121,000 and long-term debt is $82,500. The Vice President of Excel Hydro, Inc. wants to improve the current ratio on the company's next financial statement.

5.       What is the book value of shareholders' equity?

6.       Explain what the Vice President can legitimately do now to help accomplish this goal. Provide specific examples in your answer.

Excel Hydro plans to raise $6.2 million to expand their business. To accomplish this, they plan to sell 20-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 9.5%. The company plans on depositing $10,000 a year in real terms into your investment account for the next four years. The relevant nominal discount rate is 7.5% and the inflation rate is 4.2%.

7.       What is the minimum number of bonds they must sell to raise the $6.2 million they need?

8.       What are the deposits worth in today's dollars?

Excel Hydro Inc. has just issued dividends at $2 per share. There are 500,000 shares outstanding. The recently released Income statement shows net earnings of $1200,000. Dividends will grow at the rate of 10% for the next four years. The required rate of return is 12%.

9. Calculate the EPS of the company.

10. Calculate the Present value of the stock.

Answer 1

Answers:

5. $210,700

6. To convert short -term debt into long-term to improve working capital

7. 38,078 bonds

8. $37,023.0297661

9. $2.4 per share

10. $110

.

Step-by-step explanation

5. Book value of equity = Total assets - Total Liabilities

                                     = Equipment + working capital - long term debt

                                     = $172,200 + $121,000 - $82,500

                                     = $210,700

6.

The one of the methods to improve the current ratio is to sell capital assets that are producing enough returns. But in the given case, the machine is the only capital asset owned by the firm. Therefore, another way is to short-term dent in long-term to enhance net working capital.

7. Compute PVIF at 9.5% for 20 yrs.

PVIF = 1/(1+r)^n

         = 1/(1+0.095)^20

          = 0.1628236989

Current price of zero-coupon bond:

Current price = FV * PVIF (9.5%, 20yrs.)

                     = $1,000 * 0.1628236989

                     = $162.8236989

No. of bonds = Funds required / Current price

                    = $6,200,000 / $162.8236989

                    = 38,078 bonds

8. Real rate = ((1+Nominal rate)/(1+inflation rate)) - 1

                   = ((1+0.075) / (1+0.042)) - 1

                   = 1.03166986564 - 1

                    = 3.166986564%

PVIFA = (1- (1+r) ^-n)/r

            = (1-(1+ 0.03166986564) ^-4) / 3.166986564%

            = 3.70230297661

PV of deposits = Annual deposits * PVIFA (3.166986564%, 4 yrs.)

                       = $10,000 * 3.70230297661

                       = $37,023.0297661

9. EPS = Net income / No. of shares o/s

           = $1,200,000 / 500,000

           = $2.4 per share

10. PV of stock = DPS at the end of year 1 / (Required return - Growth rate)

                         = ($2(1+0.1)) / (0.12-0.10)

                         = $2.2 /0.02

                         = $110