Find the duration of a 6.8% coupon bond making semiannually coupon payments if it has three years until maturity and has a yield to maturity of 6.0%. What is the duration if the yield to maturity is 9.4%? Note: The face value of the bond is $100.

At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment.

The company will need to do replacement analysis to determine which option is the best financial decision for the company.

Price Co. is considering replacing an existing piece of equipment. The project involves the following:

Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment.

The net present value (NPV) of this replacement project is:

$1,566,617.

$1,174,963.

$1,331,624.

$1,879,940.

You and your team are financial consultants who have been hired by a large, publicly-traded electronics firm, Brilliant Electronics (BI), a leader in its industry. The company is looking into manufacturing its new product, a machine using sophisticated state of the art technology developed by BI’s R&D team, overseas. This overseas project will last for five years. They’ve asked you to evaluate this project and to make a recommendation about whether or not the company should pursue it. BI’s management team needs your recommendation and the analysis used to arrive at it by no later than December 3, 2019.

The following market data on BI’s securities are current:

Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling or 108 percent of par; the bonds have $1000 par value each and make semi-annual payments

Common Stock: 8,300,000 shares outstanding, selling for $68 per share; beta=1.1

Preferred Stock: 450,000 shares of 4.5% preferred stock outstanding, selling or $81 per share

Market: 7 percent expected market risk premium; 3.5 percent risk-free rate

The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.4 million on an after-tax basis.   In five years, the after-tax value of the land will be $4.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $37 million to build.

At the end of the project (the end of year 5), the plant can be scrapped for $5.1 million. The manufacturing plant will be depreciated using the straight-line method.

The company will incur $6,700,000 in annual fixed costs excluding depreciation. The plan is to manufacture 15,300 machines per year and sell them at $11,450 per machine; the variable production costs are $9,500 per machine. Selling price and costs are expected to remain unchanged over the life of the project.

BI uses PK Global (PKG) as its lead underwriter. PKG charges BI spreads of 8% on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues. PKG has included all direct and indirect issuance costs (along with its profit) in setting these spreads. BI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume BI raises all equity for new projects externally (that is, BI does not use retained earnings).

The weighted average flotation cost is the sum of the weight of each source of funds in the capital structure of the company times the flotation costs, so:

f_T = ($564.4/$827.65)(0.08) + ($36.45/$827.65)(0.06) + ($226.8/$827.65)(0.04) = 0.0682, or 6.82%

Thus the initial investment is increased by the amount of flotation costs:

                  (Amount raised)(1 – 0.0682) = $37,000,000   

                  Amount raised = $37,000,000/(1 – 0.0682) = $39,708,092

1. Calculate the firm’s current cost of capital using the information provided.

2. Calculate the project’s cost of capital (the appropriate discount rate to use to evaluate BI’s new project) assuming the capital structure will remain the same if the project is undertaken.

This project is somewhat riskier than a typical project for BI; therefore, management has asked you to use an adjustment factor of 12% to account for this increased riskiness (that is, to add 12% to the firm’s cost of capital) to estimate the project’s required rate of return.

(NOTE: Flotation costs do not have to be considered when calculating the required rate of return for each class of security – they are addressed in this problem by adjusting the cost of the initial investment to $39,708,092 from $37,000,000).

3. Calculate the project’s annual cash flows, taking into account all the relevant cash flows.

   1. Calculate the project’s initial Time 0 cash flow, taking into account all relevant cash flows.

   2. Calculate the project’s annual operational cash flows (OCF) over the life of the project.

   3. Calculate the project’s terminal (last year of the project) cash flow. Include all relevant cash flows.

(Note: You can present the cash flows from Year 0 to Year 5 in a table format)

4. What is the NPV and IRR of the project?

Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm's EBIT is $12.263 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 5%. BEA is considering increasing its debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 8%. BEA has a beta of 1.2.

A. What is BEA's unlevered beta? Use market value D/S (which is the same as wd/ws) when unlevering. Do not round intermediate calculations. Round your answer to two decimal places.

B. What are BEA's new beta and cost of equity if it has 40% debt? Do not round intermediate calculations. Round your answers to two decimal places.

Beta:

Cost of equity: %

C. What are BEA’s WACC and total value of the firm with 40% debt? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the total value of the firm with 40% debt? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

$ million

Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:

1.)This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Fox pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation. (Note: Round your answer to the nearest whole dollar.)

a.) $35,762

b.) $47,683

c.) $45,696

d.) $39,736

2.) Now determine what the project’s NPV would be when using straight-line depreciation. (Note: Round your answer to the nearest whole dollar.): _________   

The: (straight line/accelerated)  depreciation method will result in the highest NPV for the project.

3.) No other firm would take on this project if Fox turns it down. How much should Fox reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $500 for each year of the four-year project? (Note: Round your answer to the nearest whole dollar.)

a.) $1,551

b.) $1,318

c.) $1,163

d.) $1,706

4.)The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $9,000, after taxes, if the project is rejected. What should Fox do to take this information into account?

a.) Increase the NPV of the project by $9,000.

b.) The company does not need to do anything with the value of the truck because the truck is a sunk cost.

c.) Increase the amount of the initial investment by $9,000.

Problem 18-4 WACC If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.15. The company has a target debt-equity ratio of .65. The expected return on the market portfolio is 12 percent and Treasury bills currently yield 3.4 percent. The company has one bond issue outstanding that matures in 25 years, a par value of $1,000, and a coupon rate of 6.3 percent. The bond currently sells for $1,065. The corporate tax rate is 21 percent. a. What is the company’s cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the YTM of a bond with the the following characteristics: Face value - $1,000; Current Price - $902; Coupon rate - 10%; Maturity - 7 yrs; Pays semi-annually

Your firm is has equity of $2,270,000.00 and debt of $4,060,000.00. The firm has been estimate to have a beta of 1.50 and the expected market risk premium (MRP) is 4.72% with the risk-free rate at 3.58%. The firm just recently issued bonds which traded at $905.58 on it's issue date and they have a 10-year maturity (assume standard corporate bonds). The stated rate on the bonds was 3.60%. What is your firm's weighted average cost of capital (WACC) if the tax rate is 30.00%? (enter your value as a percent (i.e. 20.5 for 20.5%) tolerance is 0.1)

Evaluate the project below using all 6 methods, a 3-year cut off period and an 11% required return.

A.) Payback Period:

B.) Discounted Payback Period

C.) Internal Rate of Return

D.) Net present Value

E.) MIRR

F.) Profitability index

Please show formulas used and work, not excel sheet

Pearl Corp. is expected to have an EBIT of $3,100,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $140,000, and $180,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $16,000,000 in debt and 1,050,000 shares outstanding. At Year 5, you believe that the company's sales will be $22,230,000 and the appropriate price-sales ratio is 2.3. The company's WACC is 8.7 percent and the tax rate is 23 percent.

What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)