Caspian Sea Drinks' is financed with 61.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.40% coupon bonds which sell for 97.87% of par. Their stock currently has a market value of $24.17 and Mr. Bensen believes the market estimates that dividends will grow at 3.21% forever. Next year’s dividend is projected to be $2.69. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?

Problem 12-03

AFN Equation

Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

Problem 12-02

AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $7.0 million in 2016 to $8.40 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 75%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

#36

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $15.00 million fully installed and will be fully depreciated over a 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.47 million per year and increased operating costs of $641,571.00 per year. Caspian Sea Drinks' marginal tax rate is 22.00%. If Caspian Sea Drinks uses a 10.00% discount rate, then the net present value of the RGM-7000 is _____.

Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.93% coupon bonds which sell for 97.73% of par. Their stock currently has a market value of $25.66 and Mr. Bensen believes the market estimates that dividends will grow at 3.83% forever. Next year’s dividend is projected to be $2.75. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $14.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.95 million per year and increased operating costs of $655,972.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The internal rate of return for the RGM-7000 is _____.

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $14.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.95 million per year and increased operating costs of $655,972.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The internal rate of return for the RGM-7000 is _____

6. Assume you have just been hired as a business manager of Bernie’s Burgers, a regional hamburger restaurant chain. The company’s EBIT was $150 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm’s owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:

                                                   % Financed With Debt            r_d            

                                                               0%                              ---      

                                                              25                                 8.0%     

                                                              33                                 8.5      

                                                              45                                10.0      

                                                              55                               12.0      

If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Bernie’s Burgers is in the 28 percent state-plus-federal corporate tax bracket, its beta is 1.27, the risk-free rate is 6 percent, and the expected return on the market is 11 percent.

1. Calculate the leveraged beta for each capital structure.

        b.Calculate the cost of capital for each capital structure.

Consider the following mutually exclusive investments

1. Find IRRs for both projects
2. “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph.
3. Solve for the crossover rate
4. Please describe as fully as possible which project is the best and under which circumstances.

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,390,000 million. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 26 percent. You would like an option to sell the land in the next 12 months for $1,540,000. The risk-free rate of interest is 3 percent per year, compounded continuously.

What is the price of the put option?

Sales for the year just ended were 400. The firm is operating at much less than full capacity, so it will not need to increase fixed assets. Sales are expected to grow by 5% next year, the profit margin is 6%, and the dividend payout ratio is 60%. How much additional funding will be needed by the firm?

An investor buys a 6% coupon bond with 25 years to maturity and yield to maturity of 5.8%. Four years later the yield to maturity is 6.2% and the investor sells the bond. During the 4-year holding period, coupons are reinvested at 5.8% annual rate (coupons are received and reinvested semi-annually) during the 4-year holding period. The bond pays semi-annual coupons. a. What is the purchase price of the bond? b. At what price is the bond sold after 4 years? c. How much will be accumulated from the coupons received and reinvested? d. Putting the answers from b and c above together, how much does the investor have at the end of 4 years?

1. NPV: Project L costs $55,000, its expected cash inflows are $12,000 per year for 7 years, and its WACC is 10%. What is the project's payback? Round your answer to two decimal places.

2.IRR: Project L costs $72,976.35, its expected cash inflows are $14,000 per year for 11 years, and its WACC is 12%. What is the project's IRR? Round your answer to two decimal places.

3. PAYBACK PERIOD: Project L cOSTS $60,000, its expected cash inflows are $13,000 per year for 10 years, and its WACC is 11%. What is the project's payback? Round your answer to two decimal places _______ Years

4. DISCOUNTED PAYBACK: Project L costs $45,000, its expected cash inflows are $11,000 per year for 8 years, and its WACC is 8%. What is the project's discounted payback. Round your answer to two decimal places. _______ years

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Income Statement for January 1 - December 31, 2016 (Thousands of Dollars)

1. Suppose 2017 sales are projected to increase by 25% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 6%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as a line of credit. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations.

   Total assets	$
   AFN	$

2. What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.
   Line of credit

Project L costs $59,263.48, its expected cash inflows are $13,000 per year for 10 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places.