George Taylor, owner of a toy manufacturing company, is considering the addition of a new product line. Marketing research shows that gorilla action figures will be the next fad for the six-to ten-year-old age group. This new product line of gorilla-like action figures and their high-tech vehicles will be called Go-Rilla. George estimates that the most likely yearly incremental cash flow will be $26,000. There is some uncertainty about this value because George’s company has never before made a product similar to the Go-Rilla. He has estimated the potential cash flows for the new product line along with their associated probabilities of occurrence. His estimates follow
| Go-Rilla Project | ||
| Cash Flows | Probability of Occurrence | |
| $20,000 | 1% | |
| $22,000 | 12% | |
| $24,000 | 23% | |
| $26,000 | 28% | |
| $28,000 | 23% | |
| $30,000 | 12% | |
| $32,000 | 1% |
a. Calculate the standard deviation of the estimated cash flows.
b. Calculate the coefficient of variation.
c. If George’s other product lines have an average coefficient of variation of 12 percent, what can you say about the risk of the Go-Rilla Project relative to the average risk of the other product lines
In: Finance
You have a credit card on which you owe a balance of $3,000. The card carries an interest rate of 22% (APR), compounded monthly. You decide to cut up the card, and pay it off by paying the minimum payment due each month, which is a constant $60 (HINT: The amount you owe the credit card company today is a loan).
In: Finance
| The interest rate on a 1-year Canadian security is | 12% | ||||
| current exchange rate is C$ = US | 0.8 | ||||
| 1-year forward rate is C$ = US | 0.82 | ||||
| The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is | |||||
|
12.00% |
||
|
13.24% |
||
|
14.18% |
||
|
14.80% |
In: Finance
Suppose you enter into a 9-month long forward contract on a non-dividend-paying stock when the stock price is S0 = $125 and the risk-free rate is 2.0% per annum with continuous compounding.
(a) What are the forward price (F0) and the initial value of the forward contract?
(b) Three months later, the price of the stock (S0) is $112, and the risk-free remains 2.0%. What are the forward price (F0) and the value of the forward contract?
(c) Another month later (4 months from today), the risk-free rate increases to 2.25% while the stock price stays $112. What are the forward price and the value now?
(d) Suppose now that another month later (5 months from today) the risk-free rate stays 2.25%, but the stock price goes up to $130. How much could you sell your forward contract for?
In: Finance
Use the market of corporate bonds and government bonds to graphically explain why the credit spread increases when there is a financial crisis.
In: Finance
In: Finance
A portfolio manager wants to exchange one bond in a portfolio for another. The old bond position has a market value of 6.5 million, a price of $81.90 per $100 of par value, and a duration of 4.33. The new bond has a duration of 4.33 and a price of $85.52 per $100 of par value.
What is the total market value of the new bond that the portfolio manager must buy in order to keep the same portfolio duration?
Correct Answer: 6,500,000
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Dixon Weed Seeds Inc. is considering expanding. An outlay of $205 million is required for equipment for the expansion, and additional net working capital of $23 million is required to support the expansion. The equipment is expected to have a productive life of 10 years, and will be depreciated over 10 years to $19.04 million. It is expected to be sold at the end of its life for $24.6 million. Revenues minus expenses are expected to be $44.834 million per year for the life of the equipment. The corporation's marginal tax rate is 24% and the cost of capital for this investment is 10.3%. Compute the NPV of Dixon's proposed expansion. (In $millions with 3 decimals.)
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|
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,580,000; the new one will cost, $1,897,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $375,000 after five years. |
|
The old computer is being depreciated at a rate of $320,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $513,000; in two years, it will probably be worth $147,000. The new machine will save us $326,000 per year in operating costs. The tax rate is 21 percent, and the discount rate is 8 percent. |
| a-1. |
Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| a-2. |
What is the NPV of the decision to replace the computer now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
How do you figure out a-2?
In: Finance
In: Finance
Doak Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 15,700 1 6,800 2 8,000 3 7,600 4 6,400 5 – 3,800 The company uses an interest rate of 12 percent on all of its projects. Calculate the MIRR of the project using all three methods.
In: Finance
Assume that sales will grow at 5.00%. The following accounts (cash, accounts receivable, inventory, net fixed assets, accounts payable and accruals, as well as operating costs) are assumed to change with sales and will maintain their current percentage of sales rates into 2016. The dividend payout ratio will remain the same. Long-term debt and notes payable will remain constant into 2016 as will interest expense, as a result. The firm also does not plan to issue any additional common stock or conduct any share repurchases. The firm’s tax rate is 40%. Any additional funds needed will be sourced through a line-of-credit (LOC) and surpluses will be paid out through a special dividend.
| 2015 | |
|---|---|
| Sales | $1,450.00 |
| Operating Costs: | $1,265.00 |
| EBIT | $185.00 |
| Interest | $35.00 |
| Earnings Before Taxes | $150.00 |
| Taxes (40%) | $60.00 |
| Net Income | $90.00 |
| Dividends | $45.00 |
| Addition to Retained Earnings | $45.00 |
BALANCE SHEET AS OF 12/31/2015:
| ASSETS | 2015 |
|---|---|
| Cash | $72.50 |
| Accounts Receivable | $145.00 |
| Inventory | $290.00 |
| Current Assets | $507.50 |
| Net Fixed Assets (Net PPE) | $362.50 |
| Total Assets (TA) | $870.00 |
| LIABILITIES & SHAREHOLDER EQUITY | 2015 |
|---|---|
| Accounts Payable and Accruals | $36.25 |
| Notes Payable | $40.00 |
| Current Liabilities | $76.25 |
| Long Term Debt | $310.00 |
| Total Liabilities | $386.25 |
| Common Stock | $300.00 |
| Retained Earnings | $183.75 |
| Owners' Equity | $483.75 |
| Total Liabilities and Shareholder Equity | $870.00 |
Using the percent-of-sales forecast approach, forecast the 2016 income statement and balance sheet. Be sure the balance sheet balances.
What is the Projected Special Dividend (if any)?
Enter 0 if none.
Submit
Answer format: Currency: Round to: 2 decimal places.
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You have found the following historical information for the Daniela Company:
| year 1 | year 2 | year 3 | year 4 | |
| stock price | $46.48 | $61.43 | $65.39 | $63.59 |
| EPS | 2.47 | 2.53 | 2.70 | 2.69 |
Earnings are expected to grow at 8 percent for the next year. Using the company's historical average PE as a benchmark, what is the target stock price in one year?
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|
NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).
|
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Calculating Project NPV Down Under Boomerang Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3,950,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $3,175,000 in annual sales, with costs of $1,455,000. The tax rate is 35 percent and the required return is 10 percent. What is the project’s NPV?
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