In our class example, I simplified the “annuity” prize option by assuming level, equal annual payments. Actually, this annuity prize option is now on an annuitized prize payment schedule with 30 beginning of year payments that start at a lower amount with each successive payment being 5% higher than the previous annual payment. The sum of these 30 annuitized payments equal the announced estimated jackpot amount with a lower one-time lump-sum payment also being available as the Cash Option.
A recent Mega Millions estimated jackpot amount is $200 million which is the undiscounted sum of the 30 annuity option payments with a Cash Option of $138 million. The first payment under the Annuity Option which would occur immediately is $3,010,300 with 29 additional annual payments with each payment being 5% larger than the previous one. Using this information and assuming you demand a 3.5% annual return, would you prefer the Annuity Option or the Cash Option if you have the winning ticket? Please include the following to support your decision: 1. A complete schedule of all 30 annual payments under the Annuity Option. 2. A comparison of the present value of all the payments under the Annuity Option and the present value of the Cash Option. 3. Your decision.
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Research the financial press (online media) to find two companies that merged within the last 5 years. Determine or estimate the following:
(maybe the companies, Saudi Aramco and SABIC)
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You are considering investing in a real estate project which has an asking price of $30,000. The project is expected to generate annual cash flows to you of: $4,500 in year 1, $5,000 in years 2-5, $8,000 in year 6 and $19,000 in year 7. Your required rate of return for projects with similar risk is 12% annually.
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Compute ROE
and RNOA with Disaggregation
Selected balance sheet and income statement information for Home
Depot follows.
$ millions | Jan. 31, 2016 | Feb. 01, 2015 |
---|---|---|
Operating assets | $40,333 | $38,223 |
Nonoperating assets | 2,216 | 1,723 |
Total assets | 42,549 | 39,946 |
Operating liabilities | 14,918 | 13,427 |
Nonoperating liabilities | 21,315 | 17,197 |
Total liabilities | 36,233 | 30,624 |
Total stockholders' equity | 6,316 | 9,322 |
Sales | 88,519 | |
Net operating profit before tax (NOPBT) | 11,774 | |
Nonoperting expense before tax | 753 | |
Tax expense | 4,012 | |
Net income | 7,009 |
Round all answers to two decimal places (ex:
0.12345 = 12.35%)
a. Compute return on
equity.
Answer%
b. Compute return on
net operating assets (RNOA).
Answer%
c. Use ROE and RNOA to
determine the nonoperating return for the year.
Answer%
d. Disaggregate RNOA
into components of profitability and productivity and show that the
product of the two components equals RNOA. Assume a statutory tax
rate of 37%.
NOPM Answer%
NOAT Answer
RNOA Answer%
Most important, I can not figure out D
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Chapter 11 Mini Case, Capital Budgeting, Capital Rationing, and Cash Flow It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows: To: The Assistant Financial Analyst From: Mr. V. Morrison, CEO, Caledonia Products Re: Cash Flow Analysis and Capital Rationing We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project: Cost of new plant and equipment: $7,900,000 Shipping and installation costs: $100,000 Sales price per unit: $300/unit in years 1 through 4, $260/unit in year 5 Variable cost per unit: $180/unit Annual fixed costs: $200,000 per year in years 1–5 Working-capital requirements: There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. Year Units Sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000 The purpose/risk classes and preassigned required rates of return are as follows: • Replacement decision 12% • Modification or expansion of existing product line 15% • Project unrelated to current operations 18% • Research and development operations 20% a. Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits? b. How does depreciation affect free cash flows? c. How do sunk costs affect the determination of cash flows? d. What is the project’s initial outlay? e. What are the differential cash flows over the project’s life? f. What is the terminal cash flow? g. Draw a cash-flow diagram for this project. h. What is its net present value? i. What is its internal rate of return? j. What is its modified internal rate of return? NEW QUESTION k. Should the project be accepted? Why or why not? l. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project’s risk? m. According to the CAPM, which measurement of a project’s risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project’s risk? Please delete this question. m. Explain how simulation works. What is the value in using a simulation approach? n. What is sensitivity analysis and what is its purpose?
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1. Should companies impose their corporate values on employees?
2. Should a company be held responsible for the actions of its investors or does a duty to shareholders trump such ethical questions?
3. Should companies reject investors that they perceive as misaligned with their values?
4. Is it a corporation’s role to take a public stance on a political situation?
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(Estimated time allowance: 4 minutes) Pera Inc. is planning to buy a piece of equipment that can be used in a 9-year project. The equipment costs $2,000,000; has a tax life of 10 years, and is depreciated using the straight-line method. The equipment can be sold at the end of 9 years for $200,000. If the marginal tax rate is 20 percent, what is termination value of the equipment (the after-tax cash flow from the sale of this asset)? PLEASE SHOW ALL STEPS!!
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Manzana Inc. is buying a piece of equipment. The equipment costs $1,000,000. The equipment is considered for tax purposes as a 5-year MACRS class. If the equipment is sold at the end of 4 years for $200,000, what is termination value of the equipment (the after-tax cash flow from the sale of this asset)? The marginal tax rate is 20 percent. The Annual expense percentage for a 5-year MACRS property from year 1 to 6 respectively are: 20.00%; 32.00%; 19.20%; 11.52%; 11.52: and 5.76%. PLEASE SHOW ALL STEPS!!
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8.You save $2000 a year into a 401(k) account that you invest in a mutual fund earning 9% per year. You plan to retire in 35 years. How much money will you have in your account at retirement?
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Ivanka maintains an aggressive investment posture including margin trading. She currently holds a $100,000 diversified stock portfolio in her margin account. The account has a debit balance of $40,000. She believes T. Enterprises, which is selling at $20 per share, is about to soar to at least $50 per share in the next year. The company pays no dividends. The initial margin requirement is 50% and margin loans charge 10%.
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P4-15 (similar to) |
Multiple cash
budgetslong dash—Scenario
analysis Brownstein, Inc., expects sales of $101,000 during each of the next 3 months. It will make monthly purchases of $56,000 during this time. Wages and salaries are $ 10,000 per month plus 6 %of sales. Brownstein expects to make a tax payment of $25,000 in the next month and a $19,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero.
a. Construct a cash budget for the next 3 months.
b. Brownstein is unsure of the sales levels, but all other figures are certain. If the most pessimistic sales figure is $81,000
per month and the most optimistic is $121,000 per month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the 1-month periods?
c. Briefly discuss how the financial manager can use the data in parts a. and b. to plan for financing needs.
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A japanese comapny has a bond outstanding that sells for 91.53 percent of its 100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond?
Settlement date = 1/1/2000
Maturity date = 1/1/2016
Annual coupon rate = 3.4%
Coupons per year = 1
Face value (% of par) = 100
Bond price (% of par) = 91.530
Face value = 100,000
Please answer in exel format: =Yeild(settlement, matruity, rate, pr, redemption, frequency)
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Do you think it makes sense to do a seed round of financing? Why or why not?
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Project Analysis: You are considering a new product launch. The project will cost $760,000, have a four year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 420 units per year; price per unit will be $17,200; variable cost per unit will be $14,300; and fixed costs will be $640,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 35 percent.
a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within +- 10 percent. What are the upper and lower bounds for these projections? What is the base case NPV? What are the best case and worst case scenarios?
b. Evaluate the sensitivity of your base case NPV to changes in fixed costs.
c. What is the accounting break even level of output for this project?
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