Buffelhead’s stock price is $220 and could halve or double in each six–month period (equivalent to a standard deviation of 98%). Suppose that you own a one–year American put option on Buffelhead stock with an exercise price of $220. The interest rate is 20% a year.
(a) Calculate the value of the put.
(b) Now compare the value with that of an equivalent European put
option.
In: Finance
7. Calculate the annual purchasing power over the term of a 5-year loan of provided to Shane Kavanagh, a 37-year old bricklayer. The interest-only loan of $80,000 requiring annual repayments in arrears was made by the Beneficial Finance Agency on a variable interest rate basis. The variable interest rate over the loan term was as follows:
Details Year 1 Year 2 Year 3 Year 4 Year 5
Interest rate 7% 8% 8.5% 9.2% 9%
Other details over this period are shown below:
Details Year 1 Year 2 Year 3 Year 4 Year 5
Inflows:
Salary $65,000 $75,000 $82,000 $88,000 $90,000
Investments $5,000 $10,000 $12,000 $11,000 $78,000
Outflows:
Taxation $ 8,000 $10,000 $14,000 $16,000 $15,000
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A German company expects to pay 5 million Australian Dollars (AUD in 3 months. a. Name 3 principal methods to do so b. How could the German company hedge its currency risk using futures contracts traded on the Chicago Mercantile Exchange (CME)? What contracts could the company enter into? How many would the company enter into? Buy or sell them?
In: Finance
In: Finance
WACC
Williams, Inc., has compiled the following information on its
financing costs:
|
Type of Financing |
Book Value |
Market Value |
Cost |
|
Short-term debt |
$12,000,000 |
$12,500,000 |
4.1% |
|
Long-term debt |
20,000,000 |
23,000,000 |
7.2 |
|
Common stock |
9,000,000 |
54,000,000 |
13.8 |
|
Total |
$41,000,000 |
$89,500,000 |
The company is in the 21 percent tax bracket and has a target debt-equity ratio of 60 percent. The target short-term debt/long-term debt ratio is 20 percent.
a. What is the company's weighted average cost of capital using
book value weights?
b. What is the company's weighted average cost of capital using
market value weights?
c. What is the company's weighted average cost of capital using
target capital structure weights?
d. What is the difference between WACCs? Which is the correct
WACC to use for project evaluation?
Show all the steps and don't round off calculations.
In: Finance
Machine cost = $500,000
Project life = 2 years
Tax allowance for machine = 20% (reducing balance method)
Tax rate = 15% (payable half in the current year)
Cost of capital before tax = 10%
General rate of inflation = 4%
The incremental cash inflows from project = $2 million p.a (in today’s value)
The resale value of the machine is calculated at the end of the project to be the same as the net book value of the asset at the time of sale.
Compute the NPV.
In: Finance
In: Finance
Stock Dividends
The owners' equity accounts for Octagon International are shown
here:
Common stock ($1 par value) $ 25,000
Capital surplus 135,000
Retained earnings 487,600
Total owners' equity $647,600
a. If the company's stock currently sells for $39 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.
b. If the company declared a 25 percent stock dividend, how would the accounts change?
Show all the steps and don't round off calculations.
In: Finance
ROE and Leverage
Suppose the company in Problem 1 has a market-to-book ratio of
1.0.
a. Calculate return on equity, ROE, under each of the three
economic scenarios before any
debt is issued. Also calculate the percentage changes in ROE for
economic expansion and recession, assuming no taxes.
b. Repeat part (a) assuming the firm goes through with the proposed
recapitalization.
c. Repeat parts (a) and (b) of this problem assuming the firm has a
tax rate of 21 percent.
Please show all the steps and don't round off calculations.
Problem 1 :
Sunrise, Inc., has no debt outstanding and a total market value of
245000. Earnings before interest and taxes, EBIT, are projected to
be $19,000 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 25 percent higher. If
there is a recession, then EBIT will be 40 percent lower. The
company is considering a $58800 debt issue with an interest rate of
8 percent. The proceeds will be used to repurchase shares of stock.
There are currently 5,000 shares outstanding. Ignore taxes for this
problem. Assume the stock price is constant under all
scenarios.
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Capital Structure and Growth
Edwards Construction currently has debt outstanding with a market
value of $95,000 and a cost of 9 percent. The company has EBIT of
$8,550 that is expected to continue in perpetuity. Assume there are
no taxes.
a. What is the value of the company's equity? What is the
debt-to-value ratio?
b. What are the equity value and debt-to-value ratio if the
company's growth rate is 3 percent?
c. What are the equity value and debt-to-value ratio if the
company's growth rate is 7 percent?
Show all the steps and don't round off calculations.
In: Finance
Break-Even EBIT and Leverage
Kolby Corp. is comparing two different capital structures. Plan I
would result in 3,500 shares of stock and $37,440 in debt. Plan II
would result in 2,800 shares of stock and $66,560 in debt. The
interest rate on the debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $14,800. The all-equity plan would result in 4,400 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?
b. In part (a) what are the break-even levels of EBIT for each
plan as compared to that for
an all-equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I and II?
d. Repeat parts (a), (b), and (c) assuming that the corporate
tax rate is 21 percent. Are the
break-even levels of EBIT different from before? Why or why
not?
Show all the steps and don't round off calculations.
In: Finance
Cost of Capital
Harris, Inc., has equity with a market value of $18.5 million and
debt with a market value of $7.3 million. Treasury bills that
mature in one year yield 4 percent per year and the expected return
on the market portfolio is 11 percent. The beta of the company's
equity is 1.15. The firm pays no taxes.
a. What is the company's debt-equity ratio?
b. What is the firm's weighted average cost of capital?
c. What is the cost of capital for an otherwise identical
all-equity firm?
Show all the steps and don't round off calculations.
In: Finance
Alpha has 10 million shares outstanding with a market price of $5 per share and no debt. The company generates consistently stable earnings and pays a corporate tax rate of 35%. The firm just announces it will issue a consol (or perpetuity) bond with a par value of $10 million at a coupon rate of 5%. The company will use the borrowed funds to repurchase outstanding shares.
i. What is the stock price of Alpha On the announcement date?
ii.What is the stock price of Alpha On the date when the consol bond is issued but before the share repurchase?
iii. What is the stock price of Alpha After the share repurchase?
In: Finance
Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 14% of total sales, and the federal-plus-state tax rate is 40%. What is the expected return on equity under each current assets level? Round your answers to two decimal places.
Restricted policy %
Moderate policy %
Relaxed policy %
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Dealer A offers the following exchange rates:
1 USD = 1.12 CAD
1 USD = 0.849 GBP
Dealer B offers the following exchange rates:
1 CAD = 0.836 GBP
What is the arbitrage profit on $39,752?
Enter your answer round off two two decimal points.
In: Finance