Discuss why a firm’s book value may differ significantly from its market capitalization or enterprise value Identify 3-4 factors that could cause the market cap to greatly exceed book value. How or why should book value impact the valuation of a firm? When might you use book value as a measure of a firm’s value? Discuss how balance sheets items could affect your valuation of a firm. Provide examples.

A city water and​ waste-water department has a​ four-year-old sludge pump that was initially purchased for​ $65,000. This pump can be kept in service for an additional four​ years, or it can be sold for $35,500 and replaced by a new pump. The purchase price of the replacement pump is ​$49,500. The projected MVs and operating and maintenance costs over the​ four-year planning horizon are shown in the table that follows. Assuming the MARR is 88​%,

​(a) determine the economic life of the challenger and ​(b) determine when the defender should be replaced.

   Defender       Challenger  
Year   MV at EOY   O&M Costs   MV at EOY   O&M Costs
1   24,500   17,500   38,500   13500
2   21,500   20,500   30,500   16,500
3   18,500   23,500   22,500   19,500
4   15,500   26,500   14,500   22,500
              

Nissan’s all-electric car, the Leaf, has a base price of $32,780 in the United States, but it is eligible for a $7500 federal tax credit. A consulting engineering company wants to evaluate the purchase or lease of one of the vehicles for use by its employees traveling to job sites in the local area. The cost for leasing the vehicle will be $4200 per year (payable at the end of each year) after an initialization charge of $2500 paid now. If the company purchases the vehicle, it will also purchase a home charging station for $2200 that will be partially offset by a 50% tax credit. If the company expects to be able to sell the car and charging station for 40% of the base price of the car alone at the end of 3 years, should the company purchase or lease the car? Use an interest rate of 10% per year and annual worth analysis

Rooney, Inc. is considering a new machine for its largest product line. The cash flows are:
Installed Purchase Price $ 40,000
Reduced Cost of Materials $ 6,000 per year
Labor Savings $ 9,000 per year
Increase in Working Capital (for Year 0 and 1 only) $5,000
Depreciable Life (zero salvage value) 4 years
Economic Life 8 years
Required Return 12%
Tax Rate 40%

1. What is the NPV of this machine if it does not replace any other?

2. Suppose the machine replaces another machine with the following characteristics: Book Value of Old Machine $ 6,000
Market Value of Old Machine $ 4,000
Remaining Depreciable Life of Old Machine 6 years

Assume the old machine was not expected to have any salvage value and compute the NPV of the New Machine.

Please show all steps. Don't round off until you get to the end.

4 years ago you purchased a 12 year maturity, 4.7% coupon annual pay bond at a price of $90 per $100 of face value. Shortly after you purchased the bond, yields changed to 4.08%. If you sell the bond today at a price of $106 per $100 of face value, what is your annualized holding period return?

Question 1 a. After completing its capital spending for the year, HSU Manufacturing has $1,000 extra cash. HSU’s managers must choose between investing the cash in Treasury bonds that yield 8% or paying the cash out to investors who would invest in the bonds themselves. i. If the corporate tax rate is 35%, what personal tax rate would make the investors equally willing to receive the dividend or to let HSU invest the money? ii. Is the answer to part i) reasonable? Explain. b. The desire for high current income is a valid explanation of preference for high current dividend policy. Comment on the validity of this statement.

Midas is considering two stocks. The expected return on LAN is 15% with a standard deviation of 32%. The expected return on GBT is 9% with a standard deviation of 23%. The correlation between the returns on LAN and GBT is 0.15. The betas of LAN and GBT are 1.2 and 0.8 respectively.
a. Assume that Midas would like to have a portfolio with a beta of 0.9. Recommend how he can invest in two stocks to achieve his objective. Determine the expected return and standard deviation on this portfolio.

KNF Company (KNFC) is considering a new project that involves the production of additional product for which cash out flows and inflows have already estimated. KNFC has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 2.028125, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The return on market portfolio is 12.5 percent, T-bonds (risk free assets) are yielding 4.5 percent, and KNFC's tax rate is 32 percent. What WACC should KNFC apply to this new project's cash flows if the project has the same risk as KNFC 's typical project?

You must show your work step-by-step and write 4 lines for each problem to explain your approach of finding the solution.

Both Bond A and Bond B have 10 percent coupons, make semiannual payments, and are priced at par value. Bond A has 5 years to maturity, whereas Bond B has 10 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond A and Bond B? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond A and Bond B?

Please shows all the formula and steps. Don't round off until you get to the end.

Consider the following two mutually exclusive projects:

Whichever project you choose,if any, you require a 15 percent return on your investment?
If you apply the payback criterion, which investment will you choose?
If you apply the NPV criterion, which investment will you choose?
If you apply the IRR criterion, which investment will you choose?
If you apply the profitability index criterion, which investment will you choose?
Please show all steps. Don't round off until you get to the end.

Your friend is celebrating his 35th birthday and wants to start saving for his anticipated retirement at age 65. He wants to be able to withdraw $10,000 from his saving account at the end of each year for 15 years following his retirement (the first withdrawal will be at the end of his 65th year). Your friend is very risk-averse and will only invest his money in the local savings bank, which offers 8 percent interest compounded annually. He wants to make equal, annual deposits at the end of each year in a new savings account he will establish for his retirement fund.

Please show all steps. Don't round off until you get to the end.

1. If he starts making these deposits at the end of this year and continues to make deposits until he is 65 (the last deposit will be at the end of his 64th year), what amount must he deposit annually to be able to make the desired withdrawals upon retirement?

2. Suppose your friend has just inherited a large sum of money and has decided to make one lump sum payment at his 35th birthday to cover his retirement needs rather than making equal annual payments. What amount would he have to deposit?

Demonstrate why the annuity formula can be written as a difference between two perpetuities.

Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders' required rate of return, r_s, is 12.25%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and target capital structures, and then find the sum of these three WACCs.

You must show your work step-by-step and write 4 lines for each problem to explain your approach of finding the solution.

Excel Online Structured Activity: Required annuity payments

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 3%. He currently has $155,000 saved, and he expects to earn 7% annually on his savings. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Do not round your intermediate calculations. Round your answer to the nearest cent.