Options in corporate finance
A. The CEO of a growing cyber-security firm was awarded 25,000 stock options as part of her pay package. She can exercise the options -turn them into stock- in two years. The company’s stock price was $35.00 per share at the time of the stock option grant. Shortly after the option award was received, she went to an investment banking firm and bought put options at a strike price of $35.00. The option expires in two years.
(i) What does the put option do for the CEO? Carefully explain why your stated result occurs.
(ii) Stock options and stock ownership are included in compensation packages to create incentives for CEOs to create value for shareholders. Does this put option purchase change those incentives? If so, how?
(iii) If you were a shareholder in this company, would you want to be informed about these types of transactions by the CEO?
____________________________________________________________
B. Company B is a small, publicly-traded technology company. Company B is close to completing development of a new software/hardware product for schools that uses voice recognition to quickly translate a lecture into written notes that are projected onto a screen and automatically sent to students as PDF documents. The lecturer can then annotate the notes with a drawing pad linked to the computer projection system. These annotations are included in the PDF that is distributed after the lecture is complete.
The company needs about $30 million to complete development and begin production and marketing of this product. The company is profitable with one other product that generates about $1,200,000 in cash flow annually. For many reasons the company has been very secretive about its new product so its stock price is quite low, being based on the modest cash flows of its existing product. Company officials and outside consultants agree that it is too early to reveal the new product’s details given what they know of competing products.
The company has hired an investment banker to help it determine how to raise the $30 million. The banker immediately recommends convertible bonds. Current interest rates on bonds or notes for companies of this type are in the range of 8% to 10%, but convertible debt would probably have a coupon rate of 3% to 5% depending on the conversion price. The higher the conversion price the higher the coupon rate.
The banker says that convertible bonds are a win-win for the company in this situation. The company can keep their product secret but issue stock at a higher price (the conversion price) than the current stock price. In the meantime, the interest rate on the debt will be about 4% or 5%, which the company should be able to support from its cash flow. The banker explains that if for some reason the product is not a success, and there is no conversion to stock, the company has issued debt at a very low rate. Probably 5% below the rate on non-convertible debt. Win-win!
The company’s tax rate is about 28%.
In: Finance
REPLACEMENT ANALYSIS
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life.
A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%.
The old machine can be sold today for $60,000. The firm's tax rate is 40%. The appropriate WACC is 9%.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| $ | $ | $ | $ | $ |
please help.Thank you!
In: Finance
Holmes Manufacturing is considering a new machine that costs $230,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $26,000 at the end of its 5-year operating life. The applicable depreciation rates are 33%, 45%, 15%, and 7%. Net operating working capital would increase by $24,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 40%, and a 12% WACC is appropriate for the project.
Assume management is unsure about the $90,000 cost savings-this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these situations? Round your answers to the nearest cent. Negative amount should be indicated by a minus sign.
20% savings increase. $
20% savings decrease. $
| Scenario | Probability | Cost Savings | Salvage Value | NOWC |
| Worst case | 0.35 | $72,000 | $21,000 | $29,000 |
| Base case | 0.35 | 90,000 | 26,000 | 24,000 |
| Best case | 0.30 | 108,000 | 31,000 | 19,000 |
Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Round your answers to two decimal places.
E(NPV) = $
σNPV = $
CV =
please help!Thank you!
In: Finance
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $625,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $125,000 per year, using the straight-line method.
The new machine has a purchase price of $1,125,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $125,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $205,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.
| Year | Depreciation Allowance, New | Depreciation Allowance, Old | Change in Depreciation |
| 1 | $ | $ | $ |
| 2 | |||
| 3 | |||
| 4 | |||
| 5 |
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| $ | $ | $ | $ | $ |
please help! Thank you!
In: Finance
WACC
Assume it is January 1, 2020. Zelus Sport Shoe Company has three debt issues outstanding.
6.5% Notes December 31, 2028 ($200 million face value) Market price $980.05.
7.0% Bonds, maturing December 31, 2030 ($100 million face value) Market price $984.98.
7.5% Bonds, maturing December 31, 2036 ($200 million face value) Market price $1,029.15.
All bonds have a $1,000 face value and pay interest semi-annually.
Use a 5.0% risk-free rate and a 7.0% market risk premium to compute Zelus’s cost of equity. The table shows the weekly closing prices for Zelus and the S&P 500 Index. Last week Zelus’s stock closed at $99.75 per share. There are 16 million shares of common stock outstanding.
The company also has 8 million shares of preferred stock outstanding. The preferred stock pays an annual $5.00 dividend and current sells for $50 per share. The tax rate is 30%.
Assume you are doing the WACC calculation on January 1, 2020, and that the semi-annual interest payments of the notes and bonds were paid on December 31, 2019. Show your beta and the costs and weights of all of the WACC components in the table provided. Show costs to 3 decimal places.
|
Date |
Zelus |
SP500 |
|
12/6/19 |
99.75 |
2066.50 |
|
11/29/19 |
101.25 |
2067.50 |
|
11/22/19 |
97.80 |
2063.50 |
|
11/15/19 |
102.50 |
2039.80 |
|
11/8/19 |
102.25 |
2031.95 |
|
11/1/19 |
98.50 |
2018.00 |
|
10/25/19 |
88.00 |
1964.65 |
|
10/18/19 |
87.00 |
1886.75 |
|
10/11/19 |
90.50 |
1906.10 |
|
10/4/19 |
89.75 |
1967.90 |
|
9/27/19 |
93.25 |
1982.85 |
|
9/20/19 |
89.00 |
2010.50 |
|
9/13/19 |
82.50 |
1985.50 |
|
9/6/19 |
85.00 |
2007.70 |
Beta (3 decimal places) = __________
|
Source of Capital |
Amount |
Before-tax Costs |
After-tax Cost |
Weight |
Weighted Cost |
|
6.5% Notes |
|||||
|
7.0% Bonds |
|||||
|
7.5% Bonds |
|||||
|
Preferred Stock |
|||||
|
Common Stock |
|||||
|
TOTAL |
- |
- |
WACC |
In: Finance
You boss expects prices to go up in the near future and wants to use an option strategy. Explain to your boss when he wants to use the following strategies:
In: Finance
XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $64 per share. A call option on XYZ has an exercise price of $58 and 3-month time to expiration. The risk-free interest rate is 0.7% per month, and the stock’s volatility (standard deviation) = 8% per month. Find the Black-Scholes value of the American call option. (Hint: Try defining one “period” as a month, rather than as a year, and think about the net-of-dividend value of each share.) (Round your answer to 2 decimal places.) Ps: The answers to this question already on chegg are incorrect.
In: Finance
St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $48,000 per year. The new machine will cost $87,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 18%. The old machine has been fully depreciated and has no salvage value.
What is the NPV of the project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
pelase help!Thank you!
In: Finance
State Retirement Funding
A state retirement plan has been frozen. It is considered fully funded, with $635,244,352.26 of assets on hand and makes payouts to 1,000 recipients. It assumes it will earn 7.5% per year on these assets. The most recent total payout was $50,000,000. Next year it will be $51,000,000, which includes a 2% COLA increase in benefits. This payout amount is scheduled to increase by 2% per year for inflation. All interest earned and payments occur at the end of the year. For this cohort of retirees, the final payment will be made in exactly22 years from today. The fund balance at that time will be zero.
The effective rate for annuities like this is RATE = [(1+growth)/(1+Inflation)]-1=0.0539216.
The PV was calculated as =PV(RATE,22,-50000000,0,0)
A) Create an amortization table that shows the pension is fully funded.
B) Suppose that instead of 7.5% the assets earn 5% per year. By how much is the pension under-funded assuming the 2% COLA adjustment continues.
C) At a 5% growth rate what total annual payments can the original asset balance support for 22 years with no inflation adjustment? i.e., the same amount each year.
D) Given the initial balance of $635,244,352.26 and assuming a 2% COLA increase ever year, what initial payment can be made to beneficiaries?
In: Finance
|
The company sells many styles of earrings, but all are sold for the same price—$14 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): |
| January (actual) | 20,900 | June (budget) | 50,900 |
| February (actual) | 26,900 | July (budget) | 30,900 |
| March (actual) | 40,900 | August (budget) | 28,900 |
| April (budget) | 65,900 | September (budget) | 25,900 |
| May (budget) | 100,900 | ||
|
The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 30% of the earrings sold in the following month. |
|
Suppliers are paid $8 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 20% is collected in the second month following sale. Bad debts have been negligible. |
| Monthly operating expenses for the company are given below: |
| Variable: | ||
| Sales commissions | 4 | % of sales |
| Fixed: | ||
| Advertising | $ | 199,100 |
| Rent | $ | 17,100 |
| Salaries | $ | 105,100 |
| Utilities | $ | 6,100 |
| Insurance | $ | 2,100 |
| Depreciation | $ | 13,100 |
| Insurance is paid on an annual basis, in November of each year. |
| The company plans to purchase $15,300 in new equipment during May and $39,100 in new equipment during June; both purchases will be for cash. The company declares dividends of $10,500 each quarter, payable in the first month of the following quarter. |
| A listing of the company's ledger accounts as of March 31 is given below: |
| Assets | Liabilities and Stockholders' Equity | ||||
| Cash | $ | 150,000 | Accounts payable | $ | 193,600 |
| Accounts receivable ($75,320 February sales; $458,080 March sales) |
533,400 | Dividends payable | 10,500 | ||
| Inventory | 158,160 | Capital stock | 890,000 | ||
| Prepaid insurance | 21,900 | Retained earnings | 589,000 | ||
| Property and equipment (net) | 819,640 | ||||
| Total assets | $ | 1,683,100 | Total liabilities and stockholders' equity | $ | 1,683,100 |
|
The company maintains a minimum cash balance of $30,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. |
|
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $30,000 in cash. |
| Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: |
| Requirement 2: |
|
A cash budget. Show the budget by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values except deficiencies, repayments and interest which should be preceded by a minus sign when appropriate. Total financing should be preceded by a minus sign when it consist of repayments and interest. Omit the "$" sign in your response.) |
| EARRINGS UNLIMITED Cash Budget For the Three Months Ending June 30 |
||||||||
| April | May | June | Quarter | |||||
| Total cash available | $ | $ | $ | $ | ||||
| Less disbursements: | ||||||||
| (Click to select)RepaymentsCashMerchandise purchasesInterestBorrowings | ||||||||
| (Click to select)SalesInterestCashAdvertisingRepayments | ||||||||
| (Click to select)CashRentLand purchasesPurchase of inventoryAccounts payable | ||||||||
| (Click to select)BorrowingsSalariesSalesInterestRepayments | ||||||||
| (Click to select)SalesCommissionsInterestBorrowingsCash | ||||||||
| (Click to select)InterestUtilitiesRepaymentsBorrowingsCash | ||||||||
| (Click to select)Accounts payableInterestRepaymentsSalesEquipment purchases | ||||||||
| (Click to select)RepaymentsAccounts payableBorrowingsSalesDividends paid | ||||||||
| Total disbursements | ||||||||
| Excess (deficiency) of receipts over disbursements |
||||||||
| Financing: | ||||||||
| (Click to select)Sales commissionsBorrowingsAccounts payableMiscellaneousSales | ||||||||
| (Click to select)RepaymentsDividends paidCashSalaries and wagesSales | ||||||||
| (Click to select)InterestAccounts payablePurchase of inventoryCashLand purchases | ||||||||
| Total financing | ||||||||
| Cash balance, ending | $ | $ | $ | $ | ||||
In: Finance
You are considering a new product launch. The project will cost $4,500,000, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 750 units per year; price per unit will be $15,500, variable cost per unit will be $12,200, and fixed costs will be $850,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 25 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±12 percent.
| Question 1 | |||
| Base Case | Best Case | Worst Case | |
| Unit sales | 750 | 750 | 750 |
| Variable cost/unit | 12,200 | ||
| Fixed costs | 850,000 | ||
| Sales | |||
| Variable cost | |||
| Fixed cost | |||
| Depreciation | |||
| EBIT | |||
| Taxes | |||
| Net income | |||
| OCF | |||
| NPV | |||
| Question 2 | |||
| Accounting break-even (ignoring taxes) | |||
| Question 3 | |||
| Cash break-even (ignoring taxes) | |||
| Question 4 | |||
| OCF at financial-break even | |||
| Financial break-even (ignoring taxes) | |||
| Question 5 | |||
| Degree of operating leverage |
In: Finance
Present the top 5 banks on the world and he top 5 banks on the EU in terms of assets and their ration: ROE, ROA and C/I.
Justify the answer.
In: Finance
When should the WACC and the APV be used? How do personal taxes affect the use of these two methods? Use examples when explaining your answer.
Please only include the examples and be detailed.
In: Finance
In: Finance
Beatles will double in value from £35,000 to £70,000 in 9 years. If the “rule of 72” applies, what is the approximate implied annual interest rate if the dealer’s claim is true? What is the actual annual interest rate if the claim is true?
In: Finance