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.

Beta (3 decimal places) = __________

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:

1. A naked call option purchased
2. A naked put option sold
3. A bull money spread using calls starting at the same strike price as in Part 1
4. A bull money spread using puts starting at the same strike price as in Part 1

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.

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!

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?

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.

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.

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.

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?

Demolition Construction Services has 12,500 shares of stock outstanding and no debt. The new CFO is considering issuing $75,000 of debt and using the proceeds to retire 2,500 shares of stock. The coupon rate on the debt is 6.8 percent. What is the break-even level of earnings before interest and taxes between these two capital structure options?

A) $16,860

B) $18,520

C) $18,240

D) $21,000

E) $15,300

A project has an initial cost of $60,500, expected net cash inflows of $13,000 per year for 8 years, and a cost of capital of 12%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.

ABC Co has 10 million shares of common stock outstanding which currently trades at a market price of $5 per share. The company also has 100,000 bonds issued which are trading at $1,050 per bond. ABC has not issued any preferred stock. If ABC’s cost of equity is 10% and their effective cost of debt is 5%, what is their WACC?

Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure.

Currently it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 90% debt.

American Exploration currently has 5% after-tax cost of debt and a 10% cost of common stock.

The company does not have any preferred stock outstanding.

a. What is American Exploration's current WACC?

b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure?

c. Do you think shareholders are affected by the increase in debt to 90%? If so, how are they affected? Are the common stock claims riskier now?

d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required return so that cost of common equity is 14%. What will its new WACC be in this case?

e. What does your answer in part d suggest about the tradeoff between financing with debt versus equity?