White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.
|
Year |
Cash Flow |
|
0 |
$1,680,000 |
|
1 |
−3,885,000 |
|
2 |
2,225,027 |
a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%,10%,15%,20%,22.5%,25%,30%.
b. What does the NPV profile tell you about this investment's IRR?
c. If the company follows the IRR decision rule and their cost of capital is 15%, should they accept or reject the opportunity? Why is it hard to make a decision on this investment based solely on the IRR rule?
d. If the company's cost of capital is 15%, should they reject or accept the investment based on its NPV?
In: Finance
What is the "opening price point"? how is it used to increase sales at Walmart?
In: Finance
The interest rate is 8%.
When you are 30, you want to deposit $X in your retirement account so that when you retire in 35 years you can withdraw $100,000 every year for 20 years (first withdrawal is at year 36).
How much is X?
In: Finance
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.4%. The probability distributions of the risky funds are:
| Expected Return | Standard Deviation | |
| Stock fund (S) | 15% | 44% |
| Bond fund (B) | 8% | 38% |
The correlation between the fund returns is .0684.
A) Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL. -What is the standard deviation of your portfolio?
B) What is the proportion invested in the T-bill fund?
C) What is the proportion invested in each of the two risky funds?
Stock %
Bonds %
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7. Constant-growth rates
One of the most important components of stock valuation is a firm’s estimated growth rate. Financial statements provide the information needed to estimate the growth rate.
Consider this case:
Robert Gillman, an equity research analyst at Gillman Advisors, believes in efficient markets. He has been following the mining industry for the past 10 years and needs to determine the constant-growth rate that he should use while valuing Pan Asia Mining Co.
Robert has the following information available:
| • | Pan Asia Mining Co.’s stock (Ticker: PAMC) is trading at $21.25. |
| • | The company has forecasted net income and book value of equity for the coming year to be $1,341,300 and $10,497,500, respectively. |
| • | The company has also been paying dividends for the past 8 years and has maintained a dividend payout ratio of 42.50%. |
Based on this information, Robert’s forecast of PAMC’s growth rate in earnings and dividends should be:
8.15%
27.16%
28.75%
7.35%
Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?
Growth in earnings requires growth in dividends.
Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company.
Retaining a higher percentage of earnings will result in a higher growth rate.
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|
Heginbotham Corp. issued 10-year bonds two years ago at a coupon rate of 8.1 percent. The bonds make semiannual payments. If these bonds currently sell for 102 percent of par value, what is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| YTM | % |
Financial Calculator Inputs please
In: Finance
|
Year |
BV |
EV |
|
1 |
100 |
120 |
|
2 |
120 |
137 |
|
3 |
137 |
122 |
|
4 |
122 |
98 |
|
5 |
98 |
100 |
|
Economy |
Probability |
Return |
|
Strong |
0.2 |
20.0% |
|
Weak |
0.7 |
-10.0% |
|
Mild |
0.1 |
5.0% |
|
2006 |
2007 |
2008 |
2009 |
|
|
A) 0.1 |
0.12 |
0.07 |
0.15 |
|
|
B) 0.08 |
0.04 |
0.11 |
0.13 |
|
E(r ) |
Std Dev |
Weight |
|
|
0.08 |
0.02 |
0.7 |
|
|
0.04 |
0.06 |
0.3 |
In: Finance
2) Acme Mining Company has 7.7 million shares of common stock outstanding. In addition, the company has 200,000 bonds outstanding. The bonds have a 6.4% coupon (paid semi-annually) and their par value is $1,000. The common stock currently sells for $35 per share and has a beta of 1.20. The bonds have 10 years until maturity, and sell for 105% of par. The market risk premium is 7%, the risk-free rate is 2%, and the company’s tax rate is 40%.
a) What is the current market value of the company?
b) If the company is evaluating a new investment project that has the same risk as the company’s typical project, what rate should the firm use to discount the project’s cash flows?
c) Assume the company adjusts its capital structure and now has no debt (i.e. the company is all equity financed). What is the company’s stock beta?
In: Finance
Why do we want portfolios on efficient frontier (EF) rather than the portfolios on the lower part of the portfolio possibilities curve (PPC)?
In: Finance
You have just completed the first half of one of the most
challenging yet exhilarating classes of your college career. You
are 19 years old. After listening to the wise words of your awesome
professor and the thrilling representatives from Calm Waters
Financial, you have decided being a millionaire is well within your
reach. You decide you want to be a millionaire by the age of 59.
You have looked around and found a mutual fund that expects an
average return of 7% compounded monthly (totally feasible).
QUESTION 1- If you are making your plan today and hope to start
saving at the end of the month, how much do you need to deposit
each month to reach your goal? QUESTION 2 - How much would you end
up contributing to your million? After a bit of calculation, you
decide you don’t want to wait until you are 59, and shift your goal
to being a millionaire by 49. QUESTION 3- How much will
you need to invest each month now? When you see the number you
realize it might be a bit to aggressive for you based on your
budget. You think about it and remember that if you can find a fund
yielding a high average return, you could get that payment down.
QUESTION 4 - You and Google have a late night together and you find
a fund that averages 12% compounded monthly. What impact does that
have on your monthly payment? QUESTION 5 - How much do you
contribute with these changes?
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|
Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 45 percent and makes interest payments of $46,000 at the end of each year. The cost of the firm’s levered equity is 19 percent. Each store estimates that annual sales will be $1.335 million; annual cost of goods sold will be $765,000; and annual general and administrative costs will be $425,000. These cash flows are expected to remain the same forever. The corporate tax rate is 24 percent. |
| a. |
Use the flow to equity approach to determine the value of the company’s equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) |
| b. | What is the total value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) |
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|
Knotts, Inc., an all-equity firm, is considering an investment of $1.77 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $606,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $56,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 25 percent. |
|
Using the adjusted present value method, calculate the APV of the project. |
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|
Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $17 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 35% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 11%. BEA has a beta of 0.9.
|
In: Finance
| Click here to read the eBook: The Cost of Retained Earnings,
rs Problem Walk-Through COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 4% per year. Callahan's common stock currently sells for $22.75 per share; its last dividend was $2.50; and it will pay a $2.60 dividend at the end of the current year.
|
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The state lottery's million-dollar payout provides for $33 million(s) to be paid over 1919 years in 2020 payments of $ 150 comma 000$150,000. The first $ 150 comma 000$150,000 payment is made immediately, and the 1919 remaining $ 150 comma 000$150,000 payments occur at the end of each of the next 1919 years. If 1212 percent is the appropriate discount rate, what is the present value of this stream of cash flows? If 2424 percent is the appropriate discount rate, what is the present value of the cash flows?
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