You are planning to save for retirement over the next 35 years. To do this, you will invest £400 a month in a share account and £500 a month in a bond account. The annual return of the share account is expected to be 7 per cent, and the bond account will pay 4 per cent annually. When you retire, you will combine your money into an account with a 6 per cent annual return.

How much can you withdraw each month from your account, assuming a 25-year withdrawal period?

1. (a) £7,585.

2. (b) £8,650.

3. (c) £9,000.

4. (d) £9,985.

5. (e) I choose not to answer.

. Replacement decision

The electronics company plans to replace the manually operated manufacturing machine with a new fully automated machine. Use the following information to determine the cash flows and profitability of the replacement decision.

Current situation

• Current estimated wages of operators are 30,000 annually. By replacing, we can save these labour related costs.

• Maintenance costs € 8,000 per year.

• Waste related costs of € 10,000 per year

• The machine currently in use was bought 5 years ago for 60,000 euros. The company can continue to operate this machine for the next five years. The company applies linear depreciation and both the book and market values are zero after five years.

• The potential sales price of the old machine today is € 20,000

Project under consideration

• Required capital investment is € 120,000
• Maintenance costs € 14,000 per year.
• Waste related costs of € 5,000 per year
• The machine is going to be operated for the next 5 years
• Linear depreciation is applied. Accounting salvage value is zero after 5 years of operation. However, it is estimated that the potential market value of the new machine is 25% of the purchase price.
• Replacement requires additional investments of € 12,000 into net working capital, which is expected to be recovered when project ends.
• The company applies 10% cost of capital for this type of replacement projects
• Corporate tax rate is 40% on both profits and capital gains.

Find:

a) Incremental cash flows from replacing the machine (including investment, annual cash flow, and closing cash flow)

d) Based on the NPV, assess whether the replacement is economically viable

Kong Ltd is a home appliance manufacturer listed on the local stock exchange. The company has no debt but has 100 million shares with a current price $10 per share. The company would like to change its capital structure by borrowing $300 million and repurchasing shares. The restructure plan is announced to the market and shareholders expect the change in debt to be permanent

(i). Assume the market is perfect so all the assumptions of Modigliani and Miller (MM) theorey hold. Calculate the value of the firm and the value of equity after the proposed share repurchase.

(ii). Assume the market is imperfect and the only imperfections are corporate taxes and financial distress costs. Kong pays corporate taxes of 40%. If the share price of Kong Ltd increases to $10.6 immediately after the announcement of the capital restructure plan, what is the present value of financial distress costs Kong will incur as the result of the debt?

1. Capital budgeting

The company is going to analyse a new investment project, which has the following characteristics:

Unit price                                                                $5.00

Annual unit sales                                                   40,000

Variable cost per unit                                           $2.5

Investment into new machinery (t=0)              $400,000

Investment in working capital                           $50,000               (fully recovered at the end of project)

Project life                                                              6 years

Annual depreciation                                             $60,000

Market value of machinery (t=6)                       80,000

Tax rate                                                                    40 %                     (the same for profits and capital gains)

Required rate of return (WACC)                        10 %

Marketing research expense                              $16,000               (the research was done earlier this year)

Questions:

1. Find the project cash flows (incl. initial investment, operating cash flows each year and terminal cash flow)
2. Evaluate the project NPV
3. Should the company invest into such project? Explain.

1. Capital budgeting.

Põltsamaa Felix, an exclusive Estonian fruit wine producer, is considering the purchase of 10,000 French oak barrels at a cost of 900 eur each. The investment into barrels is considered a capital expense and would be depreciated straight line over 5 years.

After 4 years, the barrels will be useless for making fine wine, but they expect to be able to sell them for 3.5 million EUR to E & J Gallo, the world largest wine producer. The increase in the quality of its sweet apple line of wines due to the use of the new French oak barrels is expected to increase revenue by 7 million eur (but only) in years 3 and 4. The barrels would have no influence on COGS, SG&A or other operating expenses. The additional working capital investment is 10% of the additional sales revenues and is fully recovered when the project ends (in four years). Note that the investment into working capital is made just before the expected sales increase. The tax rate is 30% (profits are taxed), and the required return is 14%.

1. Construct the capital budget
2. Evaluate the project on the basis of NPV and MIRR.

How do we determine if cash flows are relevant to the capital budgeting decision?

What are sensitivity analysis, scenario analysis, break-even analysis, and simulation? Why are these analyses important, and how should they be used?

The margin requirement on the S&P 500 futures contract is 10%, and the stock index is currently 1,200. Each contract has a multiplier of $250.

a. How much margin must be put up for each contract sold?

Margin            $   

b. If the futures price falls by 2% to 1,176, what will happen to the margin account of an investor who holds one contract? (Input the amount as a positive value.)

Margin account (Click to select)increasesdecreases by $ .

c-1. What will be the investor's percentage return based on the amount put up as margin? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Percentage return             %

c-2. What would be the current cash balance in the margin account?

Cash balance            $

Problem 4-34 Growing Annuity

Your job pays you only once a year, for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $59,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 10 percent of your annual salary in an account that will earn 9.9 percent per year. Your salary will increase at 2 percent per year throughout your career.

How much money will you have on the date of your retirement 35 years from today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Future value           $

The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives:

At the end of three years, the fleet could be sold for one-half of the original purchase price.

Riteway Ad Agency’s required rate of return is 20%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:    

1. What is the net present value of the cash flows associated with the purchase alternative?

2. What is the net present value of the cash flows associated with the lease alternative?

3. Which alternative should the company accept?

If the selling price was only $4.85 per bu., what per acre yield would be necessary to break-even?

given this information

1. Expected yield 35.0 bu.per acre2. Selling price $ 5.25 per bu.3. Labor cost -preharvest $ 9.80 per acre4. Land rent $47.50 per acre5. Fertilizer cost $26.50 per acre6. Seed cost $25.00 per acre7. Chemical cost $ 12.75 per acre
C. OTHER INFORMATION(CONT.)8. Tractor variable cost $13.20 per acre9. Variable cost on othermach. & equip. $ 5.65 per acre10. Custom harvesting, hauling, etc. $25.00 per acre11. Compute interest on totalpreharvestcosts @ 6% for 6 months

Please, summary about BASEL1, BASEL2, BASEL2.5 and BASEL3.

I don't know well these accord each. So please give me some kind explanation about each BASEL.

The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company’s present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase alternative: The company can purchase the cars, as in the past, and sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $26,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: Annual cost of servicing, taxes, and licensing $ 4,200 Repairs, first year $ 2,100 Repairs, second year $ 4,600 Repairs, third year $ 6,600 At the end of three years, the fleet could be sold for one-half of the original purchase price. Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $61,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $10,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency’s required rate of return is 20%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept?

What is the clean price (invoice price) for a bond with face value of $1,000, annual coupon rate of 12%, semiannual payment, time to maturity of 17 years if the YTM is 14%? 12%? 10%? Respectively? What is the current yield for each of the three cases? If the last coupon is paid 60 days ago, what is the dirty price for each of three cases? (Assume 365 days a year)

The recent trade war has hit the Huaway company severely. Management announced plans to scale down its operation. Huaway announced that next year's dividend will be $1 per share which is expected to decrease at the rate of 6% forever.

The market price of the stock fell to $3.5 when this development was disclosed.

i) calculate the expected return investors hope to get from investing the stock based on the constant dividend growth market.

ii) explain 1 limitation of the constant dividend growth market

iii) Briefly discuss 2 reasons for investing in ordinary shares of a company compared to the company's

a) preferred shares

b) bond

3/ Explain why investors might be interested to purchase, "your newly created debt instrument" 34pts