Question 1 Part I

The capital structure of a company with relevant market information are shown as below:

Common stock: There are 55 million shares outstanding of $10 par. The stock has a beta coefficient of 1.8. The management of the company just paid an annual dividend of $1.5 per share and the market expects that the dividend growth rate to be 20 percent for coming three years and grow by 5 percent per year thereafter in the foreseeable future. The required rate of return on your company’s stock is 15 percent.

Preferred stock: 12 million shares currently selling at $96 per share, with dividend rate of 6 percent and face value of $100.

Debt: Three years ago, the company issued 9 million 15-years 8% semi-annual coupon bonds with par value of $1,000 that are still outstanding. The yield-to-maturity (in terms of an effective rate of return) on the bond is 16% per annum.

Market: The current Treasury bill yields 3 percent and the expected return on the market is 12 percent. The company is in the 40% corporate tax bracket. Required:

(a) Estimate the current common stock value using the Dividend Growth Model. (b) Calculate the bond price today. [answers in a whole dollar amount]

(c) Based on answers in above (a) and (b), determine the company’s capital structure weights (WE, WP, WD) for equities and debt. [answers in %]

(d) Compute the cost of equity (RE) using CAPM, cost of preferred stock (RP), and pre-tax cost of debt (RD). [answers in %]

(e) Assuming that the company is going to maintain the current capital structure, calculate the weighted average cost of capital (WACC) of the company. [answer in %]

Richard Miyashiro purchased a condominium and obtained a 30-year loan of $198,000 at an annual interest rate of 8.15%. (Round your answers to the nearest cent.)

(a) What is the mortgage payment? $1473.61

(b) What is the total of the payments over the life of the loan? $

(c) Find the amount of interest paid on the mortgage loan over the 30 years. $

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لشركة / Business ليصبح شركة / Business 4.0.

1.Define 'the 4th Industry' to be created by the technologies of the 4th Industrial revolution.

2.Explain ‘P2D2P Loop’, the core concept of the 4th Industry. (Reference 2).
3.What are the factors that affect the existing business by the 4th Industrial ecosystem
that enables 'P2D2P Connection'? Or why should an existing business be digitally
transformed? (Reference 1 & 2).
4. Define what 'XaaS' is, and how this concept related to P2D2P Loop? (Reference 2 & 3).
5.Explain three macro forces shift of the nine big shifts that required at digital
transformation. (Reference 4)

The 4 most fundamental factors that affect the cost of money are

(1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) opportunity cost.

a. True b. False

A company has granted 2,000,000 options to its employees. The stock price and strike price are both $70. The options last 8 years and vest after 2 years. The company decides to value the options using an expected life of 6 years and a volatility of 30% per annum. Dividends on the stock are $1.50 per year, payable halfway through each year, and the risk-free is 5%. What will the company report as an expense for the options on its income statement?

1. (10 pts) The intrinsic value of a share of stock is equal to today’s value of all expected future cash flows to be received by an investor. The more risk the stock exposes the investor to, the less the investor shall be willing to pay. Support this thought with only two principles of finance.

Please show all work.

Currently YL trading at $54. Lee bought YL April $55 call option for $1.25. At expiration, YL’s price is 55.75, What is the option payoff? Profit?

Solution:
ITM Call Long Position Payoff = $0.75
Profit/Loss = 0.75 -1.25 = -$0.50   

Above is the question and the solution but, I am confused on how they came to this solution. Any help would be appreciated!

1. You’ve inherited $10,000. You’d like to have $20,000 in 5 years. What rate of return do you need to make on your investment to reach your savings goal?

2. You’re interested in buying a house and need a $5,000 down payment. How much do you need to set aside today if you can make 5% on your money to make sure you have $5,000 in three years.

3. You’ve decided you want to get your MBA, which will cost you $15,000. If you have $10,000 now and can make 7.5% on your money, how soon can you attend classes?

4. You’ve just been hired on your first job! Congratulations. The company has a 401(k) plan and you’ve decided to put 10% of your $45,000 salary away each year. If you can earn 8% annually on your money, how much will you have 35 years from now when you’re ready to retire?

5. You’re aunt Edna just retired at the age of 65 years old. She has an annuity with $750,000 and wants to begin taking payments until she’s 90 years old. If the annuity can earn 4.5% annually, how much can she take each year before the account gets to $0?

6. You have to choose between investing your $1000 in a band CD that pays 2.5% annually, or into a 20 year treasury bond that pays 2.2% semi-annually. Which investment pays a better rate of return?

 Barry Swifter is 60 years of age and considering retirement. ​ Barry's retirement portfolio currently is valued at​ $750,000 and is allocated in Treasury​ bills, an​ S&P 500 index​ fund, and an emerging market fund as​ follows:

a.  Based on the current portfolio composition and the given expected rates of​ return, the expected rate of return for​ Barry's portfolio is

( ) ​%.

​(Round to two decimal​ places.)

b.  If Barry moves all his money out of emerging market funds and puts it in Treasury​ bills, the expected rate of return for his portfolio is

( ) %

​(Round to two decimal​ places.)

Question 4. Cash Flow Valuation Model

A local investment banking firm, Denver Creek Inc., is evaluating a deal to acquire a sports apparel company, Breezee.

The company has a term loan requiring monthly payment and the principal of the loan to be paid down over the life of the loan (that is, amortized). The debt balance at year 0 is $150 million and the loan rate is 5% (APR or annual percentage rate =5%). The loan will mature at year 3 or in 36 months.

In the long term, the company plans to manage its capital structure to a target debt-to-value ratio. The target is set at the industry average level of 20%. When the term loan matures at the end of year 3, the company will refinance with new debt to reach the target level and will keep the debt ratio at 20% in the steady state (starting year 4).

The company’s capital structure over time is presented in the table below.

Other inputs and assumptions:
Unlevered cost of capital (Ru) = 9%; Cost of capital (Rwacc) in the steady state = 11% Tax rate = 21%; Long-term growth rate (LTg) = 2%

1. Determine the term loan’s monthly total payment, principle repayment and
interest payment, and construct the amortization schedule.
Note: An amortization schedule is a complete table of periodic loan payments, showing the amount of principal repayment and the amount of interest that comprise each payment until the loan is paid off at the end of its term. 


2. Choose the appropriate cash flow valuation model and explain your rationale.

3. Apply the model of your choice and estimate the target company’s value of operation. 


You buy a 20-year bond with a coupon rate of 9.9% that has a yield to maturity of 10.9%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 11.9%. What is your return over the 6 months?

Consider a project with the following data: accounting break-even quantity = 29,129 units; cash break-even quantity = 17,834 units; life = 10 years; fixed costs = $204,846; variable costs = $22 per unit; required return = 12 percent; depreciation = straight line. Ignoring the effect of taxes, what is the financial break-even quantity?

You have $600 in an account which pays 4.5 % compounded annually. How many additional dollars of interest would you earn over 4 years if you moved the money to an account earning 6.6 %?

How many additional dollars of interest would you earn over 4 years from the account that pays 6.6 %?

$___ (Round to the nearest cent.)

Andy promises to pay Opie $7,000 when Opie graduates from Mayberry University in 10 years. How much must Andy deposit today to make good on his promise, if he can earn 5 % on his investments?

How much must Andy deposit today to make good on his promise?

$ ___(Round to the nearest cent.)

A company is considering undertaking a new project. The project will require purchasing a machine for $250 today. The cost of the machine will be depreciated straight-line to zero over four years. Cash sales will be $230 per year for four years (from t=1 until t=4) and costs of goods sold will run $120 per year for these four years. At t=5 you sell the machine for $50. The firm has already spent $100 for R&D last year. The corporate tax rate is 35%. Calculate the unlevered net income and the free cash flows for years 0-5.