You have been hired as a capital budgeting analyst by Advent Sports, a sporting goods firm that manufactures athletic shoes. The firm believes it can generate another $10 million per year over the next 10 years by investing $10 million in a new distribution system (which will be depreciated over the system's 10-year life to a salvage value of zero). The firm will also need an initial increase of $1 million in net working capital to take on this project. The company expects its variable costs associated with these sales to be 40% of revenues, and additional advertising costs are anticipated to be $1 million per year. The firm is in the 40% tax bracket and has a hurdle rate of 8%. What is the project's NPV expected to be?
Select one:
A. $12,277,470
B. $14,556,754
C. $15,876,943
D. $17,834,221
Please dont do the problem in Excel. I need the step by step process how to do this by hand.
In: Finance
An investor is considering purchasing a Treasury bond with a 20 year maturity, an 8% coupon and a 9% required rate of return. The bond pays interest semiannually.
a)What is the bond's modified duration?
b)If promised yields rise 25 basis points immediately after the purchase what is the predicted price change in dollars based on the bond's duration?
(please solve with formula not the macauly duration chart)
In: Finance
Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interest is compounded semiannually. If similar bonds in the market yield 7.8 percent, what is the value of these bonds? (Round answer to 2 decimal places, e.g. 15.25.)
Cullumber Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 11.2 percent? (Round answer to 2 decimal places, e.g. 15.25.)
In: Finance
The Blossom Department of Transportation has issued 25-year
bonds that make semiannual coupon payments at a rate of
9.825percent. The current market rate for similar securities is
11.3 percent. Assume that the face value of the bond is
$1,000.
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the problem.
What is the current market value of one of these bonds?
What will be the bond’s price if rates in the market (i) decrease to 9.30 percent or (ii) increase to 12.3 percent?
How do the interest rate changes affect premium bonds and
discount bonds? Bonds, in general, INCREASE OR DECREASE price when
interest rates go up. When interest rates decrease, bond prices
INCREASE OR DECREASE.
Suppose the bond were to mature in 12 years. What will be the
bond’s price if rates in the market (i) decrease to 9.30 percent or
(ii) increase to 12.3 percent? (Round answers to 2
decimal places, e.g. 15.25.)
In: Finance
Please answer all 4 parts of this question
John Johnson just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Crane Corp. that pays an annual coupon rate of 5.0 percent. If the current market rate is 9.00 percent, what is the maximum amount John should be willing to pay for this bond?
Sheridan, Inc., has issued a three-year bond that pays a coupon
rate of 8.5 percent. Coupon payments are made semiannually. Given
the market rate of interest of 4.2 percent, what is the market
value of the bond? (Round answer to 2 decimal places,
e.g. 15.25.)
Pharoah Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 6.350 percent. What is the current value of these bonds? Assume annual coupon payments.
Sharon Lee is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9.7 percent. Assume annual coupon payments. What is the current value of this bond? (Round answer to 2 decimal places, e.g. 15.25.)
In: Finance
A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 4 years at $1,042.15, and currently sell at a price of $1,083.62. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.
YTM: %
YTC: %
What return should investors expect to earn on these bonds?
Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
In: Finance
A bond has a $1,000 par value, 10 years to maturity, and an 8% annual coupon and sells for $980. What is its yield to maturity (YTM)? Round your answer to two decimal places.
%
Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
$
In: Finance
The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period:
Month Madison Cookies Sophie Electric
1 -0.06 0.05
2 0.04 -0.02
3 -0.07 -0.07
4 0.14 0.16
5 -0.03 -0.08
6 0.06 0.03
Compute the following. Do not round intermediate calculations. Round your answers to four decimal places.
A. Average monthly rate of return R̅i for each stock.
B. Standard deviation of returns for each stock.
C. Covariance between the rates of return.
D. The correlation coefficient between the rates of return.
E. Would these two stocks be good choices for diversification? Why or why not?
In: Finance
If a corporation has limited capital to use for project investment, but it has more projects than the available capital will support and these projects will earn above the cost of capital, should it ration capital (to do fewer projects) or borrow (to do all projects)? Explain your answer.
In: Finance
|
As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price:1 |
| (P0 – PX)/D = (1 – TP)/(1 – TG) |
|
where P0 is the price just before the stock goes ex, PX is the ex-dividend share price, Dis the amount of the dividend per share, TP is the relevant marginal personal tax rate on dividends, and TG is the effective marginal tax rate on capital gains. |
| a. |
If TP = TG = 0, how much will the share price fall when the stock goes ex? |
|
| b. |
If TP = 15 percent and TG = 0, how much will the share price fall? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c. |
If TP = 15 percent and TG = 20 percent, how much will the share price fall? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) |
| d. |
Suppose the only owners of stock are corporations. Recall that corporations get at least a 50 percent exemption from taxation on the dividend income they receive, but they do not get such an exemption on capital gains. If the corporation’s income and capital gains tax rates are both 26 percent, what does this model predict the ex-dividend share price will be? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) |
| 1N. Elton and M. Gruber, “Marginal Stockholder Tax Rates and the Clientele Effect,” Review of Economics and Statistics 52 (February 1970). |
In: Finance
|
After completing its capital spending for the year, Carlson Manufacturing has $1,100 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 2 percent or paying the cash out to investors who would invest in the bonds themselves. |
| a. |
If the corporate tax rate is 21 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money? (Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.) |
| b. | Is the answer to (a) reasonable? |
|
| c. |
Suppose the only investment choice is a preferred stock that yields 6 percent. The corporate dividend exclusion of 50 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d. | Is this a compelling argument for a low dividend-payout ratio? |
In: Finance
Suppose a stock had an initial price of $69 per share, paid a dividend of $1.95 per share during the year, and had an ending share price of $53. Compute the percentage total return, the dividend yield, and the capital gains.
Suppose you bought a stock one year ago for $965.00. The stock sells for $935.00 today. The dividend is $100.
a) What was your total dollar return on this investment over the past year?
b) What was your total nominal rate of return on this investment over the past year?
c) Fisher Effect: If the inflation rate last year was 5 percent, what was your total real rate of return on this investment?
You've observed the following returns on Jason Corporation's stock over the past five years: 12 percent, -14 percent, 4 percent, 27 percent, and 7 percent.
a) What was the average return on Jason's stock over this five-year period?
b) What was the variance of Jason's returns over this period? The standard deviation?
In: Finance
if expected return is 14%. the dividend is to grow at the rate of 8% it currently sells for $50 per share. what is the current dividend per share. what is the dividend yield
In: Finance
(EAC) Brandy's Place has decided to purchase a new branding machine. Brandy will buy one of two machines. Each machine costs $1,500. Machine A has a four-year life, a salvage value of $1,000, and expenses of $475 per year. Machine B has a five-year life, a salvage value of $500, and expenses of $460 per year. Whichever machine is used, revenues for this project are $1,200 per year, and machines will be replaced at the end of their lives. Using straight-line depreciation to the salvage value, a tax rate of 35%, and a cost of capital of 20%, which machine should Brandy buy, and why?
In: Finance
You deposit $175,000 in a savings account. The APR (Annual Percentage Rate) is 6%. Calculate the following: a. Assuming that the interest is compounded once a year, what is the amount accumulated after ten years? b. Assuming that the interest is compounded every month, what is the amount accumulated after ten years? c. Assuming that the interest is compounded every day, what is the amount accumulated after ten years? d. What is the observed effect of compounding at a higher frequency on the amount of money accumulated? Explain.
In: Finance