Calculation of individual costs and WACC - Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital The weighted average cost is to be measured by using the following weights: 30% long term debt, 20% preferred stock, and 50% common stock equity.

Debt - the firm can sell for $1010 a 15-year, $1,000 par value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 3.5% of the par value is required.

Preferred stock - 9.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $6 per share must be paid to the underwriters.

Common stock - The firm's common stock is currently selling for $59.43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.40 dividend payment D₀, that the company just recently made. If the company wants to issue new new common stock, it will sell them $1.50 below the current market price to attract investors, and the company will pay $3.50 per share in flotation costs.

a. calculate the after-tax cost of debt.

b. calculate the cost of preferred stock.

c. calculate the cost of common stock (both retained earnings and new common stock).

d. calculate the WACC for Dillon Labs.

The one rate that truly represents the interest earned in a year is the annual effective yield. (or effective annual interest rate).

True

False

Market interest rates are supposed to reflect any anticipated changes in earning power as well as purchasing power in the economy.

True

False

When you pay cash for a car, you lose the opportunity to earn interest on the money you spend.

True

False

An asset manager follows an active international asset allocation strategy. The average execution cost for a buy or a sell order is forecasted at 0.6%. On average, the manager turns over the portfolio once a year. Various administrative costs include a custodial cost amount of 0.5% per year of assets under management. The annual management fee is 1% of assets under management. The annual expected return before costs is 14% compared to an expected return of 10% on a passive global benchmark (some global index).
1. What is the annual expected return net of execution costs?
2. What is the net annual expected return for the client?
3. Should the client expect the portfolio to outperform the global index used as a benchmark?

The cost of capital represents the weighted average cost of all sources of long-term financing to the firm, is normally the discount rate to use in analyzing an investment, is based on the valuation techniques from the previous chapter and is applied to bonds, preferred stock and common stock.

What does this mean?

on May 2nd you buy 30 contracts of September reliance futures at rupees 420/share assume that each contact covers 50 shares the initial margin is rupees 900 /contract and maintenance margin rupees 675/contract
daily settlement prices are as follows
may 2nd -409
may 3rd-433
may4th-418
May 5th-423
whenever you allow to withdraw From margin account you are withdrawing half the maximum amount each day describe what changes take place in the margin account at the end of each day?

1. Interest Rate Parity, Purchasing Power Parity, International Fisher deEffect Separated by more than 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following information has been collected from the respective areas: Assumptions London New York Spot exchange rate ($/pound) 1.3264 1.3264 One-year Treasury bill rate 1.5% 2.5% Expected inflation rate Unknown 2.0% a. Estimate today's one-year forward exchange rate F between the dollar and the pound using Covered Interest Rate Parity. b. Find approximate expected inflation in London next year. Is it smaller or larger than New York expected inflation? Why? You can do the forecast using PPP or International Fisher Effect. If you use PPP then assume that the Expected exchange rate E(S) is the same as the forward exchange rate F that you found in (a). Then solve for expected inflation in London using PPP formula. If you use International Fisher effect assume that the real interest rates for two countries are the same.

Please explain what should the investor know about Corporate Bonds vs. Municipal Bonds before deciding to invest.

Larry’s best friend, Garfield, owns a lasagna factory. Garfield’s financial skills are not very strong, so he asked Larry to take a look at his financials. Here is the information Garfield provided to Larry for 2019.

- Sales were $23,730

- COGS were $16,780

- Depreciation was $2,840

- Interest paid was $414

- Tax rate was 35%

- The paid dividends were $616  

Garfield also gathered some balance sheet information for 2018 and 2019. The numbers are presented in the following table. December 31, 2018 December 31, 2019 Current Assets $2,940 $3,528 Net Fixed Assets $16,560 $18,840 Current Liabilities $2,592 $2,484

Because Larry is very busy following the current market developments, he asked you to help him. You must

a) Compute the net income

b) Compute the operating cash flow

c) Compute the free cash flow

d) Explain and interpret the positive or negative sign of your answer in part c.

Check point: OCF = $5,511.50

1. What’s the cost of each component of capital and which need to be adjusted?
   • What do the IRR and NPV tell us?
   • what it means for a stock to be in equilibrium?
   • what is a callable bond, when will a bond be called and how that helps/hurts an investor?

PROBLEM # 4:

You are considering investing $300,000 in an activity which will generate a yearly income of $25,000 for the first 5 year, thereafter the income will increase by $7,000 per year for the following 10 years, when the life of the investment will end. You know that the ongoing money market interest rate is 5%.

1. Should you proceed with the investment? (show the equation)
2. Plot the NPW of the investment for i= 3%, 5%, 7%, 8%, 9%, 10% . At what point does the investment becomes unattractive?

Q1) A(n) 8.3% bond matures in 7 years and has a current yield (not YTM) of 6%. The bond's current trading price is $________.

Q2) A 4% coupon bond with 6 months remaining until maturity is currently trading at $997.26. Assume semi-annual coupon payments. The bond's YTM is__________%.

If you can do both, please do! Thank you.

Peter and Blair recently reviewed their future retirement income and expense projections. They hope to retire in 29 years and anticipate they will need funding for an additional 21 years. They determined that they would have a retirement income of $62304 in today's dollars, but they would actually need $45000 in retirement income to meet all of their objectives. Calculate the total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent. The total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent is $______________

Suppose that one year US and Polish rates are 2.5% and 6.5% respectively. One year US inflation forecast is 1.5%. What should be the expected inflation rate in the Poland if we can assume that International Fisher Effect holds? [Hint: Use accurate Fisher Effect formula on slide #5 in Parity Relationships-2 ; do not use approximation]

a. 0.90%

b. 5.46%

c. 1.50%

d. 6.50%

If the interest rate is 11%, what is the Equivalent Annual Cost (EAC) of the following machine: Cost: $9,000 Life: 10 years Annual cost to operate: $2,000 Answer to 2 decimal places, for example 970.12