Bonnie and Clyde the Houston’s company's pension fund management
division, with Bonnie having responsibility for fixed income
securities (primarily bonds) and Clyde being responsible for equity
investments. A major new client, Ms. Victoria, has requested that
Houston Company present an analysis of Sugar Land Company (SLC) she
is considering to purchase.
Assume that Sugar Land (SLC) has a beta coefficient of 1.2, that
the risk-free rate (the yield on 10-year Treasury-Note) is 7
percent, and that the market risk premium is 5 percent, (Survey of
all analysts).
1. According to CAPM, what is the required rate of return on
SLC’s stock?
2. Assume that Sugar Land is a constant growth company whose last
dividend D0, was $2.0, and whose dividend is
expected to grow indefinitely at a 6 percent
rate.
Answer the
followings:
a. What is the firm’s expected dividend stream over the next 3
years?
b. What is the firm’s current stock price?
c. What is the stock's expected value 1 year from
now?
d. What is the expected dividend yield, the capital gains yield,
and the total return during the first
year?
3. Now assume that the stock is currently selling at $30.29. No,
other changes.
a. What is the expected rate of return on the stock?
b. What would the stock price be if its dividends were expected to
have zero growth? (Zero growth model, K is the same but g=0)
In: Finance
A stock has a required return of 9%; the risk-free rate is 3%; and the market risk premium is 3%.
-Select-
New stock's required rate of return will be %. Round your answer to
two decimal places.
In: Finance
In: Finance
The MIT Whitehead Institute must choose between two cDNA microarray machines to expand their high-throughput genomic laboratory. Both of these machines have the same function, and the firm will only choose one vendor from which to purchase their machines.
The first machine, manufactured by Amersham Pharmacia (machine 1), will cost $350,000. The second machine, manufactured by PE Applied Biosystems (machine 2), will cost $300,000.
The cost of capital for both of these investments is 9.5%. The life for both machines is estimated to be 5 years. During this period, cash flows for machine 1 will be $17,000 per year and cash flows for machine 2 will be $8,000 per year. These cash flows include depreciation expenses.
Calculate the NPV and IRR for each machine using MS Excel. Then, select the best choice for the MIT Whitehead Institute. Under your analysis, briefly explain the reasoning for your decision and how it might impact operations over the next five years
In: Finance
A call option with a strike price of $65 costs $8. A put option with a strike price of $58 costs $9. 1) How can a strangle be created? 2) With the strangle created above, what is the profit/loss if the stock price is $41? 3) With the strangle created above, when would the investor gain a positive profit?
In: Finance
Maggie's Muffins Bakery generated $4,000,000 in sales during 2016, and its year-end total assets were $2,600,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2017, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 4%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Round your answers to the nearest whole.
Sales can increase by $ , that is by %.
In: Finance
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.
The firm's weighted average cost of capital is 12%, and it has $1,970,000 of debt at market value and $390,000
of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024,
are given in the table,
Beyond 2024 to infinity, the firm expects its free cash flow to grow by 3% annually.
2020 $220,000
2021 $280,000
2022 $320,000
2023 $390,000
2024 $430,000
a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?
In: Finance
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 5.0% + 1.30RM + eA
RB = –2.0% + 1.60RM + eB
σM = 20%; R-squareA = 0.20; R-squareB = 0.12
Assume you create a portfolio Q, with investment proportions of 0.40 in a risky portfolio P, 0.35 in the market index, and 0.25 in T-bill. Portfolio P is composed of 70% Stock A and 30% Stock B.
a. What is the standard deviation of portfolio Q?
b. What is the beta of portfolio Q?
c. What is the "firm-specific" risk of portfolio Q?
d. What is the covariance between the portfolio and the market index?
In: Finance
|
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. |
||||||
|
Martin Enterprises needs someone to supply it with 144,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $1,005,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $142,000. Your fixed production costs will be $580,000 per year, and your variable production costs should be $19.25 per carton. You also need an initial investment in net working capital of $128,000. Assume your tax rate is 24 percent and you require a return of 11 percent on your investment.
|
a. NPV __________________
b. Breakeven numbers of Cartons ___________
c. Breakeven fixed costs______________
In: Finance
|
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $3,700,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $475,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $530,000 at the end of Year 11. |
| a. |
What is the IRR for the gold mine? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. |
The Utah Mining Corporation requires a return of 11 percent on such undertakings. Should the mine be opened? |
|
In: Finance
|
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 15 percent. |
| Year | Deepwater Fishing | New Submarine Ride | ||||
| 0 | −$ | 975,000 | −$ | 1,900,000 | ||
| 1 | 395,000 | 950,000 | ||||
| 2 | 530,000 | 825,000 | ||||
| 3 | 445,000 | 800,000 | ||||
| a-1. | Compute the IRR for both projects. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
| a-2. |
Based on the IRR, which project should you choose? |
|
| b-1. |
Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b-2. |
Based on the incremental IRR, which project should you choose? |
|
| c-1. |
Compute the NPV for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| c-2. |
Based on the NPV, which project should you choose? |
|
| c-3. | Is the NPV decision consistent with the incremental IRR rule? |
|
In: Finance
|
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: |
| Year | Project A | Project B | Project C | ||||||
| 0 | −$ | 190,000 | −$ | 355,000 | −$ | 190,000 | |||
| 1 | 123,000 | 222,000 | 133,000 | ||||||
| 2 | 123,000 | 222,000 | 103,000 | ||||||
| Suppose the relevant discount rate is 9 percent per year. |
| a. |
Compute the profitability index for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) |
| b. |
Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) |
| c. |
Suppose these three projects are independent. Which project(s) should Amaro accept based on the profitability index rule? |
|
| d. |
Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule? |
|
| e. |
Suppose Amaro’s budget for these projects is $545,000. The projects are not divisible. Which project(s) should Amaro accept? |
|
In: Finance
|
Novell, Inc., has the following mutually exclusive projects. |
| Year | Project A | Project B | ||
| 0 | –$34,000 | –$37,000 | ||
| 1 | 19,000 | 20,000 | ||
| 2 | 15,500 | 14,000 | ||
| 3 | 4,300 | 15,500 | ||
| a-1. |
Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) |
| a-2. |
If the company's payback period is two years, which, if either, of these projects should be chosen? |
|
| b-1. |
What is the NPV for each project if the appropriate discount rate is 16 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| b-2. |
Which, if either, of these projects should be chosen if the appropriate discount rate is 16 percent? |
|
In: Finance
|
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $107,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 3 percent per year forever. The project requires an initial investment of $1,600,000. |
| a-1 |
What is the NPV for the project if the required return is 12 percent? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| a-2 |
If the company requires a return of 12 percent on such undertakings, should the firm accept or reject the project? |
|
| b. |
The company is somewhat unsure about the assumption of a growth rate of 3 percent in its cash flows. At what constant growth rate would the company break even if it still required a return of 12 percent on investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
|
Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate is 12 percent. |
| Year | Board Game | DVD | ||||
| 0 | –$ | 1,200 | –$ | 2,700 | ||
| 1 | 690 | 1,750 | ||||
| 2 | 950 | 1,570 | ||||
| 3 | 210 | 800 | ||||
| a. |
What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| b. | What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| c. | What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d. | What is the incremental IRR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance