In 20YY , Australia’s BHP Billiton Limited’s put a bid for Britain’s Rio Tinto plc. This hostile takeover attempt, if successful, would have been the third largest takeover in history. However the failure left both companies feeling bruised and battered. The merger was opposed on anti-trust grounds with the proposal that the merger would actually raise the price of iron ore and other key products. Where are the synergies, or cost savings, expected from the merger?

1. Basic concepts

Finance, or financial management, requires the knowledge and precise use of the language of the field. Match the terms relating to the basic terminology and concepts of the time value of money on the left with the descriptions of the terms on the right. Read each description carefully and type the letter of the description in the Answer column next to the correct term. These are not necessarily complete definitions, but there is only one possible answer for each term.

Term

Answer

Description

Discounting

A. A 6% return that you could have earned if you had made a particular investment.

Time value of money

B. A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely.

Amortized loan

C. A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.

Ordinary annuity

D. An interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed.

Annual percentage rate

E. The process of determining the present value of a cash flow or series of cash flows to be received or paid in the future.

Annuity due

F. A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years.

Perpetuity

G. A series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, quarterly, and so on).

Future value

H. One of the four major time value of money terms; the amount to which an individual cash flow or series of cash payments or receipts will grow over a period of time when earning interest at a given rate of interest.

Amortization schedule

I. A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.

Opportunity cost of funds

J. A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.

Time value of money calculations can be solved using a mathematical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the present value of an ordinary annuity?

a. PMT x {[(1 + r)^n – 1]/r} x (1 + r)

b. PMT/r

c. PMT x {[(1 + r)^n– 1]/r}

d. PMT x {1 – [1/(1 + r)^n]}/r

A pharmaceutical company will spend $1,500,000 each year for 3 years to develop a new drug (years 0, 1, 2). After that (starting year 3), they will earn $900,000 in profits per year for 8 years before thepatent runs out. No extra profits after the patent is gone. If future payments are discounted using a 10% interest rate (compounded annually), is this new drug a profitable venture? Should you lease or buy equipment?

Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can borrow fixed at 16.2 percent and floating at LIBOR+ 0.35 percent. A financial intermediary charges a fee of 0.14 percent. Company A wishes to borrow floating and company B wishes to borrow fixed. Assume the gain is evenly split between the two parties and floating rate legs are LIBOR. Design the swap. What is the company A's fixed rate leg and company B's fixed rate leg, respectively.

(Extra Credit) What is the value of the following cash flows in year 6? What is the value today? Assume interest rates today are 6.5%, then rates will be 6.25% for the next 4 years, 3.75% for the next 3 years, 5.3% for the next 4 years, and 3.75% thereafter.

Year Cash Flow

6 $5,675

8 $9,725

10 $6,750

17 $11,750

Investors expect the following series of dividends from a particular common stock: Year 1 $0.95 Year 2 $1.03 Year 3 $1.18 Year 4 $1.24 Year 5 $1.32 After the 5th year, dividends will grow at a constant rate. If the required rate of return on the stock is 8% and the current market price is $47.86, what is the long-term rate of dividend growth expected by the market?

You are considering investing in a $1000 face value 8% semi-annual coupon bond with 3 years left to maturity. Similar bonds are yielding 9.5% in the market, so the current price of this bond is _______, and if market interest rates drop to 8.25% the selling price of the bond would _____________

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $250,000. The old machine is being depreciated by $120,000 per year, using the straight-line method.

The new machine has a purchase price of $1,200,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $200,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

1. What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
   $
   
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2
   3
   4
   5

3. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

4. Should the firm purchase the new machine?
   -Select-Yes or No
   
   Support your answer.
   
5. In general, how would each of the following factors affect the investment decision, and how should each be treated?
   1. The expected life of the existing machine decreases. 2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year.

home / study / business / finance / finance questions and answers / rak, inc., has no debt outstanding and a total market value of $240,000. earnings before interest ... Question: RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest... (4 bookmarks) RAK, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 20 percent lower. RAK is considering a $150,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 15,000 shares outstanding. RAK has a tax rate of 35 percent.

A7X Corp. just paid a dividend of $1.35 per share. The dividends are expected to grow at 30 percent for the next 7 years and then level off to a growth rate of 8 percent indefinitely. If the required return is 14 percent, what is the price of the stock today?

$77.47

$75.92

$60.94

$79.02

$.14

1.

You must evaluate a proposal to buy a new milling machine. The base price is $128,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $44,800. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $49,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. The cost of research is an incremental cash flow and should be included in the analysis.
   3. Only the tax effect of the research expenses should be included in the analysis.
   4. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   5. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   
   -Select-

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-Yes or No

2.

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $290,000, and it would cost another $58,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $101,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $76,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

3. If the WACC is 14%, should the spectrometer be purchased?
   -Select-Yes or No

The background information and instruction of the question is provided below, and i only asked for solving the table 4 and table 5, thank you

Scenario 2:

Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the current cost of the wine that you want to import is €2,500,000. The wine in France can be shipped to the United States immediately but you have three months to conduct payment.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Britain. The payment of £2,500,000 for the export to Britain will be received twelve months from now.

You consider different transaction hedges, namely forwards, options and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

Please solve only table 4 and table 5

Table 4: France import cost with option hedge:

Table 5: France: Exchange rate hedges compared:

Which hedging technique should be applied? ________________________________

16. Cost of trade credit

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which affect the cost of asset of sale for the buyer as well as the seller.

Consider this case:

Free Spirit Industries Inc. buys on terms of 2.5/15, net 45 from its chief supplier.

If Free Spirit receives an invoice for $1,545.78, what would be the true price of this invoice?

$2,110.00

$1,281.07

$1,507.14

$1,582.50

The nominal annual cost of the trade credit extended by the supplier is ____________ . (Note: Assume there are 365 days in a year.)

The effective annual rate of interest on trade credit is ______________

Suppose Free Spirit does not take advantage of the discount and then chooses to pay its supplier late—so that on average, Free Spirit will pay its supplier on the 50th day after the sale. As a result, Free Spirit can decrease its nominal cost of trade credit by___________% by paying late.