Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $3.00000 dividend at that time (D₃ = $3.00000) and believes that the dividend will grow by 15.60000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 3.78000% per year. Goodwin’s required return is 12.60000%. Fill in the following chart to determine Goodwin’s horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places.

Horizon Value:

Current Intrinsic Value:

Assuming that the markets are in equilibrium, Goodwin’s current expected dividend yield is ,_____ and Goodwin’s capital gains yield is ______

. Goodwin has been very successful, but it hasn’t paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin’s investment opportunities are poor. Is this statement a possible explanation for why the firm hasn’t paid a dividend yet? No Yes

Consider a bond with a coupon rate of 8 percent that pays semiannual coupon and matures in eight years. The market rate of return on bonds of this risk is currently 10 percent. What is the current value of a $1,000 face value bond?

$891.62

$830.58

$854.08

$843.07

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

R_A = 2.8% + 1.00R_M + e_A

R_B = –1.0% + 1.30R_M + e_B

σ_M = 18%; R-square_A = 0.27; R-square_B = 0.13

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? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the beta of portfolio Q? (Do not round intermediate calculations. Round your answer to 2 decimal places.

c. What is the "firm-specific" risk of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 4 decimal places.)

d. What is the covariance between the portfolio and the market index? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.

Constant Growth Valuation

Crisp Cookware's common stock is expected to pay a dividend of $1.5 a share at the end of this year (D₁ = $1.50); its beta is 1.05. The risk-free rate is 4.9% and the market risk premium is 6%. The dividend is expected to grow at some constant rate g_L, and the stock currently sells for $47 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at the end of 3 years (i.e., what is P3)? Do not round intermediate steps. Round your answer to the nearest cent.

A company currently pays a dividend of $1.75 per share (D₀ = $1.75). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.95, the risk-free rate is 6.5%, and the market risk premium is 4%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Swee Rien Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of RM1,500,000. The company’s board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9.50 percent. The cash inflows associated with the two projects are shown in the following table.

Cash inflows (CFt)

a) Find the payback period for each project.
b) Calculate the NPV of each project at 9.50 percent.
c) Compute the Profitability Index.
d) Derive the IRR of each project.
e) Rank the projects by each of the techniques used. Make and justify a recommendation.

Scenario Analysis

We are evaluating a project that costs $1,160,000, has a ten-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 44,000 units per year. Price per unit is $45, variable cost per unit is $20, and fixed costs are $645,000 per year. The tax rate is 35 percent, and we require a 20 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

NPV Best-case $

Worst-case $

Troy Industries purchased a new machine 4 year(s) ago for $82,000.

It is being depreciated under MACRS with a​ 5-year recovery period using the schedule.

Assume 40% ordinary and capital gains tax rates.

a. What is the book value of the​ machine?

b. Calculate the​ firm's tax liability if it sold the machine for each of the following​

amounts: $98,400​; $57,400​; $13,940​; and $9,800.

a. The remaining book value is

​$           . (Round to the nearest​ dollar.)

At year-end 2016, total assets for Arrington Inc. were $1.8 million and accounts payable were $325,000. Sales, which in 2016 were $2.4 million, are expected to increase by 15% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $445,000 in 2016, and retained earnings were $260,000. Arrington plans to sell new common stock in the amount of $65,000. The firm's profit margin on sales is 4%; 40% of earnings will be retained.

What were Arrington's total liabilities in 2016? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
$

How much new long-term debt financing will be needed in 2017? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round your intermediate calculations. Round your answer to the nearest cent. (Hint: AFN - New stock = New long-term debt.)
$

Capital Budgeting – Example 1

General Farm Supply is considering the feasibility of expanding their line of fertilizers. They evaluate such projects by determining the net present value and internal rate of return.

General recently completed a feasibility study that indicated they would be able to sell as much fertilizer as they can produce. The study was performed by Fertilizer Consultants, Inc. at a cost of $100,000.

General has also determined facility needs that will accompany the expansion. Warehouse expansion will cost $500,000 and will be depreciated using the 5-year MACRS depreciation schedule. (.20, .32, .192, .1152, .1152, .0576). Equipment installation costs will total $50,000. General currently owns land next to their existing facility that can be used for the expansion. The land was purchased 10 years ago for $5,000. Current market value for the land is $20,000.

In order to finance the expansion, General plans to issue $500,000 in bonds. The bonds will have a 10% coupon rate and will mature in 10 years. They will have to pay $50,000 per year in interest on the bonds.

General uses a corporate-wide hurdle rate of 10.1% when evaluating capital projects. Their marginal tax rate is 35%.

General has determined that the expansion will allow them to sell 1,000,000 pounds of fertilizer per year at an estimated price of $0.30 per pound. Fixed costs per year are forecast at $40,000. Variable costs of $0.10 per pound are forecast.

General forecasts the following one-time changes in working capital in year 0:

Inventory will increase $20,000

Accounts receivable will increase $10,000

Accounts payable will increase $8,000

Any increase in NWC should be recaptured at the end of year 7.

Due to anticipated technological changes in the fertilizer industry, General is forecasting zero cash flow from this project beyond year 7.

General forecasts that the equipment that was purchased for this project can be sold for $40,000 at the end of year 7.

Help General’s CFO evaluate the project by completing the following on the Excel spreadsheet provided:

Find annual cash flows for years 0 through 7

Find the net present value

Find the internal rate of return

Should General do the project? Why or why not?

. Amortization Table. You wish to buy a $40,000 car. The bank can finance you with a 3-year loan at a 4 percent APR. If you make a $7,000 down payment on the purchase. What are the monthly payments on your loan? How much will you pay in interest each year?

ABC company issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for these bonds on January 1, 2012 if the market price of the bond on that date is $950?

(i) Describe and interpret the assumptions related to the problem. (ii) Apply the appropriate mathematical model to solve the problem. (iii) Calculate the correct solution to the problem

ABC Golf Corporation Assignment:

ABC Golf Equipment Corporation has 500,000 shares outstanding and currently has no debt. The company has a marginal tax rate of 35% and the firm’s stock price is $27 per share. The firm’s unlevered beta is 1.5, the risk-free rate of return is 5%, and the expected market return is 10%.

The company is thinking of issuing bonds and simultaneously repurchasing a portion of its stock. Because the company is issuing bonds to repurchase the stock, there is no anticipated change to the stock price as a result of the stock buyback. The bonds can be issued with a 6% coupon, and under the new proposed structure the debt to capital ratio would be 7%. If the company’s debt to capital ratio exceeds 25%, the cost of debt would increase to a max rate of 8%. Company mandates require that the company’s debt to equity ratio remains at less than 3.0 at all times. The firm’s earnings are not expected to grow over time. All of its earnings will be paid out as dividends.

Use Excel for your calculations and answer the ten questions on the following pages. Your submission should consist of two files:

1) Submit a Word document clearly showing your solutions and how you achieved them

2) Also if possible please submit an Excel worksheet showing your spreadsheets that you used to calculate solutions.

Questions to answer:

1) Based on the given probabilities in the table above, what is the expected EBIT for ABC Golf Equipment Corporation?

2) If the market value equals the book value of the firm’s assets, what is the current market value of ABC Golf Equipment Corporation’s assets?

3) What is the current cost of equity to the firm?

4) Based on the current share price, what is the current dividend per share?

5) Based on the current share price, what is the current dividend yield?

6) If there is no change to the stock price as a result of the share repurchase, how much equity will shareholders own after the proposed capital restructuring?

7) After the proposed change in capital structure, how much debt will the company now carry?

8) Under these market conditions, what is the firm’s optimal debt to capital ratio for the firm?

9) What is the WACC at the optimal debt to capital ratio?

10) Under a new proposed tax cut, corporate tax rates would now be reduced to 21%. Explain how the new proposed tax plan affects the optimal capital structure. What would be the optimal capital structure under the new proposed tax plan?