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The Saunders Investment Bank has the following financing outstanding. |
| Debt: |
54,000 bonds with a coupon rate of 5 percent and a current price quote of 106.9; the bonds have 16 years to maturity and a par value of $1,000. 17,700 zero coupon bonds with a price quote of 28.8, 26 years until maturity, and a par value of $10,000. Both bonds have semiannual compounding. |
| Preferred stock: |
149,000 shares of 3.5 percent preferred stock with a current price of $90 and a par value of $100. |
| Common stock: |
2,180,000 shares of common stock; the current price is $86 and the beta of the stock is 1.10. |
| Market: |
The corporate tax rate is 24 percent, the market risk premium is 7 percent, and the risk-free rate is 3.4 percent. |
| What is the WACC for the company? |
In: Finance
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Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .85. It’s considering building a new $55 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.1 million in perpetuity. The company raises all equity from outside financing. There are three financing options: |
| 1. |
A new issue of common stock: The flotation costs of the new common stock would be 8.5 percent of the amount raised. The required return on the company’s new equity is 13 percent. |
| 2. |
A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.6 percent, they will sell at par. |
| 3. |
Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. Assume there is no difference between the pretax and aftertax accounts payable costs. |
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What is the NPV of the new plant? Assume that PC has a 25 percent tax rate. |
In: Finance
Explain the difference between a parallel and non-parallel shift in interest rates. Then explain whether the duration matching hedging approach works for both a non-parallel and parallel shift interest rates.
In: Finance
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Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1,850,000, and its economic life is five years. The machine will be fully depreciated by the straight-line method. The machine will produce 24,000 keyboards each year. The price of each keyboard will be $68 in the first year and will increase by 3 percent per year. The production cost per keyboard will be $31 in the first year and will increase by 4 percent per year. The project will have an annual fixed cost of $300,000 and require an immediate investment of $265,000 in net working capital. The corporate tax rate for the company is 23 percent. The appropriate discount rate is 8 percent. |
| What is the NPV of the investment? |
In: Finance
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $150,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $865,000 per year. The fixed costs associated with this will be $216,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $910,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 21 percent and a required return of 14 percent.
| Calculate the Time 0 cash flow for this project. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
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Calculate the annual OCF for this project. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
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Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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Calculate the IRR for this project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
We are evaluating a project that costs $1,950,000, has a life of 7 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,800 units per year. Price per unit is $38.49, variable cost per unit is $23.65, and fixed costs are $842,000 per year. The tax rate is 24 percent, and we require a return of 12 percent 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. (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.) |
Question:
| OCF | NPV | |
| best-case | ||
| worst-case |
In: Finance
Please respond to the following:
Why might the constant dividend growth model (CDGM) and capital asset pricing model (CAPM) produce different estimates of the cost of equity capital used in the weighted average cost of capital (WACC)? Describe the difference between permanent and temporary working capital. What are some factors an organization considers when it chooses the mix of long- and short-term capital to finance the organization’s activities?
In: Finance
The capital budgeting committee for Laroche Industries is meeting. Laroche is a North American conglomerate that has several divisions. Schoeman Products, a division of Laroche, has evaluated several investment projects and now must choose the subset of them that fits within its C$40 million capital budget. The outlays and NPVs for the six projects follow. Schoeman cannot buy fractional projects and must buy all or none of a project. The currency amounts are in millions of Canadian dollars.
| Project | Outlay | PV of Future Cash Flows | NPV |
| 1 | 31 | 44 | 13 |
| 2 | 15 | 21 | 6 |
| 3 | 12 | 16.5 | 4.5 |
| 4 | 10 | 13 | 3 |
| 5 | 8 | 11 | 3 |
| 6 | 6 | 8 | 2 |
Schoeman wants to determine which subset of the projects is optimal.
A proposal comes from the division Society Services. The cash flows relating to the project is as follow:
An outlay pf C$190 million at time 0.
Cash flows of C$40 million per year for years 1-10 if demand is high.
Cash flows of C$20 million per year for years 1-10 if demand is low.
The probability of high demand is 0.50, and the probability of low demand is 0.50.
The required rate of return is 10 percent.
The internal auditor for Laroche Industries has made several suggestions for improving capital budgeting processes at the company. The internal audito's suggestions are as follows:
Suggestion:1 "In order to put all capital budgeting proposalson an equal footing, the projects should all use the risk-free rate for the required rate of retun."
Suggestion: 2 "When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR."
1. The optimal subset of the six projects that Schoeman is considering consits of which projects?
a. 1 and 5
b. 2, 3, and 4
c. 2, 3, and 5
d. 2, 4, 5, and 6
2. What is the NPV (C$ millions) of the project for Society Services?
a. -6.11
b. -5.66
c. 2.33
d. 5.58
3. Should the capital budgeting committee accept the internal auditor's first and second suggestions?
Suggestions 1 Suggestion 2
a. No No
b. No Yes
c. Yes No
d. Yes Yes
Explain/Show How You Got Each Answer.
In: Finance
John Jones, CFA, is head of the research department at
Peninsular Research. Peninsular has a client who has inquired about
the valuation method best suited for comparing companies in an
industry with the following characteristics:
• Principal competitors within the industry are located in the
United States, France, Japan, and Brazil.
• The industry is currently operating at a cyclical low, with many companies reporting losses. Jones recommends that the client consider the following valuation ratios:
1. P/E.
2. P/B.
3. EV/S.
Determine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with one reason that makes that ratio superior to either of the other two ratios in this case.
In: Finance
"IPO's are like hors d'oeuvers at a cocktail party. When the tray comes around, take some wether you are hungry or not." What does he mean by this statement? Does the IPO market provide evidence for or against the efficient market hypothesis? Explain.
In: Finance
a) Use the information below to calculate the bid cross rate between C$ and € in the "C$/€ " format.
| Bid | Ask | |
| Canadian Dollar | $0.7529 | $0.7774 |
| Euro | $1.1545 | $1.1644 |
Answer Format: Keep four decimals; use the price currency as the unit. Example: 4.1234(C$) or 4.1234( € )
b) An English business man just received €187,039 payment from a European company. He obtained currency quotes from his bank: €1.116/£ -- €1.1256/£. Estimate his £ cash flow.
Answer format: keep four decimal places; include the price currency only; do not use thousand separator. Example: 2122.1345 (£) or 2122.1345 (€)
c) On May 1 of a certain year the pound to euro exchange rate was £0.1.1245/€. On July 15 the exchange rate was £0.1.1298/€ . Therefore during the two and half months period, euro appreciated against pound.
True or False
d) Suppose you obtained quotes for euro from your bank: $1.1265/€ -- $1.1305/€. Calculate the bid ask spread.
Answer format: use four decimals; do not report percentages. Example: 0.0011.
In: Finance
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Unequal Lives Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 8%.
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In: Finance
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
| Year | Cash Flow | ||
| 1 | $ | 20,000 | |
| 2 | 25,000 | ||
| 3 | 26,000 | ||
| 4 | 30,000 | ||
| 5 | 15,000 | ||
a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
|
b. What is the internal rate of return?
(Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places.)
|
c. Should the project be accepted?
| Yes | |
| No |
In: Finance
You are buying a house and the mortgage company offers to let you pay a "point" (1.0 % of the total amount of the loan) to reduce your APR from 6.50 % to 6.25 % on your $ 400000, 30-year mortgage with monthly payments. If you plan to be in the house for at least five years, should you do it? (Note: Be careful not to round any intermediate steps less than six decimal places.)
In: Finance
Fey Fashions expects the following dividend pattern over the next seven years:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 |
| 1.5 | 1.62 | 1.75 | 1.89 | 2.04 | 2.2 | 2.38 |
. The company will then have a constant dividend of$2.60 forever. What is the stock's price today if an investor wants to earn
a.
16%?
b.
23%?
In: Finance