You have just completed the first half of one of the most
challenging yet exhilarating classes of your college career. You
are 19 years old. After listening to the wise words of your awesome
professor and the thrilling representatives from Calm Waters
Financial, you have decided being a millionaire is well within your
reach. You decide you want to be a millionaire by the age of 59.
You have looked around and found a mutual fund that expects an
average return of 7% compounded monthly (totally feasible).
QUESTION 1- If you are making your plan today and hope to start
saving at the end of the month, how much do you need to deposit
each month to reach your goal? QUESTION 2 - How much would you end
up contributing to your million? After a bit of calculation, you
decide you don’t want to wait until you are 59, and shift your goal
to being a millionaire by 49. QUESTION 3- How much will
you need to invest each month now? When you see the number you
realize it might be a bit to aggressive for you based on your
budget. You think about it and remember that if you can find a fund
yielding a high average return, you could get that payment down.
QUESTION 4 - You and Google have a late night together and you find
a fund that averages 12% compounded monthly. What impact does that
have on your monthly payment? QUESTION 5 - How much do you
contribute with these changes?
In: Finance
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Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 45 percent and makes interest payments of $46,000 at the end of each year. The cost of the firm’s levered equity is 19 percent. Each store estimates that annual sales will be $1.335 million; annual cost of goods sold will be $765,000; and annual general and administrative costs will be $425,000. These cash flows are expected to remain the same forever. The corporate tax rate is 24 percent. |
| a. |
Use the flow to equity approach to determine the value of the company’s equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) |
| b. | What is the total value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) |
In: Finance
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Knotts, Inc., an all-equity firm, is considering an investment of $1.77 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $606,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $56,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 25 percent. |
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Using the adjusted present value method, calculate the APV of the project. |
In: Finance
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Optimal Capital Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $17 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 35% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 11%. BEA has a beta of 0.9.
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In: Finance
| Click here to read the eBook: The Cost of Retained Earnings,
rs Problem Walk-Through COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 4% per year. Callahan's common stock currently sells for $22.75 per share; its last dividend was $2.50; and it will pay a $2.60 dividend at the end of the current year.
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In: Finance
The state lottery's million-dollar payout provides for $33 million(s) to be paid over 1919 years in 2020 payments of $ 150 comma 000$150,000. The first $ 150 comma 000$150,000 payment is made immediately, and the 1919 remaining $ 150 comma 000$150,000 payments occur at the end of each of the next 1919 years. If 1212 percent is the appropriate discount rate, what is the present value of this stream of cash flows? If 2424 percent is the appropriate discount rate, what is the present value of the cash flows?
In: Finance
Consider the following information of Petronas Bond
| Description | Petronas Bond |
| Face value | RM 1000 |
| Maturity | 5 YEARS |
| Coupon rate | 9.00% per annum |
| Compounding (m) | Semiannually |
a) Assuming annual interest rate is 6.00% on the bond, calculate
the value of the bond.
b) Illustrate the discounting cash flows using the Macaulay
Duration Schedule.
c) Compute
i. Modified duration.
ii. Convexity
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In: Finance
QUESTION 2 [35 MARKS]
Consider the following information of Petronas Bond
Description
Petronas Bond
Face value
RM1,000
Maturity
5 Years
Coupon rate
9.00% per annum
Compounding (m)
Semiannually
a) Assuming annual interest rate is 6.00% on the bond, calculate
the value of the bond.
b) Illustrate the discounting cash flows using the Macaulay
Duration Schedule.
c) Compute
i. Modified duration.
In: Finance
1. In the following ordinary annuity, the interest is compounded
with each payment, and the payment is made at the end of the
compounding period.
Find the accumulated amount of the annuity. (Round your answer to
the nearest cent.)
$1000 monthly at 6.3% for 20 years.
2. In the following ordinary annuity, the interest is compounded
with each payment, and the payment is made at the end of the
compounding period.
Find the required payment for the sinking fund. (Round your answer
to the nearest cent.)
Monthly deposits earning 5% to accumulate $6000 after 10 years.
3. In the following ordinary annuity, the interest is compounded
with each payment, and the payment is made at the end of the
compounding period.
Find the required payment for the sinking fund. (Round your answer
to the nearest cent.)
Yearly deposits earning 12.2% to accumulate $5500 after 12 years.
4. In the following ordinary annuity, the interest is compounded
with each payment, and the payment is made at the end of the
compounding period.
Find the amount of time needed for the sinking fund to reach the
given accumulated amount. (Round your answer to two decimal
places.)
$265 monthly at 5.8% to accumulate $25,000.
In: Finance
The Lost Continent Store pays a constant dividend. Last year, the dividend yield was 5.75 percent when the stock was selling for $67.5 a share. What must the stock price be today if the market currently requires a 5.25 percent dividend yield on this stock?
In: Finance
You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover’s basic price is $200,000, and it would cost another $30,000 to modify it for special use. Assume that the mover falls into the MACRS 5-year class, it would be sold after 4 years for $60,000, and it would require an increase in net operating working capital (spare parts inventory) of $10,000. The earth mover would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40 percent and the project’s cost of capital is 10 percent. Evaluate the project using the NPV rule and the IRR rule. Evaluating a Cost Saving Project Year 0 Year 1 Year 2 Year 3 Year 4 Acquisition - 5 Year Life Earth Mover ?? Installation Costs ?? Total Initial Investment $ - Savings in Costs ?? ?? ?? ?? Depreciation Rate (5 Year) ?? ?? ?? ?? Total Depreciation Costs ?? ?? ?? ?? Earnings Before Income Tax (EBIT) ?? ?? ?? ?? Tax Rate ?? ?? ?? ?? Total Taxes ?? ?? ?? ?? Net Operating Profits (NOPAT) ?? ?? ?? ?? Add Back Depreciation ?? ?? ?? ?? Operating Cash Flow ?? ?? ?? ?? Net Operating Working Capital ?? ?? ?? ?? ?? Increase in NOWC ?? ?? ?? ?? ?? Total Annual Project Cash Flow ?? ?? ?? ?? ?? Terminal Year Cash Flow Machine Sale ?? Less: Book Value of Machine ?? Profit on Sale ?? Tax on Profit (40%) ?? Net Salvage Value on Equipment ?? Free Cash Flow ?? ?? ?? ?? ?? Required Rate of Return (WACC) ?? NPV ?? IRR ??
In: Finance
Use the bond term's below to answer the question
Maturity 7 years
Coupon Rate 4%
Face value $1,000
Annual Coupons
YTM 3% (interest rate)
Assuming the YTM remains constant throughout the bond's life, what
is the bond's price in year 4?
A) $1,062.30 B) $1,028.29 C) $1,083.55 D)$1,008.12
In: Finance
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Trapper Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 320,000 shares of stock outstanding. Under Plan II, there would be 240,000 shares of stock outstanding and $2,272,000 in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes. |
| a. | Use M&M Proposition I to find the price per share of equity. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| b. | What is the value of the firm under Plan I? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| c. | What is the value of the firm under Plan II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
In: Finance
George, the automotive manufacturer, had a beta of 1.05 in 1995. It had $13 billion in debt outstanding in that year and 355 million shares trading at $50 per share. The marginal tax was 36%
1. Estimate the unlevered beta of the firm
2. Suppose the firm paid out a special dividend of $5 billion, what is the new beta for George after the special dividend? Hint: dividend reduces equity
3. How does the dividend payout affect the cost of equity and cost of debt for George?
In: Finance
Briefly describe how analysts typically forecast each of the following items: Sales, Cost of Sales, Inventory, and Tax expense.
In: Finance