the main services that financial institutions provide as financial intermediaries
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You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 12 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 10 years to maturity. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
BOND PRICE___________
b. With 5 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
NEW BOND PRICE________________
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***Please show your math work, thank you!
Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 2.0 on the market index. Firm-specific returns all have a standard deviation of 32%.
Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +3.0%, and the other half have an alpha of −3.0%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.
a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)
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b. How does your answer change if the analyst examines 50 stocks instead of 20 stocks? 100 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)
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Market Value Capital Structure
Suppose the Schoof Company has this book value balance sheet:
| Current assets | $30,000,000 | Current liabilities | $20,000,000 | |||
| Fixed assets | 70,000,000 | Notes payable | $10,000,000 | |||
| Long-term debt | 30,000,000 | |||||
| Common stock (1 million shares) | 1,000,000 | |||||
| Retained earnings | 39,000,000 | |||||
| Total assets | $100,000,000 | Total liabilities and equity | $100,000,000 |
The notes payable are to banks, and the interest rate on this debt is 11%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 7%, and a 25-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $50 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.
| Short-term debt | $ | % | ||
| Long-term debt | ||||
| Common equity | ||||
| Total capital | $ | % |
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West Fraser Timber Company (WFT) is expected to have free cash flow in the coming year of $2 million and its free cash flow is expected maintain at a sustainable growth rate of 4% per year. It has a debt worth $10 million. It’s equity cost of capital is 12%, cost of debt before tax is 6%, and it pays a corporate tax rate of 30%. If WFT Company maintains a debt-equity ratio of 0.5 and the company has 3 million common shares outstanding, what is the fair value of WFT stock?
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Consider an asset that costs $475,200 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $59,400.
Required : If the relevant tax rate is 31 percent, what is the aftertax cash flow from the sale of this asset?
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A project has an unlevered NPV of $1.5 million. To finance the project, debt is being issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5-year life. The debt of $10 million is being issued at the market interest rate of 10 percent paid annually, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 21 percent, calculate the project's APV.
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$2,441,107 |
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$1,494,028 |
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$2,384,312 |
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$2,245,618 |
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$1,909,417 |
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David has a savings account with a 7,000 balance today. The account earns an annual percentage rate of interest of 2.25%, compounded monthly. David plans to make no other deposits or withdrawals. How many years will it take David's account balance to double?
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The Metchosin Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $3,100 every six months over the subsequent eight years, and finally pays $3,400 every six months over the last six years. Bond N also has a face value of $30,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 12% compounded semiannually, what is the current price of bond M and bond N? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
| Current Price | |
| Bond M | $ |
| Bond N | $ |
In: Finance
In: Finance
In: Finance
In: Finance
You would like to buy a house that costs $350,000. You have $50,000 in cash that you can put down on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 7% per year. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining balance on the mortgage. How much will this balloon payment be?
The PV of the annuity is (Round to the nearest dollar.)
The balloon payment is (Round to the nearest dollar.)
$nothing .
(Round to the nearest dollar.)
In: Finance
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Etonic Inc. is considering an investment of $375,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $255,000 and $80,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. The company will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $55,000 in nominal terms at that time. The one-time net working capital investment of $15,000 is required immediately and will be recovered at the end of the project. The corporate tax rate is 38 percent. |
| What is the project’s total nominal cash flow from assets for each year? (A negative answers should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) |
| Cash flow | |
| Year 0 | $ |
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
| Year 4 | $ |
| Year 5 | $ |
In: Finance
Problem 11-20 Project Analysis [LO1, 2]
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McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $865 per set and have a variable cost of $425 per set. The company has spent $340,000 for a marketing study that determined the company will sell 70,600 sets per year for seven years. The marketing study also determined that the company will lose sales of 13,800 sets of its high-priced clubs. The high-priced clubs sell at $1,235 and have variable costs of $695. The company will also increase sales of its cheap clubs by 15,800 sets. The cheap clubs sell for $455 and have variable costs of $245 per set. The fixed costs each year will be $10,750,000. The company has also spent $2,900,000 on research and development for the new clubs. The plant and equipment required will cost $39,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,600,000 that will be returned at the end of the project. The tax rate is 24 percent, and the cost of capital is 12 percent. |
| a. |
Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
| b. | Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c. | Calculate the IRR. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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