Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Exhibit 16.1. Assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Exhibit 16.1. PP is considering changing its capital structure to one with 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations?

Ben buys a 180-day $100 000 bank bill, 30 days after issue, for a price of $98 140.70 (the purchase yield is 4.61% p.a.). After holding the bill for 30 days Ben sells it at a yield of 4.56% p.a. (simple interest).

a. Construct a Cash flow diagram from Ben's perspective

b. Find the sale price.

c. Find Ben's simple interest yield p.a. (as a percentage, rounded to 2 decimal places) over the 30-day holding period.

d. Explain how Ben's yield calculated in b. would change (increase or decrease) if the sale yield was less than 4.56% p.a. Why would the yield change in this way?

e. When a bank bill is purchased and sold before maturity the dollar return consists of two components—a capital component and an interest component. State how to calculate the capital component.

f. Explain in your own words and with reference to the purchase yield and the sale yield when the capital component will be a gain and when it will be a loss.

g. Use your explanation in (f.) to determine whether the capital component of Ben's bank bill investment will be a gain or a loss. Note that you are not required to calculate the actual value of the capital component.

Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 14%. New common stock in an amount up to $8 million would have a cost of re = 17%. Furthermore, Olsen can raise up to $2 million of debt at an interest rate of rd = 11% and an additional $5 million of debt at rd = 14%. The CFO estimates that a proposed expansion would require an investment of $4.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

The manager of Furniture For Less has approved Mac's application for 36 months of credit with maximum monthly payments of $32. If the APR is 20.2 percent, what is the maximum initial purchase that Mac can buy on credit?

• $627.53

• $1,047.91

• $858.70

• $870.58

• $617.19

We are evaluating a project that costs $1,740,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 86,700 units per year. Price per unit is $38.07, variable cost per unit is $23.30, and fixed costs are $821,000 per year. The tax rate is 22 percent, and we require a return of 9 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.)

You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding 9.0%.

a. What weight of each bond will you hold to immunize your portfolio? (Round your answers to 2 decimal places.)

-zero coupon bond

-perpetuity bond

b. How will these weights change next year if target duration is now nine years? (Round your answers to 2 decimal places.)

-zero coupon bond

-Perpetuity bond

-

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.13.

You require that your portfolio yield an expected return of 11%, and that it be efficient, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Round your answer to 2 decimal places.)

b. What is the proportion invested in the T-bill fund and each of the two risky funds? (Round your answers to 2 decimal places.)

You are considering a new product launch. The project will cost $950,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 340 units per year; price per unit will be $15,945, variable cost per unit will be $11,950, and fixed costs will be $620,000 per year. The required return on the project is 9 percent, and the relevant tax rate is 22 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. What are the best-case and worst-case values for each of the projections? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) What are the best-case and worst-case OCFs and NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) What are the base-case OCF and NPV? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) What are the OCF and NPV with fixed costs of $630,000 per year? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) What is the sensitivity of your base-case NPV to changes in fixed costs? (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

1a.Suppose that you pay $100,000,000 dollars for a factory that has an expected life of eight years and no salvage value. If the tax rate is 37.5%, and your EBITDA will be $20,000,000 per year for the next three years, and $36,000,000 for the following five years, what is your IRR? (Hint: EBITDA is the EBIT before depreciation and amortization expenses, which are non-cash.)

1b. For problem above suppose there is a $50,000,000 cash payment that you must make to tear down and clean up the factory in year 9, what’s the IRR?

A 30-year maturity bond making annual coupon payments with a coupon rate of 8% has duration of 11.37 years and convexity of 187.81. The bond currently sells at a yield to maturity of 9%.

a. Find the price of the bond if its yield to maturity falls to 8%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

d-1. What is the percent error for each rule? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

d-2. What do you conclude about the accuracy of the two rules?

• The duration-with-convexity rule provides more accurate approximations to the true change in price.

• The duration rule provides more accurate approximations to the true change in price.

e-1. Find the price of the bond if its yield to maturity increases to 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e-2. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e-3. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e-4. What is the percent error for each rule? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) – (d)?

• Yes

• No

The capital structure of Vermont Machinery Ltd. (VM) contains the following items. Equity: 2,000,000 ordinary shares, with face value of $1 per share. VM’s ordinary shares are currently trading at $5 per share. The company’s next dividend is estimated to be $0.50. This dividend is expected to grow at 3% per annum forever. The current market required rate of return of the shares is calculated as 13%.
Long-term bonds: 10,000 bonds maturing in 5 years, with a face value of $1000 per bond. The bond has a coupon rate of 6%, which is paid semi-annually. The current market price of a bond is $918.89 and the yield to maturity (the implied market required rate of return) of the bond is 8% per annum.
Preference share: 500,000 preference shares, with a face value $1 per share and paying a 12.5% preference dividend on the face value. Currently, VM’s preference share is trading at $1.25 per share.
Assume VM’s corporate tax rate is 30%. Calculate VM’s after-tax weighted average cost of capital (WACC)

The MoMi Corporation’s cash flow from operations before interest and taxes was $2.1 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 15% of pretax cash flow each year. The tax rate is 21%. Depreciation was $270,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 14% per year, and the firm currently has debt of $4 million outstanding. Use the free cash flow approach to calculate the value of the firm and the firm’s equity. (Enter your answer in dollars not in millions.)

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $880,000, and it would cost another $19,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $637,000. The machine would require an increase in net working capital (inventory) of $18,500. The sprayer would not change revenues, but it is expected to save the firm $482,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

1. What is the Year 0 net cash flow?
   $
2. 
   
3. 
   
4. 
   
5. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

   Year 1	$
   Year 2	$
   Year 3	$

6. 
   
7. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
8. 
   
9. 
   
10. 
    
11. If the project's cost of capital is 11 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
    $
    
    Should the machine be purchased?
    -Select-Yes or No

Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$49.39. The firm just recently paid a dividend of ​$3.99. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$43.96 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you expect the company to pay next​ year? b. Determine the net​ proceeds, Nn​, that the firm will actually receive. c.  Using the​ constant-growth valuation​ model, determine the required return on the​ company's stock, r Subscript s​, which should equal the cost of retained​ earnings, r Subscript r. d.  Using the​ constant-growth valuation​ model, determine the cost of new common​ stock, r Subscript n. a.  The average annual dividend growth rate over the past 5 years is?

Compute the YTM: