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Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.6 million. In five years, the aftertax value of the land will be $5 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.44 million to build. The following market data on DEI’s securities is current: |
| Debt: |
111,000 7 percent coupon bonds outstanding, 26 years to maturity, selling for 107 percent of par; the bonds have a par value of $2,000 and make semiannual payments. |
| Common stock: |
8,100,000 shares outstanding, selling for $70.30 per share; the beta is 1.3. |
| Preferred stock: |
443,000 shares of 5.9 percent preferred stock outstanding, selling for $80.30 per share and having a par value of $100. |
| Market: |
6 percent expected market risk premium; 4.8 percent risk-free rate. |
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DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 6 percent on new common stock issues, 5 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 22 percent. The project requires $1,125,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally. |
| a. |
Calculate the project’s initial Year 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $3.8 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| d. | The company will incur $6,100,000 in annual fixed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $10,450 per machine; the variable production costs are $9,050 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| e. | DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| f. | Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
1. The face value for Karen’s Limited bonds is $100,000 and has a 2 percent annual coupon. The percent annual coupon bonds matures in 2022, and it is now 2012. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk andmaturity are currently yielding 12 percent. How much should Karen sell her bonds today?
2. What is the semi-annual coupon bond’s nominal yield to maturity (YTM), if the years to maturity is 15 years, and sells for 119% with coupons rate of 10%? Assume the par value of the bond is $1,000.
3. MJI Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semi-annual basis. Assuming there are no changes to interest rates during the course of the year, what are the current yield and capital gains yield on the bonds for this year?
In: Finance
In what ways is IRR more useful than NPV? In what ways is NPV more useful than IRR? Or you could view this question as asking for the pros and cons of each calculation.
In: Finance
We decided that we need to specify the type of retirement income we want and make plans to accomplish our goal. Our goal is to plan for 25 years of retirement, at $150,000 per year, but we want to receive the
$150,000 at the beginning of each year of our retirement. So, to reach our objective, for the next 30 years, we need to set aside the right amount of money as an annual constant contribution into a retirement fund at the end of each of those years. So in total, there will be 25 annual payments (withdrawals) of 150,000 each received at the beginning of each month, preceded by 30 annual contributions made at the end of each period. (The last contribution time may correspond with that of the first withdrawal time).
We discussed this in general terms with another pension adviser, and she advised us to assume an average nominal annual rate of return of 8.50%, compounded annually, for the entire 55-year period.
Ques 1) How much money would we need in our pension plan when we retire after 30 years of work to make our pension dream come true? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 1. amount needed at beginning of retirement |
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|
APR |
8.50% |
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period rate |
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|
annual pension |
-$150,000.00 |
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#periods |
25 |
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Amount needed at BEG of retirement: |
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Ques 2) In order to accumulate this amount of money, how much would we need to deposit in our pension plan at the end of each year, for each of the next 30 years of work, if we contributed a constant amount each year? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 2. required annual contribution |
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period rate |
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#periods |
30 |
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Required annual contribution: |
Ques 3) If the inflation rate for the next 30 years were to be 2% per year (assuming country’s Bank manages to meet its target inflation of about 2%), what annual income now would provide the same purchasing power as a $150,000 annual income in 30 years? Please use (display + name) the excel function/ formula used for each yellow cell.
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Answer 3. inflation impact after 30 years |
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inflation rate |
0.02 |
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payment in 30 years |
$150,000.00 |
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equivalent amount in today's dollars: |
In: Finance
You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems related to the risk and return, stocks and bonds valuation. You are required to show the following 3 steps for each problem:
(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.
1. A $1,000 par value 8-year bond with a 13 percent coupon rate recently sold for $980. What is the yield to maturity if the bond makes semiannual payments? Submit your answer as a percentage rounded to two decimal places.
2. Consider a 7 year bond with face value $1,000 that pays an 8.4% coupon semi-annually and has a yield-to-maturity of 6.9%. What is the approximate percentage change in the price of bond if interest rates in the economy are expected to increase by 0.40% per year? Submit your answer as a percentage and round to two decimal places. (Hint: What is the expected price of the bond before and after the change in interest rates?)
3. Nippon, Inc. expects its current annual $30 per share common stock dividend to remain the same for the foreseeable future. What is the intrinsic value of the stock to an investor with a required return of 9.2%? Round to two decimal places.
In: Finance
5.31 Calculating Interest Expense
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .9 percent per year, compounded monthly for the first six months, increasing thereafter to 18.5 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year?
In: Finance
ABC paid a dividend of $3.00 this past year. The dividends are expected to grow at a rate of 20% for the next three years, and at a constant 3% rate thereafter. The required rate of return for investors in this stock is 10%. Calculate the value of this stock today.
In: Finance
Evaluate the following pure-yield pickup swap: You currently hold a 15-year, AA-rated, 8.5% coupon bond priced to yield 11.0%. As a swap candidate, you are considering a 15-year, AA-rated, 10.5% coupon bond priced to yield 12.0%. (Assume reinvestment at 11.0%, $1,000 par value, semiannual coupons.) Do not round intermediate calculations. Round your monetary answers to the nearest cent and percentage answers and value of swap to two decimal places. You may use Appendix C to answer the questions.
| Current Bond | Candidate Bond | |
| Dollar investment | $ | $ |
| Annual coupon | $ | $ |
| i on one coupon | $ | $ |
| Principal value at year end | $ | $ |
| Total accrued | $ | $ |
| Realized compound yield | % | % |
Value of swap: basis points in one year
In: Finance
PROJECT CASH FLOW
Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:
| Sales revenues | $15 million |
| Operating costs (excluding depreciation) | 10.5 million |
| Depreciation | 3 million |
| Interest expense | 3 million |
The company has a 40% tax rate, and its WACC is 12%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
In: Finance
1.
(Pmt, FV=? ) what is the future value of an annuity of $9 invested every week for the next 2 years starting one week from now at 8.9% compounded every week?
2.
(PMT, N = ?) You need to borrow &117,119 today and can repay the money in installments of $11,760 every year stating next year. If the rate of return is 7.5%, how long do you expect to repay the loan
In: Finance
Company A plans to replace with one of their current equipment with one of the three options shown in the table.
|
Option |
A |
B |
C |
|
Initial Cost |
200 |
350 |
475 |
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Annual Operation Cost |
450 |
275 |
300 |
|
Salvage Value |
75 |
60 |
80 |
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Estimated Life in Year |
20 |
20 |
20 |
Perform AW analysis to figure out which option should company A choose. The rate of return is 8% per year compounded Monthly. Please see correct answer below how do you get this?
| Time Window - Year | |||
| A | B | C | |
| PMT | ($469.24) | ($310.18) | ($347.77) |
| Winner |
In: Finance
Company B must choose one of two methods for its validation activity. Based on the information below, perform an AW analysis and make recommendation. MARR is 10% per year compounded quarterly. Please use the AW analysis.
|
Method |
X |
Y |
|
Initial Cost |
100,000 |
250000 |
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Annual Operation Cost |
30,000 in year one increasing by 5000 each year |
200,00 |
|
Salvage Value |
0 |
0 |
|
Estimated Life in Year |
3 |
6 |
Please see below correct answer. How do you get this? Use Excel.
| X | Y | |
| FV | ||
| PMT | ($75,152.98) | ($78,044.72) |
| Winner |
In: Finance
In: Finance
Blossom Corp. management is investigating two computer systems. The Alpha 8300 costs $2,991,425 and will generate cost savings of $1,560,125 in each of the next five years. The Beta 2100 system costs $3,323,500 and will produce cost savings of $1,340,750 in the first three years and then $2 million for the next two years. The company’s discount rate for similar projects is 14 percent. What is the NPV of each system? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)
NPV of Alpha system $enter a dollar amount rounded to 0 decimal places
NPV of Beta system $enter a dollar amount rounded to 0 decimal places
Which one should be chosen based on the NPV?
In: Finance
Problem 7-18 Abandonment
We are examining a new project. We expect to sell 6,700 units per year at $61 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $61 × 6,700 = $408,700. The relevant discount rate is 15 percent, and the initial investment required is $1,780,000. After the first year, the project can be dismantled and sold for $1,650,000. Suppose you think it is likely that expected sales will be revised upward to 9,700 units if the first year is a success and revised downward to 5,300 units if the first year is not a success.
a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
In: Finance