Lancaster is evaluating a plan to purchase a huge tract of land in the southeastern United States for $85 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Lancaster’s annual pretax earnings by $14.125 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Lancaster has a 23 percent corporate tax rate (state and federal).
If Lancaster wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
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As someone who wishes to begin saving for retirement, what is your investment strategy? (In what types of investments would you be looking to place your hard earned money? Again, please be specific)
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In: Finance
A proposed cost-saving device has an installed cost of $660,000. The device will be used in a five-year project but is classified as three-year MACRS (MACRS Table) property for tax purposes. The required initial net working capital investment is $51,500, the marginal tax rate is 34 percent, and the project discount rate is 13 percent. The device has an estimated Year 5 salvage value of $76,500. What level of pretax cost savings do we require for this project to be profitable? Pretax savings $
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McGilla Golf is evaluating a new golf club. The clubs will sell for $1,070 per set and have a variable cost of $485 per set. The company has spent $175,000 for a marketing study that determined the company will sell 54,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,200 sets of its high-priced clubs. The high-priced clubs sell at $1,570 and have variable costs of $700. The company also will increase sales of its cheap clubs by 12,800 sets. The cheap clubs sell for $485 and have variable costs of $215 per set. The fixed costs each year will be $10,000,000. The company has also spent $1,350,000 on research and development for the new clubs. The plant and equipment required will cost $33,600,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs also will also require an increase in net working capital of $2,740,000 that will be returned at the end of the project. The tax rate is 24 percent and the cost of capital is 14 percent. What is the senstivity of the NPV to changes in the price and quantity sold of the new clubs? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
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The Shield Corporation has BB-rated bonds with a yield to maturity of 6.40% APR. A U.S Treasury, with the same maturity, currently has a yield to maturity of 4.14% APR. Both bonds pay semi-annual coupons at a 6.24% APR and have 5.00 years until maturity. (assume $1,000 face value)
What is the current price of the Shield Corporation bond?
What is the current price of the Treasury bond?
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A 30-year loan of 1100 is repaid with payments at the end of each year.
Each of the first fifteen payments equals 155% of the amount of interest due. Each of the last fifteen payments is X.
The lender charges interest at an annual effective rate of 8%. Calculate X
a. 57
b. 65
c. 77
d. 82
e. 46
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. Define each of the following types of credit market instruments and identify one common example of each type: (a) simple loan; (b) fixed payment loan; (c) coupon bond; (d) discount bond. (e) Are loans and bonds credit and/or debt instruments? Briefly explain.
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Examine the stock market changes in the recent years, especially after the credit crisis in 2007-08. What has happened to the stock market? Do you find the market volatile?
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Excel Business & Finance
You are going to contribute some money to your retirement fund
at the beginning of this year and each of the next 39 years. You
have the following assumptions:
I. Initial balance for year 1 is assumed to be 0. II. Suppose
during Year 1, your salary is $40,000 and your salary increases by
5 percent each year until your retirement. III. You want to
contribute the same percentage of your salary each year while you
are working for your retirement.
IV. When you retire in 40 years, you plan to withdraw $100,000 per
year for 20 years (starting year 41) and will not make any
contribution to your retirement during the 20 years.
You also Assume the following retirement investment
portfolio:
I. First 20 years of your investing, the investments will earn 10
percent per year V. During all other years, your investments will
earn 5 percent per year
Part I: Assume all contributions and withdrawals occur at the
beginning of the year before investment returns are received,
please set up the retirement problem to find out the minimum
percentage of your salary you should save for your retirement in
order for you to make the withdrawals.
Part II: Assume that withdrawals occur at the end of each year
after the investment returns are received and contributions occur
at the beginning of each year before the investment returns are
received, please set up the retirement problem to find out the
minimum percentage of your salary you should save for your
retirement in order for you to make the withdrawals.
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A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset's 4-year life. Ignore bonus depreciation. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the combined tax rate is 23 percent, and the required rate of return is 12 percent. What is the net present value of the project?
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$7,500.95 |
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$9,896.87 |
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$7,072.72 |
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$6,353.41 |
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$8,398.29 |
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You have just deposited $13,000 into an account that promises to pay you an annual interest rate of 6.9 percent each year for the next 5 years. You will leave the money invested in the account and 15 years from today, you need to have $43,590 in the account. What annual interest rate must you earn over the last 10 years to accomplish this goal?
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XYZ used an investment bank to do IPO. In IPO, XYZ sold 1 million shares at $68 each. The investment bank charged 7% spread. At the end of the 1st day of trading, XYZ stock price closed at $80. Calculate the total cost of IPO. That is, what is the sum of direct and indirect cost?
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Describe the components of working capital and how firms manage them in at least 200 words
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