A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 4% per annum and pays six-month LIBOR on a principal of $10 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 2% per annum. What is the loss to the financial institution? Assume that six-month LIBOR was 3% per annum halfway through year 3 and that at the time of default all OIS rates are 1.8% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,100 per month, and the rent is $2,300 per month. In addition, she must make a tax payment of $14,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $160,000.

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

1. Prepare a cash budget for December, January, and February. Use a minus sign to enter negative values for net cash flows, cumulative NCF values, and loans needed, if any. If the answer is zero, enter "0". Do not round intermediate calculations. Round your answers to the nearest dollar.

   Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this question are minimal.) Use a minus sign to enter a negative value for loan requirements. Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,259.00 to install, $5,190.00 to operate per year for 7 years at which time it will be sold for $6,843.00. The second, RayCool 8, costs $41,089.00 to install, $2,059.00 to operate per year for 5 years at which time it will be sold for $9,063.00. The firm’s cost of capital is 5.22%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

You are given the following information on the best guess of related outcomes for a project. The initial cash outlay for developing and market testing the product over the next year IS $70M. Following the test, the company will spend another $400M to put the productive capabilities in place at the END of the year. If the test is successful, which is expected to have a probability of 0.8, the expected annual cash flows will be $150M for five years. If the test fails, the expected annual cash flows will be $50M for five years. The discount rate is 12%. (a) Compute the NPV of this project at time 0 assuming that the project will be implemented regardless of the outcome of the test. Given that the value at the END of the testing year of the 5-year $150M annuity is $540.72M, and that of the 5-year $50M annuity is $180.24M. ( b) Say, you are given the option to upgrade by building a better production facility at a cost of $500M if the test fails. The upgraded facility is expected to generate annual cash flows of $100M for five years. Note that the base facility and cash flows estimates will apply if the test is successful. Compute the value of the option to upgrade at time 0.

Identify and describe the major steps involved in financial planning.

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

There are two bonds A and B. Both have the same maturity of 10 years. A has 3% coupon rate while B offers 10% coupon rate. The current yield to maturity for both bonds is 10%.

8. What are the bond prices?

Bond A                       Bond B

9. If the YTM goes up to 15% for both bonds, what are the bond prices?

10. Which bond has larger price change?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $250,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $43,000. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $23,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $

What are the project's annual 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:

If the WACC is 14%, should the spectrometer be purchased?

16. The present value of the terminal (continuation) value cash flow that begins in 9 years is $10,000,000 assuming a cost of equity equal to 14%. The year 9 free cash flow (beginning of the growing perpetuity) is $3,137,860. What is the growth rate required for the continuation value term?

1. 1%

2. 2%

3. 3%

4. 4%

5. 5%

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $30,500 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $385,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $925,000 to his nephew Frodo. He can afford to save $3,400 per month for the next 10 years. If he can earn an EAR of 10 percent before he retires and an EAR of 7 percent after he retires, how much will he have to save each month in Years 11 through 30?

Shanken Corp. issued a 30 -year, 6 percent semiannual bond 4 years ago. The bond currently sells 95 percent of its face value. The book value of the debt issue $45 million. In addition the company has a second debt issue on the market, a zero coupon bond with 15 years left to maturity; the book value of this issue is 50 million and the bonds sell 54 percent of par. The company's tax rate is 40 percent. What is the company's total book value of debt? What is the company's total market value of debt? What is your best estimate of the aftertax cost of debt?

Problem 11-06 New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,000,000, and it would cost another $18,500 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 $547,000. The machine would require an increase in net working capital (inventory) of $10,500. The sprayer would not change revenues, but it is expected to save the firm $391,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

What is the Year 0 net cash flow? $

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$

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. $

If the project's cost of capital is 12 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

The comparative statements of Wildhorse Co. are presented here.

All sales were on account. Net cash provided by operating activities for 2022 was $272,800. Capital expenditures were $168,640, and cash dividends were $79,064.

Compute the following ratios for 2022. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%.)

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Cash $ 3.5 Accounts payable $ 9.0

Receivables 26.0 Notes payable 18.0

Inventories 58.0 Line of credit 0

Total current assets $ 87.5 Accruals 8.5

Net fixed assets 35.0 Total current liabilities $ 35.5

  Mortgage loan 6.0

Common stock 15.0

Retained earnings 66.0

Total assets $122.5 Total liabilities and equity $122.5

Sales for 2016 were $325 million and net income for the year was $9.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.9 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

A. If sales are projected to increase by $100 million, or 30.77%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million

B. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places. %

C. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

Upton Computers

Pro Forma Balance Sheet

December 31, 2017

(Millions of Dollars)

Cash $ ____

Receivables $ ___

Inventories $ ___

Total current assets $ ___

Net fixed assets $ ___

Total assets $ ___

Accounts payable $ ___

Notes payable $ ___

Line of credit $ ___

Accruals $ ___

Total current liabilities $ ___

Mortgage loan $ ___

Common stock $ ___

Retained earnings $ ___

Total liabilities and equity $ ___

Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%.

1. If Global raises capital using 45% debt, 5% preferred stock, and 50% common stock what is their cost of capital?
2. If Global raises capital using 30% debt, 5% preferred stock, and 65% common stock what is their cost of capital?
3. Evaluate the two finance options and identify which one they should choose? Assess the advantages and disadvantages of your choice?