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We are examining a new project. We expect to sell 5,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $64 × 5,000 = $320,000. The relevant discount rate is 13 percent, and the initial investment required is $1,610,000. After the first year, the project can be dismantled and sold for $1,210,000. Suppose you think it is likely that expected sales will be revised upward to 8,000 units if the first year is a success and revised downward to 3,600 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 16,000. Note that abandonment is an option if the project is a failure. |
| a. |
If success and failure are equally likely, what is the NPV of the project? (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 expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
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An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Riggs, Inc., a non-dividend-paying common stock, with six months until expiration. She would like the put to have a strike price of $34 and the call to have a strike price of $63. The current price of the stock is $45 per share. Marie can borrow and lend at the continuously compounded risk-free rate of 5 percent per year and the annual standard deviation of the stock’s return is 50 percent. |
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Use the Black-Scholes model to calculate the total cost of the collar that Marie is interested in buying. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
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Handler Corp. has a zero coupon bond that matures in five years with a face value of $91,000. The current value of the company’s assets is $87,000 and the standard deviation of its return on assets is 38 percent per year. The risk-free rate is 6 percent per year, compounded continuously. |
| a. |
What is the value of a risk-free bond with the same face value and maturity as the current bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | What is the value of a put option on the company’s assets with a strike price equal to the face value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-1. | Using the answers from (a) and (b), what is the value of the company’s debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-2. | Using the answers from (a) and (b), what is the continuously compounded yield on the company’s debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d-1. | Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 47 percent per year. What is the new value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| d-2. | What is the new continuously compounded yield on the debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| e-1. | If the company restructures its assets, how much will bondholders gain or lose? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| e-2. | If the company restructures its assets, how how much will stockholders gain or lose? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
Please answer the question below, thanks!
1. Suppose a company has estimated the following cash flows in each of the next three years for operations in various countries.
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Year |
New Zealand |
Japan |
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1 |
160 NZD |
16,415 JYP |
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2 |
174 NZD |
17,844 JYP |
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3 |
181 NZD |
18,401 JYP |
If the USD/JPY is 100 and the USD/NZD is 110, what are the expected cash flows in each of the next three years?
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2. If the Euro ask price is $1.35 and the Euro bid price is $1.28, what is the bid-ask spread in percentage terms?
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3. States THREE factors that influence exchange rates.
In: Finance
If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.05. The company has a target debt-equity ratio of .55. The expected return on the market portfolio is 10 percent and Treasury bills currently yield 3.2 percent. The company has one bond issue outstanding that matures in 30 years, a par value of $1,000, and a coupon rate of 6.1 percent. The bond currently sells for $1,055. The corporate tax rate is 24 percent.
c. What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
In: Finance
National Electric Company (NEC) is considering a $45.12 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $4.17 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.2 percent and its cost of equity is 12 percent. The company’s target debt-to-value ratio is 60 percent. The project has the same risk as the company’s existing businesses and it will support the same amount of debt. The tax rate is 22 percent.
Calculate the weighted average cost of capital. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Calculate the net present value of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
In: Finance
investment analysis
using your selected company's most recent financial statements assess the financial position and performance of the company using relevant ratio analysis and other method. What does your analysIs reveal? How does your company compare with its major competitors? (The selected company is Qantas in Australia, the two major competitors are REX and Virgin Australia. 400 words)
In: Finance
In: Finance
Promoting the Financial Planning Cruise to Better Horizons Credit Union Members
Write a sales message to Better Horizons members to promote the financial planning cruise. Feel free to add additional details (i.e., price and dates for the cruise).
Must be Persuasive!!!
Scenario: Christine Russo works at Better Horizons and is developing several new services the credit union could offer. One idea is for credit union members to take a five-day cruise to the Bahamas. Two afternoons of the cruise will be devoted to financial planning workshops, including choices such as retirement planning, trusts and estates, insurance, charitable giving, taxes, and college savings. Also, a finance boot camp for teenagers will provide basic information about savings and checking accounts, loans, and budgeting.
In another initiative, Christine wants to set up a new rewards program for credit union members who use their Better Horizons debit or credit cards. Each purchase with the debit or credit card will contribute to their total reward points, which customers can redeem for brand-name merchandise, hotel accommodations, airline tickets, cruises, and other travel options (detailed in an online and paper merchandise and travel catalog). Members get one point for each dollar spent on their credit cards and one point for every two dollars spent on their debit cards. One advantage of the program is that points can be combined across accounts. So, family members Page 331or friends who are members of the credit union can transfer their points to one another’s accounts and more quickly gain rewards. The program involves no fee, and members with the cards are automatically enrolled in the program.
In: Finance
You are considering three investments to add to your portfolio. The first is a bond that is selling in the market at $1,100. The bond has a $1,000 par value, pays interest at 13 percent, and is scheduled to mature in 15 years. For bonds has a high risk rating (junk bond) and therefore you believe that a 14 percent rate of return should be required. The second investment that you are analysing is a preferred stock ($100 par value) that sells for $90 and pays an annual dividend of $ 13. Your required rate of return for this stock is 15 percent. The last investment is a common stock ($25 par value) that recently paid a $2 dividend. The firm's earnings per share have increased from $3 to $6 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $20, and you think a reasonable required rate of return for the stock is 20 percent.
Calculate the value of each security based on your required rate of return.
Which investment(s) should you accept? Why?
If your anticipated growth rate in dividends per share changed to 12 percent, would your answer change?
In: Finance
Impact of Regulation and Deregulation on Financial Services
Carson Company relies heavily on commercial banks for funding and for some other services.
Explain how the services provided by a commercial bank (just the banking, not the nonbank, services) to Carson may be limited because of bank regulation.
Explain the types of nonbank services that Carson Company can receive from the subsidiaries of a commercial bank as a result of deregulation. How might Carson Company be affected by the deregulation that allows subsidiaries of a commercial bank to offer non-bank services?
In: Finance
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, what is the amount available for college tuition?
In: Finance
Cliff Corp. (CC) is considering moving its widgets division to a new building costing $220,000. The new building will be more efficient and will save the widget division $20,000/year in operating expenses indefinitely. The move will also allow the gadget division to expand its operations in the old building resulting in $4,000/year of additional cashflow. CC’s cost of capital is 10%. Should CC move the widget division? What is the NPV of the move? If all of the cost of the new building is allocated to the widget division, will the widget division manager be in favor of the move?
In: Finance
Alexis, a professional chef, is tired of the restaurant business
and decides to open a toy store. She and her CPA project income and
expenses; perform site selection studies; and research product
lines, advertising approaches, etc.
Alexis locates Louie the Landlord, who plans to construct a small
shopping center. Alexis looks at the plans and agrees to lease the
corner location. The lease provides that Alexis is guaranteed
occupancy by November 1 (at the start of the all-important holiday
shopping season).
Alexis CPA starts ordering inventory. Louie, however, has
difficulty with the contractor, and the premises are not ready for
Alexis until February 1. In the meantime, Alexis must store the
inventory and loses the profits that Alexis and her CPA projected
for the first three months of operation. Alexis wants Louie to pay
the profits that Alexis lost by reason of not being open for three
months over the busy holiday season. The CPA's projections showed a
net profit of $6,000 for each of those three months. Louie refuses
to pay, saying that the delay is not his fault but that of his
contractor. Alexis sues Louie and the contractor for loss of
profits.
In: Finance
3. Consider a 10% semi-annual coupon bond with a face value of $1,000 that has three years to maturity. Suppose the 6-month market interest rate is 4%.
a) What is the price of the bond today?
b) Suppose six months has passed and the market interest rate is still 4%. What is the bond’s price in six months.
c) Based on your answers to parts a and b, what is the total six-month return to holding the bond?
In: Finance