What is the purpose of the Weighted Average Cost of Capital model? How does increasing debt financing or equity financing affect the results in this model?

Leslie​ Mosallam, who recently sold her​ Porsche, placed ​$9 comma 600 in a savings account paying annual compound interest of 7 percent.

a.Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3​, 7​, and 17 ​year(s).

b.Suppose Leslie moves her money into an account that pays 9 percent or one that pays 11 percent. Rework part ​(a​) using 9 percent and 11 percent.

c.What conclusions can you draw about the relationship between interest​ rates, time, and future sums from the calculations you just​ did?

You just received a bonus of ​$3,000.

a.  Calculate the future value of ​$3 comma 000​, given that it will be held in the bank for 5 years and earn an annual interest rate of 6 percent.

b.  Recalculate part ​(a​) using a compounding period that is​ (1) semiannual and​ (2) bimonthly.

c.  Recalculate parts ​(a​) and ​(b​) using an annual interest rate of 12 percent.

d.  Recalculate part ​(a​) using a time horizon of 10 years at an annual interest rate of 6 percent.

e.  What conclusions can you draw when you compare the answers in parts ​(c​) and ​(d​) with the answers in parts ​(a​) and ​(b​)?

Solar Charge is a company that manufactures solar panels for use in residential buildings. It has received an unsolicited request from a foreign buyer, willing to buy 100,000 units at $1200 each (Ex-works). It will take a year to fulfill the order and the purchaser will pay the entire amount owing when a shipment is completed. The cost of producing each unit is $1000 and the company would have to take out a loan to finance the production of the order. Its cost of capital is 10 percent per annum. The manager of the export office recommends that the company respond favourably to the foreign request, especially since it sells the panels on the domestic market for only $1100 per unit. What does the finance department say?

Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $32,000 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following:

• The fair value of the equipment is $215,000.
• The applicable discount rate is an 8 percent annual rate.
• The economic life of the asset is 10 years.
• Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term.
• The asset is a standard piece of equipment.

a. Is the lease an operating lease or a financing lease?

• Operating lease

• Financing lease

b. What will be the lease expense shown on the income statement at the end of year 1?

c. What will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

d. What will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 6% rate. Dantzler's WACC is 11%.

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

   $   million

2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.

   $   million

3. Suppose Dantzler has $33 million of debt and 39 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

   $  

Suppose Ford's stock price is currently $10, and in the next six months it will either fall to $8 or rise to $15. The six-month risk-free interest rate is 1% (it is not the yearly rate). What is the current value of a six-month call option with an exercise price of $10? Explain your answer.

Note: std of the u and d are not needed...

Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights:

35​%

​long-term debt,

10​%

preferred​ stock, and

55​%

common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is

24​%.

Debt The firm can sell for

​$1030

a

11​-year,

​$1,000​-par-value

bond paying annual interest at a

7.00​%

coupon rate. A flotation cost of

3​%

of the par value is required.Preferred stock  

9.50​%

​(annual dividend) preferred stock having a par value of

​$100

can be sold for

​$92.

An additional fee of

​$4

per share must be paid to the underwriters.Common stock  The​ firm's common stock is currently selling for

​$70

per share. The stock has paid a dividend that has gradually increased for many​ years, rising from

​$2.70

ten years ago to the

​$4.00

dividend​ payment,

Upper D 0D0​,

that the company just recently made. If the company wants to issue new new common​ stock, it will sell them

​$3.50

below the current market price to attract​ investors, and the company will pay

​$2.00

per share in flotation costs.  

a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

a.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

nothing​%.

​(Round to two decimal​ places.)

All

techniqueslong dash—Decision

among mutually exclusive investments   Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and​ after-tax cash inflows associated with these projects are shown in the following table.

a.  Calculate the payback period for each project.

b.  Calculate the net present value​ (NPV) of each​ project, assuming that the firm has a cost of capital equal to

12​%.

c.  Calculate the internal rate of return​ (IRR) for each project.

d.  Indicate which project you would recommend.

a.  The payback period of project A is

years.  ​(Round to two decimal​ places.)

NPVlong dash—Mutually

exclusive projects   Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table:

LOADING...

. The​ firm's cost of capital is

8​%.

a.  Calculate the net present value

​(NPV​)

of each press.

b.  Using​ NPV, evaluate the acceptability of each press.

c.  Rank the presses from best to worst using NPV.

d.  Calculate the profitability index​ (PI) for each press.

e.  Rank the presses from best to worst using PI.

a. The NPV of press A is

​$nothing.

Initial investment  

$85,100   $59,700   $130,200
Year          
1   $18,500   $12,000   $50,100
2   $18,500   $13,700   $30,000
3   $18,500   $15,700   $20,200
4   $18,500   $17,700   $19,700
5   $18,500   $19,700   $19,900
6   $18,500   $25,300   $30,000
7   $18,500   $0   $40,200
8   $18,500   $0   $50,300

  ​(Round to the nearest​ cent.)

Let’s consider a retirement planning problem.

Suppose you just have had your 55th birthday and you plan to retire in five years. As far as your retirement goal is concerned, all you want is to maintain your living standard at the same level as when you start your retirement. You expect to “stick around” until 90 and you plan to leave nothing to “no one”. Therefore, your “sole” concern is maintaining your living standard during your retirement years.

Your current living expense per month is $20,000 (which include everything that you can possibly lay your fingers on) and you expect it to go up in exactly the same pace as the Composite CPI (of Hong Kong). The average yearly rate of increase of the index for the next five years is 3%. You do, however, expect the index to pick up its (yearly) pace afterwards (indeed, throughout your entire retirement period) by 2 percentage points. That is, the expected yearly inflation rate as measured by the CPI is 5% per year during your retirement years.

To facilitate the planning of your retirement, you listed out the following relevant questions which you would like to think over.

(i) State the approximate AND exact relationships between nominal rate of return, real rate of return and (expected) inflation rate. What is the name of this relationship?

(ii) Using the PVA formula, estimate how much money do you need to have in your investment account at the beginning of your retirement to achieve your “sole” retirement goal IF the expected yearly investment return is

- 7%

- 10%

- 4%

[Note: Marks would only be given for using the PVA formula in the calculations. Although some of you may be tempted to use the present value growing annuity formula (which was NOT covered in the Introduction to financial management course) to answer this question, I would strongly urge you NOT to use that formula. Instead, please draw on the insights derived from Part (i) above to construct the relevant equation and carry out the calculations.]

(iii) Based on your answer to Part (ii) above, what conclusion can you draw with respect to the relationships between (a) nominal cash flow, (b) real (inflation-adjusted) cash flow, (c) nominal interest rate and (d) real interest rate when using the PVA formula to answer Part (ii)?

You have just purchased a car and, to fund the purchase, you borrowed $25,500. If your monthly payments are $360.24 for the next 7 years, what is the APR of the loan?

3. (a) Define the current ratio and return on assets ratio. (b) State what financial management problem each of these financial ratios could be used to identify. (c) What would be a good benchmark to use for each of these financial ratios?