How to calculate NPV, IRR, MIRR, and Ordinary Payback? Example please
In: Finance
Suppose that Xtel currently is selling at $54 per share. You buy 450 shares using $10,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)
How would your answer to (b) change if you had financed the initial purchase with only $12,150 of your own money? (Round your answer to 2 decimal places.)
Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)
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Terminal cash- Various lives and sale prices. Looner Industries is currently analyzing the purchase of a new machine that cost. $164,000 and requires $19,800
in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,100 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a 5-year recovery period .for the applicable depreciation percentages) and expects to sell the machine to net $10,300 before taxes at the end of its usable life. The firm is subject to a 40 % tax rate.
a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years.
b. Discuss the effect of usable life on terminal cash flows using your findings in part a.
c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,190 or (2) $169,600 (before taxes) at the end of 5 years.
d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
|
Rounded Depreciation Percentages by Recovery Year Using MACRS
for First Four Property Classes |
||||
| Percentage by recovery year* | ||||
| Recovery year | 3 years | 5 years | 7 years | 10 years |
| 1 | 33% | 20% | 14% | 10% |
| 2 | 45% | 32% | 25% | 18% |
| 3 | 15% | 19% | 18% | 14% |
| 4 | 7% | 12% | 12% | 12% |
| 5 | 12% | 9% | 9% | |
| 6 | 5% | 9% | 8% | |
| 7 | 9% | 7% | ||
| 8 | 4% | 6% | ||
| 9 | 6% | |||
| 10 | 6% | |||
| 11 | 4% | |||
| Totals | 100% | 100% | 100% | 100% |
In: Finance
Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Gamma is 13.2%, but he can’t recall how much Green Caterpillar originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Gamma. They are:
|
Year |
Cash Flow |
|---|---|
| Year 1 | $2,400,000 |
| Year 2 | $4,500,000 |
| Year 3 | $4,500,000 |
| Year 4 | $4,500,000 |
The CFO has asked you to compute Project Gamma’s initial investment using the information currently available to you. He has offered the following suggestions and observations:
| • | A project’s IRR represents the return the project would generate when its NPV is zero or the discounted value of its cash inflows equals the discounted value of its cash outflows—when the cash flows are discounted using the project’s IRR. |
| • | The level of risk exhibited by Project Gamma is the same as that exhibited by the company’s average project, which means that Project Gamma’s net cash flows can be discounted using Green Caterpillar’s 9% WACC. |
Given the data and hints, Project Gamma’s initial investment is _________ , and its NPV is ____________ (rounded to the nearest whole dollar).
A project’s IRR will _________ if the project’s cash inflows decrease, and everything else is unaffected.
In: Finance
Below are returns on the stock A and S&P500 index. All numbers are in decimals (-0.0222 is equivalent to -2.22%).
Stock A S_P500
-0.0222 0.0032
-0.0048 -0.0058
0.1333 0.0434
0.0765 0.1081
-0.0161 -0.0121
0.1250 0.1400
0.0145 0.0368
-0.0475 -0.0454
0.0430 0.0577
-0.0260 -0.1374
0.0071 0.0064
0.0249 0.0186
0.0850 0.0215
-0.0624 -0.0752
0.0933 0.0365
0.0456 0.0528
-0.0632 -0.0131
0.0450 0.0009
0.0200 0.0017
0.0280 0.0985
Suppose that the next S&P500 return will be 7%. Use the CAPM model to calculate the expected return on the stock A. Assume the risk-free rate of 1%.
Provide answer in decimals. For example, 12.34% would be 0.1234.
Also, round your answer to the fourth decimal.
Your Answer:
In: Finance
explain how to estimate the cost of capital.
How to adjust for the effect of leverage on the cost of equity (unlevered Beta)?
Should we use book or market value to determine the weights?
In: Finance
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,850,000 this year. Depreciation, the increase in net working capital, and capital spending were $225,000, $90,000, and $415,000, respectively. You expect that over the next five years, EBIT will grow at 16 percent per year, depreciation and capital spending will grow at 21 percent per year, and NWC will grow at 11 percent per year. The company has $15,100,000 in debt and 345,000 shares outstanding. You believe that sales in five years will be $22,600,000 and the price-sales ratio will be 2.4. The company’s WACC is 8.5 percent and the tax rate is 21 percent. What is the price per share of the company's stock?
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The 1-week call options on the Alibaba stock with strike prices of $185, $190, and $195 are $10, $7, and $5.5, respectively. An investor longs a butterfly spread using these three options. Specifically, he longs 100 call options with the strike price $185, shorts 200 call options with the strike price $190, and longs 100 call options with the strike price 195. What is the investor's maximum gain from this strategy? Please provide your answer in unit of dollars
In: Finance
In: Finance
In: Finance
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year for each year of its remaining life.
The new machine has a purchase price of $800,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, annual pre-tax savings of $175,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and the project cost of capital is 15%.
What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign.
$
Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.
Year |
Depreciation Allowance, New |
Depreciation Allowance, Old |
Change in Depreciation |
| 1 | $ | $ | $ |
| 2 | $ | $ | $ |
| 3 | $ | $ | $ |
| 4 | $ | $ | $ |
| 5 | $ | $ | $ |
What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be indicated by a minus sign.
| CF1 | $ |
| CF2 | $ |
| CF3 | $ |
| CF4 | $ |
| CF5 | $ |
Should the firm purchase the new machine? Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.
NPV: $
The firm -Select-shouldshould notItem 23 purchase the new machine.
In general, how would each of the following factors affect the investment decision, and how should each be treated?
The expected life of the existing machine decreases.
If the expected life of the old machine decreases, the new machine will look -Select-betterworseItem 24 as cash flows attributable to the new machine would -Select-decreaseincreaseItem 25 .
The cost of capital is not constant but is increasing as DeYoung adds more projects into its capital budget for the year.
The -Select-higherlowerItem 26 capital cost should be used in the analysis.
In: Finance
Currently, Forever Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Forever's debt currently has an 9% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 8%. Using the CAPM, Forever estimates that its cost of equity is currently 12%. The company has a 40% tax rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations.
| % debt in original capital structure, wd | 20.00% |
| % common equity in original capital structure, wc | 80.00% |
| Yield to maturity on debt, rd | 9.00% |
| Risk-free rate, rRF | 6.00% |
| Market risk premium (rM - rRF) | 8.00% |
| Cost of common equity, rs | 12.00% |
| Tax rate | 40.00% |
| % debt in new capital structure, wd New | 40.00% |
| % common equity in new capital structure, wc New | 60.00% |
| Changed yield to maturity on debt, rd New | 9.50% |
What is Forever's current WACC? Round your answer to two decimal places.
_________%
What is the current beta on Forever's common stock? Round your answer to two decimal places.
_____________%
What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Round your answer to two decimal places.
_______________%
Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the company's tax rate.
What would be the company's new cost of equity if it adopted the proposed change in capital structure? Round your answer to two decimal places.
_____________%
What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to two decimal places.
_____________%
Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure?
A. Yes
B. No
In: Finance
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3,230,000 this year. Depreciation, the increase in net working capital, and capital spending were $244,000, $109,000, and $510,000, respectively. You expect that over the next five years, EBIT will grow at 13 percent per year, depreciation and capital spending will grow at 18 percent per year, and NWC will grow at 8 percent per year. The company has $18,900,000 in debt and 395,000 shares outstanding. You believe that sales in five years will be $22,100,000 and the price-sales ratio will be 3.2. The company’s WACC is 9.4 percent and the tax rate is 25 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Share Price?
In: Finance
5. Stock dividends and stock splits
Companies sometimes consider stock splits to bring down the price so that the stock attracts more purchases.
Consider the following case:
Happy Monkey Manufacturing currently has 15,000 shares of common stock outstanding. Its management believes that its current stock price of $110 per share is too high. The company is planning to conduct stock splits in the ratio of 2 for 1 as described in the animation.
If Happy Monkey Manufacturing declares a 2-for-1 stock split, the price of the company’s stock after the split, assuming that the total value of the firm’s stock remains the same after the split, will be ___________.
A. 36.67
B. 330.00
C. 27.50
D. 55.00
E. 22.00
Fuzzy Muffin Manufacturing Company is one of Happy Monkey’s leading competitors. Fuzzy Muffin’s market intelligence research team shares Happy Monkey’s plans of announcing a stock split, influencing the distribution policy makers. Consequently, executives at Fuzzy Muffin decide to offer stock dividends to its shareholders.
Fuzzy Muffin currently has 2,300,000 shares of common stock outstanding.
If the firm pays a 5% stock dividend, what will be the total number of shares outstanding after the stock dividend?
A. 2,173,500 shares
B. 3,018,750 shares
C. 2,415,000 shares
D. 2,898,000 shares
In: Finance
One year ago, your company purchased a machine used in manufacturing for
$ 90 comma 000$90,000.
You have learned that a new machine is available that offers many advantages and you can purchase it for
$ 140 comma 000$140,000
today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of
$ 35 comma 000$35,000
per year for the next 10 years. The current machine is expected to produce a gross margin of
$ 24 comma 000$24,000
per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is
$ 8 comma 182$8,182
per year. The market value today of the current machine is
$ 65 comma 000$65,000.
Your company's tax rate is
45 %45%,
and the opportunity cost of capital for this type of equipment is
10 %10%.
Should your company replace its year-old machine?
In: Finance