Abe Simpson’s Historical Aircraft, Inc. (ASHAI) is considering adding a rare World War II B-24 bomber to its collection of vintage aircraft. The plane was forced down in Burma 1942, and it has remained there ever since. Flying a crew to Burma and collecting the wreckage will cost $100,000. Transporting the parts to the company’s restoration facility in Springfield will cost another $35,000. Restoring the plane to flyable condition will cost an additional $600,000 at t0.
ASHAI’s operating costs will increase by $40,000 a year at the end of years 1 through 7. At the end of years 3 through 7, revenues from exhibiting the plane at airshows will be $70,000. At the end of year 7, the plane will be retired. At that time the plane will be sold to a museum for $500,000.
The plane falls into the 7 year MACRS depreciation schedule. ASHAI’s tax rate is 35% and the company’s required return on the project is 12%. Calculate the NPV and IRR of the proposed investment in the plane.
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The market portfolio has expected return of 12% and risk of 19%, and the risk free rate is 5%. According to the capital market line (the line that connects the risk free rate to efficient frontier), what is the portfolio weight for the risky market portfolio if an investor wants to achieve 8.5% return? What about 16.2%? And 19% return?
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6.2 Complete the following table. Assume that the real interest rate is 3% per year, and inflation is expected to be constant at 2% per year. Recall that nominal cash flows must be discounted using nominal rates, and real cash flows must be discounted using real rates.
|
Year |
Nominal cash flow |
Real cash flow |
|
0 |
–100,000 |
–100,000 |
|
1 |
+ 12,000 |
|
|
2 |
+22,000 |
|
|
3 |
+15,000 |
|
|
4 |
+10,000 |
|
|
Net present value |
||
|
Discount rate |
3% |
Note that present values are taken at time 0, at which point real cash flows and nominal cash flows are the same, because there is no time for inflation to affect the cash flows.
This implies that the present values of the two series of cash flows should be exactly the same.
Hint: You may want to recall the $1 chocolate bar example from question 5.2 to assist you with calculating the real cash flows.
Note that you can use the CF function of the Texas Instruments BA II Plus calculator (similar on the HP 10BII series and Sharp EL738 series financial calculators) to calculate the NPV of these cash flows. See your user’s manual or a YouTube video to learn how to use this function.
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Use the following information on Filmore Corporation to calculate its WACC. 10,000 bonds with face value of $1,000 matures in 5 years, has 8% coupon rate, pays coupons semiannually, and currently sells for $1,050. 1,000,000 common shares sell for $40 per share. The dividend next year will be $2, and dividends are expected to grow at 6% constantly. It has no preferred stock. Its tax rate is 35%. What is Filmore Corporation's WACC? show the steps
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| Hudson Corporation will pay a dividend of $3.40 per share next year. The company pledges to increase its dividend by 7.70 percent per year indefinitely. |
| If you require a return of 17.30 percent on your investment, how much will you pay for the company's stock today? |
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Your division is considering two projects with the following cash flows (in millions):
| 0 | 1 | 2 | 3 |
| Project A | -$16 | $7 | $9 | $10 |
| Project B | -$26 | $14 | $20 | $11 |
What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.
What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.
What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.
If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)
If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)
If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)
Thank you.
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|
Dickson, Inc., has a debt-equity ratio of 2.5. The firm’s weighted average cost of capital is 11 percent and its pretax cost of debt is 9 percent. The tax rate is 22 percent. |
| a. | What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | What would the company’s weighted average cost of capital be if the company's debt-equity ratio were .60 and 1.50? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
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Suppose the following:
Beginning Inventory = 11246
Ending Inventory= 12348
Beginning Receivables = 6431
Ending Receivables = 6493
Beginning Payables = 8353
Ending Payables = 8919
Credit Sales = 92328
Cost of Goods Sold = 72642
Calculate the following (round final answers to 2 decimal
places):
Operating Cycle = _____ days
Cash Cycle = _____ days
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Why is there less risk on an original equipment market than on a replacement products market?
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|
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0421. The standard deviation of the returns on the market portfolio is 18 percent and the expected market risk premium is 6.4 percent. The company has bonds outstanding with a total market value of $55.1 million and a yield to maturity of 5.3 percent. The company also has 4.3 million shares of common stock outstanding, each selling for $50. The company’s CEO considers the firm’s current debt-equity ratio optimal. The corporate tax rate is 21 percent and Treasury bills currently yield 2.7 percent. The company is considering the purchase of additional equipment that would cost $49.5 million. The expected unlevered cash flows from the equipment are $16.55 million per year for 5 years. Purchasing the equipment will not change the risk level of the firm. |
|
Calculate the NPV 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) |
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(NPV with varying required rates of return)
Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $6,000,000 and would generate annual free cash inflows of $1,000,000 per year for 6 years. Calculate the project's NPV given:
a. A required rate of return of 8 percent
b. A required rate of return of 10 percent
c. A required rate of return of 14 percent
d. A required rate of return of 17 percent
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Explain how financial distress cost is useful in explaining low leverage puzzle and the heterogeneity of leverages across the different industries.
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(Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $85,000 and expected free cash flows of $25,000 at the end of each year for 6 years. The required rate of return for this project is 9 percent. a. What is the project's payback period? b. What is the project's NPV? c. What is the project's PI? d. What is the project's IRR?
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eBook A project has annual cash flows of $3,000 for the next 10 years and then $11,000 each year for the following 10 years. The IRR of this 20-year project is 11%. If the firm's WACC is 9%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.
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A loan of $12,000 is being repaid with payments of $1,500 at the end of each year for 10 years. These payments can earn interest at an effective rate of 6% per annum. At the end of the year, this interest is reinvested at the annual effective rate 5% for the first 6 years and only 4% for the second 4 years. Find the yield rate over the 10-year period.
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