2. Bird Song Industries makes a bird seed that sets native song birds singing all day long. Its product has been discovered by the back-to-nature crowd around the world. As a result, Bird Song's executives expect free cash flow (FCF) to grow rapidly over the next 3 years. The forecast FCFs are $15 in 2020 (one year from now), $25 in 2021, with a jump to $40 in 2022. After 2022 Bird Song expects growth to slow to 2.0% per year in perpetuity. Bird Song's weighted average cost-of-capital (WACC) is 13%. What is Bird Song’s fundamental value?
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Calculate the future value of$3,000 in
a.Four years at an interest rate of 5 % per year.
b.Eight years at an interest rate of 5% per year.
c. Four years at an interest rate of 10% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part
(b)?
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In: Finance
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You must evaluate a proposal to buy a new milling machine. The base price is $150,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $67,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $55,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.
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The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Guthrie Enterprises needs someone to supply it with 151,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost $1,910,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $161,000. Your fixed production costs will be $276,000 per year, and your variable production costs should be $10.50 per carton. You also need an initial investment in net working capital of $141,000. The tax rate is 21 percent and you require a return of 11 percent on your investment. Assume that the price per carton is $17.10. |
| a. |
Calculate the project NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. |
What is the minimum number of cartons per year that can be supplied and still break even? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| c. |
What is the highest fixed costs that could be incurred and still break even? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
In: Finance
Why even with all corporate controls, firms still experience frauds and unethical behavior from employees. Explain reasons from employer perspective and explain reasons from employee perspective?
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A $1,000 par value bond, has an annual coupon rate of 6 percent, an annual yield to maturity of 7.5 percent, and 10 years until maturity. Assuming semi-annual coupon payments:
d. If the bond were selling for $929, what would the effective yield-to-maturity if you reinvest coupon payments at 9 percent?
***please show the work or what is entered in calculator***
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Which are advantages of focusing on shareholder wealth maximization as the goal of financial management?
Check all that apply:
It can be measured objectively.
It's an unambiguous goal.
It avoids conflicts with other goals.
It takes into account both short-term and long-term effects and expectations.
What are examples of a possible result of the conflict of interest between shareholders and corporate managers?
Check all that apply:
Managers paying themselves excessive salaries.
Managers faking earnings to temporarily boost the stock price.
Managers using company resources for personal benefit.
Managers funding risky projects that could lose money.
Which statements are true?
Check all that apply:
C-corporations are subject to double taxation.
Corporations and LLCs limit the owners' liability.
LLCs are best for taking venture capital.
A general partnership can have many owners.
Which statements are true?
Check all that apply:
It is impossible to sell a part of your ownership stake in a sole proprietorship.
A sole proprietorship is subject to few government regulations.
A sole proprietorship is easy to set up.
All profits from a sole proprietorship are passed through to the owner for paying taxes.
A sole proprietorship offers limited liability.
A limited liability company is taxed like a _____ and its owners have _____ liability.
partnership; limited
partnership; unlimited
corporation; unlimited
corporation; limited
Which statements are true about partnerships?
Check all that apply:
Partnerships make it easy to raise large amounts of capital.
A partnership is easy to set up.
All profits from a partnership are passed through to the partners for paying taxes.
Partners have unlimited liability.
What are advantages of a corporation over a partnership?
Check all that apply:
Easier fundraising
Lower taxes
Limited liability
Unlimited life
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#13. You recently won the super jackpot lottery. You discover that you have the following two options: (a) You receive 31 annual payments of $160,000, with the first payment being delivered today. The income will be taxed at a rate of 28 percent. Taxes are withheld when the checks are issued. (b) You receive $446,000 now, and you will not have to pay tax on this amount. In addition, beginning one year from today you will receive $101,055 each year for 30 years. The cash flows from these future payments will be taxed at a rate of 28 percent. Using a discount rate of 10 percent, which option should you select?
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You own a 10-acre vineyard and earn income by selling your grapes to wineries. Your vineyard is currently planted to Merlot grapes, but you are thinking of replanting with Syrah grapes because they are commanding a higher market price per ton. Merlot fetches $1700 per ton but Syrah sells for $2700 per ton, those prices are expected to remain stable, and you produce 5 tons per year per acre (so 50 tons per year total). Either way, you plan to sell the vineyard 5 years from now (at the end of the year) for 5-times (5x) the annual income (in year 5) from the sale of grapes (that is, you'll get the income from grape sales and then sell the vineyard for 5 times that amount at the end of year 5). However, if you switch to Syrah, it will cost you $103,000 immediately and the vines won’t produce any grapes until year 4 (that is, years 1-3 will have no sales if you plant Syrah, but years 4 and 5 will). The applicable discount rate is 11% per year. What is the NPV of switching? Round to the nearest cent. [Hint: Create a timeline showing the incremental annual cash flows from switching and find their NPV. Some cash flows will be negative (first 3 years) and some (years 4 and 5) will be positive.
In: Finance
It is important to review not just the Current Ratio, but also the Quick Ratio and Cash Ratio because:
the Cash Ratio must always provide a greater statistic than the Current Ratio and Quick Ratio.
the Quick Ratio includes inventory that can be easily liquidated for cash.
a low Current Ratio may not necessarily indicate a problem with a company.
companies can operate with a Cash Ratio close to zero and maintain liquidity.
GAAP requires it.
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A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 7%. The probability distribution of the risky funds is as follows:
| Expected Return | Standard Deviation | |||||
| Stock fund (S) | 19 | % | 31 | % | ||
| Bond fund (B) | 14 | 23 | ||||
The correlation between the fund returns is 0.10.
Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)
a. Portfolio invested in the stock
b. Portfolio invested in the bond
c. Expected Return
d. Standard Deviation
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NPVs and IRRs for Mutually Exclusive Projects
Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses.
Calculate the NPV for each type of truck. Do not round intermediate calculations. Round your answers to the nearest dollar.
Electric-powered forklift truck: $ ???
Gas-powered forklift truck: $ ???
Calculate the IRR for each type of truck. Do not round intermediate calculations. Round your answers to two decimal places.
Electric-powered forklift truck: ??? %
Gas-powered forklift truck: ??? %
Which type of the truck should the firm purchase?
The firm should purchase [(A)Electric powered, (B) Gas
powered] forklift truck.
In: Finance
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Question: A) Assuming triangular arbitrage is not possible and exchange rates...
a) Assuming triangular arbitrage is not possible and exchange rates are priced efficiently, use the following quotes to determine the percentage change in the NZD against the JPY.
|
Today |
1 year ago |
|
|
AUD NZD |
1.0362 |
1.0965 |
|
AUD JPY |
71.85 |
74.65 |
b) You have the following quotes from three different banks:
|
Big Time Bank |
71.85 JPY AUD |
|
Fack Bank |
0.9601 AUD NZD |
|
Trusty Bank |
69.99 JPY NZD |
If you can buy or sell at the given quotes, how much profit can you make using AUD $1 000 000. Clearly show each of your trades and give your profit in AUD.
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6. (Merger and acquisition):Energy-USA plans to acquire Energy-Brazil. It offers X millionsharesof Energy-USA for all of Energy-Brazil’s shares. The exchange rate is R$4.07/$ around the acquisition. Also, there are no expected synergies from the transaction.
|
P/E ratio |
# of Shares |
(after-tax) Earnings |
|
|
Energy-Brazil |
20 |
200 million |
R$407 million |
|
Energy-USA |
30 |
250 million |
$200 million |
(a) If Energy-USA pays no premium to acquire Energy-Brazil, what will be the EPSof Energy-USA after the merger?
(b) What will be the P/E ratio (4 decimal places)of Energy-USA after the merger (if no premium is paid)?
(c) In part (b), find the value of Xand the exchange ratio (4 decimal places).
(d) (new part) Suppose Energy-USA offers an exchange ratio such that, at current pre-announcement stock prices ($) for both firms, the offer represents a 20% premium to acquire Energy-Brazil. What will be the EPSof Energy-USA after the merger?
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