BOND VALUATION

Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 10%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

$

Given the following information, find the yield to maturity (YTM)

DTD- 03/15/2014

Coupon rate- 4.625%

Maturity- 03/15/2024

market price- 93.749 per share (total market price= 22,812.50)

Cost price- 100.30 per share (total cost price = 25,813.25)

City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by three and one-half days and disbursement time increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 4 percent per annum.    
  
a. If City Farm has $4.55 million per day in collections and $3.55 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
  

Freed-up funds=

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
  

Interest on freed-up cash=

Zion Williams has been asked to prepare a report on potential funding sources for expansion of SI. Zion understands that private equity is a broad term covering instances where investors provide capital for businesses not listed on a stock exchange. This can range from a few thousand dollars seed capital for a venture capital start-up right through to management buyouts worth hundreds of millions of dollars. In return, private equity investors generally take a sizeable stake in the business. Required In a thousand words (1000 words) please prepare a background briefing for Zion including the following: i. discuss the resurgence of the private equity asset class globally ii. review the different types of private equity investments iii. explain the opportunities and risks that come with private equity investing (

describe the history of the forex, its participants and factors that influence exchange rates

Your company is considering investing in one of two mutually exclusive projects. The cost of capital is 11%. The first project Has $25,000 annual cash inflows, a 10-year life, and will cost $120,000 at time zero. The second project has a 7-year life, Annual cash inflows of $20,000 per year, and a cost of $75,000 at time zero. Which project has the highest NPV. Assuming that these projects will most likely be repeated indefinitely into the future, which project would add the most value to the company? Justify your answer using the EAA

Assume that Pogue's stock now sells for $18 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have 25 warrants, each warrant entitles the holder to buy 1 share of stock at a price of $21. Pogue's pure bonds yield 8%. Assume that the warrants will have a market value of $1.75 when the stock sells at $18. What annual dollar coupon must the company set on the bonds with warrants if they are to clear the market (i.e., the market is in equilibrium)? Round your answer to the nearest cent.

$   

What annual coupon interest rate must the company set on the bonds with warrants if they are to clear the market (i.e., the market is in equilibrium)? Round your answer to two decimal places.

  %

Many businesses around the world still fail because their capital investment decisions are based upon a calculation on the back of an envelope and do not take any of the correct factors into account. Even larger businesses often get this wrong. This is a true sign of poor resource management.

• Do you agree or disagree?

• Discuss the alternative methods of investment appraisal and describe the limitations of these to help justify your arguments.

• How do you think that capital budgeting decisions should ideally be made by different types of organisations

What are real options? Identify the tools and techniques available for managers for analyzing the profitability of the project. Discuss how the identified criteria are used in selecting profitable capital projects.

Best-case NPV =

Worst-case NPV =

A group of graduate students has decided to form a small Internet Service Company in Brevard County. The company will service Brevard County Florida home users and need $400 million to start the company. Two financing plans have been proposed by the investment banking firms. Plan A is an all common- equity alternative. Under this agreement, 4 million common shares will be sold to net the firm $100 per share. Plan B involves the use of financial leverage (debt and equity). A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to

$200 million. The corporate tax rate is 40 percent. If the detailed financial analysis

projects that there is a 30% chance that EBIT will be $15.0 million, 40% chance that it will be $18.0 million, and 30% chance that it will be $20 million annually, which plan will maximize the wealth of the stockholders? (note: the problem is based on the understanding of financial statement and financial leverage)

Plan ?

PLEASE ANSWER ALL THE QUESTIONS:

It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects.

Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows:

We are considering the introduction of a new product. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the new project:

Cost of new plant and equipment:                   $7,900,000

Shipping and installation costs:                                     $100,000

Sales price per unit:                                                      $300/unit in years 1 through 4, $260/unit in year 5

Variable cost per unit:                                                      $180/unit

Annual fixed costs:                                                      $200,000 per year in years 1–5

Working-capital requirements:

There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.

Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years.

Year                                    Units Sold

1                                    70,000

2                                    120,000

3                                    140,000

4                                    80,000

5                                     60,000

The purpose/risk classes and preassigned required rates of return are as follows:

• Replacement decision 12%
• Modification or expansion of existing product line 15%
• Project unrelated to current operations 18%
• Research and development operations 20%

a. Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?

b. How does depreciation affect free cash flows?

c. How do sunk costs affect the determination of cash flows?

d. What is the project’s initial outlay?

e. What are the differential cash flows over the project’s life?

f. What is the terminal cash flow?

g. Draw a cash-flow diagram for this project.

h. What is its net present value?

i. What is its internal rate of return?

j. What is its modified internal rate of return?

k. Should the project be accepted? Why or why not?

l. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project’s risk?

m. Explain how simulation works. What is the value in using a simulation approach?

n. What is sensitivity analysis and what is its purpose?