You invest 27,000 in a corporate bond selling for $900 per $1000. Over the coming year, the bond will pay interest of $75 per $1000 of par value. The price of the bond at year’s end will depend of the level of interest rate prevailing at that time. You construct the following scenario analysis:
|
Interest |
Probability |
Year-End Bond Price |
|
High |
0.2 |
$840 |
|
Unchanged |
0.5 |
915 |
|
Low |
0.3 |
975 |
Your alternative investment is a T-bill that yields a certain rate of 5%. Calculate the HPR for each scenario, the expected rate of return, and the risk premium on your investment. What is the expected year-end dollar value of your investment? (9 Points)
In: Finance
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows:
| Year | Project A | Project B | Project C | ||||||
| 0 | − | $ | 200,000 | − | $ | 365,000 | − | $ | 200,000 |
| 1 | 129,000 | 226,000 | 139,000 | ||||||
| 2 | 129,000 | 226,000 | 109,000 | ||||||
Suppose the relevant discount rate is 8 percent per year.
a. Compute the profitability index for each of the
three projects. (Do not round intermediate calculations.
Round your answers to 2 decimal places, e.g., 32.16.)
| Profitability index | |
| Project A | |
| Project B | |
| Project C | |
b. Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)
| NPV | ||
| Project A | $ | |
| Project B | $ | |
| Project C | $ | |
c. Suppose these three projects are
independent. Which project(s) should Amaro accept based on the
profitability index rule?
| Project A | |
| Project B | |
| Project C | |
| Project A, Project B, Project C | |
| Project A, Project B | |
| Project A, Project C | |
| Project B, Project C |
d. Suppose these three projects are mutually
exclusive. Which project(s) should Amaro accept based on the
profitability index rule?
| Project B | |
| Project A | |
| Project C | |
| Project A, Project B | |
| Project A, Project B, Project C | |
| Project A, Project C | |
| Project B, Project C |
e. Suppose Amaro’s budget for these projects is
$565,000. The projects are not divisible. Which project(s) should
Amaro accept?
| Project A | |
| Project B | |
| Project C | |
| Project A, Project B, Project C | |
| Project B, Project C | |
| Project B, Project A | |
| Project A, Project C |
In: Finance
The next dividend for ABC Corp. is expected to be $ 1.24. It will rise to $ 2.47 the next year and grow at a constant 6.2 % from then on. The required return is 12.4 %. What is the current price of the stock?
In: Finance
You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2016. The bonds have a par value of $1,000. Rate Maturity Mo/Yr Bid Asked Chg Ask Yld ?? May 27 103.4625 103.5353 +.3028 6.019 6.302 May 32 104.4965 104.6422 +.4305 ?? 6.168 May 42 ?? ?? +.5418 4.051 In the above table, find the Treasury bond that matures in May 2032. What is your yield to maturity if you buy this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Yield to maturity
In: Finance
|
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.6 million on an aftertax basis. In five years, the aftertax value of the land will be $7.9 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $30.2 million to build. The following market data on DEI’s securities are current: |
| Debt: |
175,000 bonds with a coupon rate of 7.5 percent outstanding, 23 years to maturity, selling for 105 percent of par; the bonds have a $2,000 par value each and make semiannual payments. |
| Common stock: |
11,000,000 shares outstanding, selling for $77.60 per share; the beta is 1.15. |
| Preferred stock: |
540,000 shares of 5.3 percent preferred stock outstanding, selling for $86.75 per share. The par value is $100. |
| Market: |
6.5 percent expected market risk premium; 4.4 percent risk-free rate. |
|
DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7 percent on new common stock issues, 4.5 percent on new preferred stock issues, and 2.5 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 22 percent. The project requires $1,850,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally and that the NWC does not require floatation costs.. |
| a. |
Calculate the project’s initial Time 0 cash flow, taking into account all side effects. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1.5 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation to a zero salvage value. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $6.7 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| d. | The company will incur $9,000,000 in annual fixed costs. The plan is to manufacture 19,925 RDSs per year and sell them at $11,220 per machine; the variable production costs are $10,075 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| e. | DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 32.) |
| f. |
Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
What are the relevant differences between angels and venture capital investors that Ranjith Kumaran should consider when raising money for his venture? Who would be the best partner for him in the short term? Who would be the best partner in the long term
In: Finance
In: Finance
You are planning on saving for retirement. You wish to retire in 40 years, and you would like to withdraw an annual sum each year to live on starting 40 years from today - You have determined that you will need $100,000 to live on (in today’s dollars) - You estimate inflation (cost of living) to be 3% - Your estimated rate of return pre-retirement is 10%; in retirement 7% Assume your life expectancy once retired is another 20 years. How much money do you need to set aside today and for the next 39 years for you to reach your goal? HINT – Use a real rate of return in retirement (growing annuity) – verify your results with a schedule showing payments, income and disbursements
In: Finance
Ariel holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock’s beta, is listed in the following table:
|
Stock |
Investment |
Beta |
Standard Deviation |
|---|---|---|---|
| Andalusian Limited (AL) | $1,750 | 0.90 | 18.00% |
| Tobotics Inc. (TI) | $1,000 | 1.30 | 11.00% |
| Water and Power Co. (WPC) | $750 | 1.10 | 18.00% |
| Flitcom Corp. (FC) | $1,500 | 0.60 | 19.50% |
Suppose all stocks in Ariel’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?
Water and Power Co.
Flitcom Corp.
Tobotics Inc.
Andalusian Limited
Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?
Flitcom Corp.
Andalusian Limited
Water and Power Co.
Tobotics Inc.
If the risk-free rate is 7% and the market risk premium is 8.5%, what is Ariel’s portfolio’s beta and required return? Fill in the following table:
|
Beta |
Required Return |
|
|---|---|---|
| Ariel’s portfolio |
In: Finance
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%.
| 0 | 1 | 2 | 3 | 4 | ||||||
| Project A | -900 | 700 | 360 | 250 | 300 | |||||
| Project B | -900 | 300 | 295 | 400 | 750 | |||||
What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places.
years
What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.
years
What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places.
years
What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.
years
In: Finance
Coupon, Discount, Sinking, Floating, Call, Municipal, Income, Index, and Junk bonds.
Describe the distinguishing features of eight (8) of these bonds, Explain with examples which bond pays the highest return and which bond pays the lowest return and Why?
In: Finance
Which is the most regressive, based upon the difference in effective rates between the lowest and highest family income quintiles?
In: Finance
What is a junk bond and how does an investor profit from the purchase of a junk bond?
Explain with examples.
In: Finance
BEEber Inc. currently has 10,000 bonds outstanding. The bonds have a coupon rate of 8%, paid semi-annually, mature in 10 years, and are trading at $985 each. BEEber’s common stock currently sells for $20 per share and there are 750,000 shares outstanding.
The risk-free rate is 4.5%, the expected return on the market is 15%, and BEEber’s beta is equal to 2.0. The corporate tax rate is 40%. What is BEEber’s WAC?
In: Finance
What are the major risks to investors when investing in bonds?
Explain with examples.
In: Finance