Quisco Systems has
6.9 billion shares outstanding and a share price of
$ 18.84
Quisco is considering developing a new networking product in house at a cost of
$ 458 million. Alternatively, Quisco can acquire a firm that already has the technology for
$ 959
million worth (at the current price) of Quisco stock. Suppose that absent the expense of the new technology, Quisco will have EPS of
$ 0.96
a. Suppose Quisco develops the product in house. What impact would the development cost have on Quisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is
25 %
and the number of shares outstanding is unchanged.
b. Suppose Quisco does not develop the product in house but instead acquires the technology. What effect would the acquisition have on Quisco's EPS this year? (Note that acquisition expenses do not appear directly on the income statement.
Assume the firm was acquired at the start of the year and has no revenues or expenses of its own, so that the only effect on EPS is due to the change in the number of shares outstanding.)
c. Which method of acquiring the technology has a smaller impact on earnings? Is this method cheaper? Explain.
a. Suppose Quisco develops the product in house. What impact would the development cost have on Quisco's EPS? Assume all costs are incurred this year and are treated as an R&D expense, Quisco's tax rate is
25 %,
and the number of shares outstanding is unchanged.Quisco's new EPS would be.
(Round to the nearest cent.)
In: Finance
You purchased a new 2020 Honda Accord. You borrowed $30,710 to make the purchase. A bank lends you the money at an annual fixed interest rate of 3.75% for 5 years. The terms of the amortization loan include making monthly payments. Build the loan amortization schedule in Excel
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You are an employee of University Consultants, Ltd and have been given the following information. You are to present an investment analysis of a new small income-producing property for sale to a potential inventor. The asking price for the property is $8.5 million. You determine that the building was worth $7.225 million and could be depreciated over 39 years (use 1/39 per year). NOIs are estimated to be $901,375 for year 1, $900,681 for year 2, $899,962 for year 3, $943,700 for year 4, $961,855 for year 5 and expected to increase by 3.16% thereafter. A fully amortizing 70 percent loan can be obtained at 10 percent interest for 20 years (total annual payments will be monthly payments *12). The property is expected to be sold for $9,360,805 after 5 years. Capital gains from price appreciation will be taxed at 15 percent and depreciation recapture will be taxed at 25 percent. Your ordinary income will be taxed at 35 percent. Assume that there is no selling cost and equity discount rate is 13%.
a. What is mortgage loan balance by the end of year 5?
b. What is the annual interest dollar amount in year 2?
c. What is the debt service for year 4?
d. What is the first-year debt coverage ratio?
e. What is the first-year equity dividend rate?
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Curtis and Kathy filed a joint return for Year One on April 15, Year Two. The return claimed bogus deductions related to Curtis’s cattle-raising business. After their divorce in Year Three, the Internal Revenue Service discovered the bogus deductions and issued a notice of deficiency to both Curtis and Kathy.
While they were married, Kathy often visited Curtis’s farmland and on occasion helped out with some chores related to the business. Kathy collected all of Curtis’s receipts and sent them to their accountant to prepare their tax returns. Kathy saw that the receipts for Year One were unusually large, but she did not question Curtis with respect to any of the receipts. Kathy had no other involvement in Curtis’s business.
If Kathy files a request for innocent spouse relief under § 6015, how should the Service respond?
In: Finance
A stock has a required return of 8%, the risk-free rate is 3%, and the market risk premium is 3%.
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Small business owners usually focus on the cash balance in their bank accounts and may not use the statement of cash flows to analyze how their businesses are generating or using cash. Discuss what information is found on the statement of cash flows that is just as important as the bank balance (or more so) for the purpose of understanding the financial position of a company.
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Suppose you are 30 years old. You plan to retire at age 67 and live forever (Ok 100 years old). You want to be able to withdraw $100,000 per year during your retirement. Assume that you will earn a starting salary of $50,000, which will grow at a 2% annual rate. Your employer contributes 5% of your annual salary to your retirement fund. Further assume that your retirement fund will be invested in a basket of well diversified indices that collectively yield an annual investment return of eight percent. Upon retirement, you plan to move your investment fund to a safer investment vehicle that yields an annual investment return of two percent. Upon your death, you want to bequeath your wealth to your favorite charity.
a) If you plan to donate $500,000 to your favorite charity, what percent of your annual salary do you need to contribute each year in order to achieve your retirement goals?
b) Use Solver to maximize the amount of donation subject to the constraint that you contribute no more than 8% of your salary each year to the retirement fund.
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The National Bank and Trust Company
The National Bank and Trust Company currently employs approximately 1,100 employees. It presently has fifty branch offices
*- located throughout the metropolitan area, each of which employs approximately fourteen individuals (Four supervisory personnel and ten tellers or clerical employees). The bank expects to add ten branch offices during the next twelve months, twelve the following year, and sixteen in the third year. Branches within the bank differ considerably in size so the figures given above represent averages.
During the past month, the bank has placed an order for thirty automated teller machines which will be placed in its old branch offices. These machines are scheduled to be in operation December 31, one year from now. The bank has found that for each new machine purchased, one fewer teller is needed, on average.
During the past few years, the bank has experienced very high turnover at it branches (approximately 30 percent for tellers and clerical employees and 20 percent for managerial personnel). Turnover at the bank’s main office (headquarters) has been about 10 percent. The bank expects that these rates will continue the next three years.
Answer questions with steps you would take in the process to find the answers to the questions asked about turnover and total employees.
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Please use the following information to answer the remaining problems: Able Corporation has a project with the following cash flows and an 9.6% cost of money: Numbers in parentheses are outflows. Both Year 0 and Year 3 cash flows are outflows. Year 0 1 2 3 4 5 6 Cash flow $(351,000) $ 95,000 $186,000 $(300,000) $ 280,000 $260,000 $268,000 23. Please calculate the net present value ______________ 24. Please calculate the profitability indexes (two decimals please)_________________ 25. Please calculate the modified profitability index using the terminal value approach in the textbook (two decimals please)_______________________ 26. Please calculate the internal rate of return (two decimals please)_____________________________ 27. Please calculate the modified internal rate of return (two decimals please and per the book)________________________ 28. Please calculate the payback period (two decimals please)________________________ 29. Please calculate the present value payback period (two decimals please)___________________ ___
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Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding. In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital. Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2. (There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital. Fast Fruit's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%. Assume that all cash flows occur at the end of the year. If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition? (Report your answer in millions of dollars.)
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You are given the following information from a T-Note quote:
Settlement date: September 15, 2017
Maturity date: September 15, 2032
Price Quote: 102:9
In excel, compute and graph the coupon rates and current yields for yields-to-maturity of 1% to 10%, in 1% increments. Which of the following accurately depicts this calculation?
In: Finance
Trevi Corporation recently reported an EBITDA of $31,200 and $9,700 of net income. The company has $6,700 interest expense, and the corporate tax rate is 35 percent. What was the company’s depreciation and amortization expense?
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Assume that you buy 200 shares of the Mulligan Corp. on Margin at a price of $75 per share. Your broker requires 60% initial margin and 35% minimum maintenance margin.
Assume that instead, you sell short 200 shares of Mulligan at $75 per share with a 50% margin requirement. (7 points total)
a) Assume that the price has increased to $88 one month later. What is the remaining equity in your account and what rate of return have you earned on the initial investment?
b) Now do the same as in part a assuming the price has fallen to $54 per share.
c) If the minimum maintenance margin on the short sale is 30%, at what stock price would a margin call be made?
In: Finance
A) An excerpt from Johnson & Johnson:
“As of December 31, 2017, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $70 million after-tax. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period.”
What is meant by “reclassified into earnings”? What type of hedging transaction is mentioned?
B) Caesar’s Casino (WILL NOT BE GRADED. WE WILL SOLVE THIS IN CLASS)
On January 1, 2015, Ceasar’s Casino, a public business entity (Ceasar’s or the “Company”), executed a $250 million revolving credit facility with Uber Bank AG (Uber). The rate of interest on the credit facility is USD LIBOR + 650 basis points (bps) for the first two years. Ceasar’s has a choice of 1M-, 3M-, and 6M-USD LIBOR each time it draws down on the credit facility. Interest payments on the borrowing are settled on the basis of the LIBOR tenor selected (e.g., if Ceasar’s selects three-month USD LIBOR as the referenced rate, interest is due every three months on that borrowing). Principal borrowed is typically due five years from the drawdown date, but each drawdown will contain a specified maturity date.
Upon finalizing the terms of the credit facility, Ceasar’s immediately drew down $50 million on January 1, 2015, at 3M-USD-LIBOR + 650 bps, due on December 31, 2019. Ceasar’s’s interest rate risk management policy requires that at least 75 percent of its outstanding debt be fixed rate (either directly or indirectly through the use of derivatives). To maintain compliance with its policy, Ceasar’s entered into an interest rate swap to “convert” the borrowing from variable to fixed interest.
The Company designated the interest rate swap as a hedge of forecasted interest payments associated with changes in 3M-USD-LIBOR on the first previously unhedged $50 million of 3M-USD-LIBOR based debt. The Company has no other debt. Specifically, Ceasar’s executed the following interest rate swap transaction:
• Notional amount: $50 million
• Trade date: January 1, 2015
• Effective date: January 1, 2015
• Maturity date: December 31, 2019
• Pay leg: 8.0 percent
• Receive leg: 3M-USD-LIBOR + 650 bps
• Initial LIBOR: 1.00 percent
• Payment dates: Each March 31, June 30, September 30, and December 31
• Variable reset dates: Quarterly, each March 31, June 30, September 30, and December 31.
Questions
1. Define the type of hedge that Ceasar’s would need to designate. In other words, are these cash flow hedges, fair value hedges, or net investment hedges?
2. Determine the journal entries to account for the hedging relationship between January 1, 2015 and June 30, 2015. Use the details below to aid in entry determination, and assume that the hedging relationship is perfectly effective.
Date 3M-USD-LIBOR Swap Fair Value
March 31, 2015 1.00% (reset 12/31) $250,000
June 30, 2015 1.10% (reset 03/31) $750,000
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David purchased an immediate annuity with a single $50,000 premium payment. He elects to receive income payments on a quarterly basis. When will his income begin? (Search Chapter 3) a. in one month b. in three months c. in six months d. in one year 22. Nikki purchased a fixed deferred annuity with a $10,000 premium payment. The contract offers a one-time bonus feature of 4 percent. Which of the following statements is true? (Search Chapter 3) a. The insurer will credit Nikki's contract with an additional $400. b. The insurer will add an additional 4 percent to the contract's death benefit. c. The insurer will increase the contract's guaranteed minimum rate of return by 4 percent during the first year. d. Nikki can withdraw an additional 4 percent of the contract's accumulated value without surrender charge. 23. At what point are a nonqualified annuity's earnings subject to income tax? (Search Chapter 3) a. when they are credited to the contract b. when they are withdrawn from the contract c. when they exceed the amount of premium deposited d. never 24. Troy purchased a deferred annuity for $100,000, naming himself and his wife as joint annuitants and his daughter, Trudy, as beneficiary. Ten years later, the contract had grown to $235,000, and Troy decided to annuitize under a joint and survivor life payout. He and his wife had received income totaling $50,000 when Troy died. How much will daughter Trudy receive at Troy's death? (Search Chapter 4) a. $0 b. $100,000 c. $135,000 d. $180,000 25. At the age of 68, Donna elected a straight life income option for the payout of her $150,000 deferred annuity. She received monthly payments for three years, totaling $42,000, and then she died. How much will her beneficiary receive? (Search Chapter 4) a. $150,000 b. $108,000 c. $42,000 d. $0
In: Finance