You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the​ drug's profits will be $1 million in its first year and that this amount will grow at a rate of 2% per year for the next 17 years. Once the patent​ expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 9% per​ year?

Problem 1-10 (LO. 4, 5)

Ashley runs a small business in Boulder, Colorado, that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned about product liability and is planning to take the company public in year 2, she currently is considering incorporating the business. Pertinent financial data are as follows:

Ashley expects her combined Federal and state marginal income tax rate to be 25% over the three years before any profits from the business are considered. Her after-tax cost of capital is 10%, and the related present value factors are: for 2017, 0.8929; for 2018, 0.7972; and for 2019, 0.7118.

Click here to access the tax table to use for this problem.

Enter all amounts as positive numbers. When required, round your answers to the nearest dollar.

a. Considering only these data, compute the present value of the future cash flows for the three-year period, assuming that Ashley incorporates the business and pays all after-tax income as dividends (for Ashley’s dividends that qualify for the 15% rate).

Considering only these data, compute the present value of the future cash flows for the period, assuming that Ashley continues to operate the business as a sole proprietorship.

Hampton Industries had $70,000 in cash at year-end 2018 and $21,000 in cash at year-end 2019. The firm invested in property, plant, and equipment totaling $300,000 — the majority having a useful life greater than 20 years and falling under the alternative depreciation system. Cash flow from financing activities totaled +$170,000. Round your answers to the nearest dollar, if necessary.

1. What was the cash flow from operating activities? Cash outflow, if any, should be indicated by a minus sign.

   $  

2. If accruals increased by $10,000, receivables and inventories increased by $125,000, and depreciation and amortization totaled $29,000, what was the firm's net income?

   $  

Charles and Caitlin are facing an important decision. After having discussed different financial scenarios, the two computer engineers felt it was time to finalize their cash flow projections and move to the next stage – decide which of two possible projects they should undertake.

Both had a bachelor degree in engineering and had put in several years as maintenance engineers in a large chip manufacturing company. About six months ago, they were able to exercise their first stock options. That was when they decided to quit their safe, steady job and pursue their dreams of starting a venture of their own. In their spare time, almost as a hobby, they had been collaborating on some research into a new chip that could speed up certain specialized tasks by as much as 25%. At this point, the design of the chip was complete. While further experimentation might improve the performance of their design, any delay in entering the market now may prove to be costly, as one of the established players might introduce a similar product of their own. The duo knew that now was the time to act if at all.

They estimated that they would need to spend about $1,000,000 on plant, equipment and supplies. As for future cash flows, they felt that the right strategy at least for the first year would be to sell their product at dirt-cheap prices in order to induce customer acceptance. Then, once the product had established a name for itself, the price could be raised. By the end of the fifth year, their product in its current form was likely to be obsolete. However, the innovative approach that they had devised and patented could be sold to a larger chip manufacturer for a decent sum. Accordingly, the two budding entrepreneurs estimated the operating cash flows for this project (call it Project A) as follows:

PROJECT A                                                                                                 

An alternative to pursuing this project would be to sell their innovative chip design to one of the established chip makers. This way, they would receive an upfront payment. But the amount would be relatively small – perhaps around $200,000 – as neither their product nor their innovative approach had a track record.

They could then invest in some plant and equipment that would test silicon wafers for zircon content before the wafers were used to make chips. Too much zircon would affect the long-term performance of the chips. The task of checking the level of zircon was currently being performed by chip makers themselves. However, many of them, especially the smaller ones, did not have the capacity to permit 100% checking. Most tested only a sample of the wafers they received. Dave and Eva were confident that they could persuade at least some of the chip makers to outsource this function to them. By exclusively specializing in this task, their little company would be able to slash costs by more than half, and thus allow the chip manufacturers to go in for 100% quality check for roughly the same cost as what they were incurring for a partial quality check today. The life of this project too is expected to be only about five years. The initial investment for this project is estimated at $ 1,100,000. After taking into account the sale of their patent, the net investment would be $900,000. As for the future, Charles and Caitlin were pretty sure that there would be sizable profits in the first year. But thereafter, the zircon content problem would slowly start to disappear with advancing technology in the wafer industry.

Keeping this in mind, they estimate the future cash inflows for this project (call it Project B) as follows:

PROJECT B                                                                                                 

Charles and Caitlin now need to make their decision. For purposes of analysis, they plan to use a required rate of return of 20% for both projects. Ideally, they would prefer that the project they choose have a payback period of less than 3.5 years and a discounted payback period of less than 4 years.

One of the concerns that Charles and Caitlin have is regarding the reliability of their cash flow estimates. The analysis depends on the accuracy of those projected cash flows. However, they are both aware that actual future cash flows may be higher or lower.

QUESTION   

1. Which of these projects would you recommend? Explain why.

Bonus Value. You have a bond that pays $ 100 of annual interest, with a value of $ 1,000 and matures in 15 years. Your required rate of return is 12%. a. Calculate the value of the bonus b. How does the value change if your required rate of return: 1. Increase to 15% 2. Decrease to 8% c. Assume that the bond matures in 5 years instead of 15 years. Re-compute your answers in part b.

Stephen Hawkins, Inc., currently has a common stock $65,000 and retained earnings of $175,000. The firm is expecting the following net income and dividends for the next five years.

Required:

Determine the Return on Equity for each year and average return on equity for the 5-year period.

Broad Ridge Corporation has the following capital structure at present.

The firm needs additional funds of $175,000 to finance an expansion plan. It is evaluating raising this capital using any one of the following options.

1. Issue common stock at a price of $35 each
2. Issue preferred stock of $200 at par each with a dividend rate of 8%.
3. Issue 10-year bonds of $10,000 at par each with an interest rate of 8%,

Required: Discuss the impact of each of these options on the capital structure of the company

Harold Reese must choose between two bonds: Bond X pays $79 annual interest and has a market value of $860. It has 12 years to maturity. Bond Z pays $89 annual interest and has a market value of $820. It has six years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Current Yield Bond X % Bond Z % b. Which bond should he select based on your answers to part a? Bond Z Bond X c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 9.90 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Approximate yield to maturity % Exact yield to maturity % d. Has your answer changed between parts b and c of this question? No Yes

"The Horace Newtech Company is considering the introduction of a new product. Generally, the company's products have a life of about 5 years, after which they are deleted from the range of products that the company sells. The new product requires the purchase of new equipment costing $9,500,000, including freight and installation charges. The useful life of the equipment is 5 years, with an estimated resale of equipment of $2,750,000 at the end of that period. The equipment will be fully depreciated to zero value using the straight line (prime cost) method.

The new product will be manufactured in a factory already owned by the company. This factory is currently being rented to another company under a lease agreement that has 5 years to run and provides for an annual rental of $190,000. Under the lease agreement, the Horace Newtech Company can cancel the lease by immediately (year 0) paying the lessee compensation equal to 1 year's rental payment.

It is expected that the product will involve the company in market research expenditures that will amount to $750,000 during the first year the product is on the market. Additions to current assets (net working capital) will require $310,000 at the commencement of the project and are assumed to be fully recoverable at the end of the fifth year.

The new product is expected to generate sales revenue as follows:

Year 1: $3,250,000

Year 2: $3,750,000

Year 3: $3,500,000

Year 4: $3,250,000

Year 5: $1,750,000

It is assumed that all cash flows are received at the end of each year. The corporate tax rate is 25%.

Horace Newtech Company has an equity beta of 0.5. Its capital structure consists of equal amounts of equity and debt. The risk free rate is 5%. The debt has a pre-tax yield of 9% and the expected rate of return on the market index is 18%.

Using the inputs suggested in the proposed investment, design an Excel financial model that can help to evaluate the project. The model should enable Horace Newtech Company to consider the project and forecast the net cash flows. 5 marks will be allocated for the presentation and clarity of your model (e.g., if there are clear headings, clear arrangement for input cells, appropriate use of colors, have some degree of flexibility, generate warning messages for wrong user inputs, etc.).

Answer the following questions using your Excel financial model:

a. What is Horace Newtech Company ’s weighted average cost of capital (WACC)?

b. Estimate the free cash flows of the project.

c. What is the net present value (NPV) and internal rate of return (IRR) of the project? Should Horace Newtech Company undertake the project based on NPV? How about IRR? Do both NPV and IRR lead to the same decision?

d. Draw a line graph to illustrate the sensitivity of the NPV to changes in WACC? The graph should have a chart title, as well as x- and y-axis labels. Briefly explain the relationship between WACC and NPV."

(Please help me )

1. Tom has $300,000 to invest. He invests his money into four stocks with the following betas:

Stock A= $120,000 Beta: 2.15

Stock B= $75,000 Beta: 0.40

Stock C= $50,000 Beta: 0.85

Stock D= $55,000 Beta: 0.66

The risk-free rate is 4%, and the expected market return is 9% Compute the required rate of return on the portfolio.

1. RRR Co. just paid a dividend of $1.15 per share. The dividend is expected to grow by 40% next year, 20% in both Years 2 & 3, 10% in Year 4, and then grow at a constant rate of 4% thereafter. The required rate of return is 8.5%. Compute the selling price of the stock.

Answer as most as possible I want to understand it all

1. Union Local School District has bonds outstanding with a coupon rate of 4.2 percent paid semiannually and 17 years to maturity. The yield to maturity on these bonds is 3.5 percent and the bonds have a par value of $5,000.

-What is the dollar price of each bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

2.  Fluss AB has 9.5 per cent coupon bonds making annual payments with a YTM of 7.1 per cent. The current yield on these bonds is 7.5 per cent. The par value of the bond is €1,000.
How many years do these bonds have left until they mature?

3.Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has four years to maturity, whereas the Hardy Corp. bond has 15 years to maturity.

a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?

b.  If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then?

4. Stand AG has bonds on the market with 17.5 years to maturity, a YTM of 6 per cent, and a current price of €930. The bonds make semiannual payments. The par value of the bond is €1,000.

-What must the coupon rate be on these bonds?

Problem 1 (Hedging)

A US exporter expects to receive £1 million in 2 months for her exports to the UK. The current exchange rate is US$2.30/£. She is worried that the pound might depreciate over the next 2 months and wants protection against its decline but she also want to benefit from a possible rise in £ over the next 2 months. Put options and call options on the £, with 2-month maturity are available.

1. What should she do?

2. Suppose the 2-month put options exercisable at US$2.50/£ are trading at US$0.01. What would be her cash revenue, given your answer in part a), if at the 2 month end the spot exchange rate turns out to be

   1. US$2.00/£

   2. US$3.00/£

3. What would be her minimum cash revenue, no matter what the spot rate at the end of 2 months turn out to be?

4. What would be the upfront cost (fee) for undertaking the appropriate options contract?

5. What would she do if the expected £1 million at the 2-month end are not received and what would be her loss if that happens?

The stock price of a company is currently $75 per share. A call option on the company’s stock has an exercise price of $80 and six months to expiration. The continuous riskfree rate is 5% per year and the stock's volatility is 28% per year.

A.) Use the Black-Scholes formula to find the value of the call option.

B.) Calculate the hedge ratio for the call option.

1. A 10-year steel pipe-producing project requires $66 million in upfront investment (all in depreciable assets), $20.40 million of which is borrowed capital at an interest rate of 6.28% per year. The expected pipe sales are 1,800,000 pipes per year. The expected price per pipe is $64 and the variable cost is $24 per widget. The fixed costs excluding depreciation are expected to be $14 million per year for ten years. The upfront investment will be depreciated on a straight line basis for the 10-year useful life of the project to $6 million book value. The expected salvage value of the assets is $14 million. The tax rate is 25% and the WACC applicable to the project is 14%.
   1. Calculate the accounting Break-even point.
   2. Calculate the DOL, DFL, and DCL (Do your own change in sales).
   3. Calculate the NPV breakeven annual cash flow for the project.
   4. Calculate the NPV break-even point