MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 6% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $5 million. (4) The unlevered cost of equity is 13%.

1. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.
   Company U: $    million
   Company L: $    million
   
2. What is r_s for Firm U? Round your answer to one decimal place.
     %
   
   What is r_s for Firm L? Do not round intermediate calculations. Round your answer to one decimal place.
     %
   
3. Find S_L, and then show that S_L + D = V_L results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.
   S_L = $    million
   S_L + D = $    million
   
4. What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.
     %

   What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
     %

Optimal Capital Structure with Hamada

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm's EBIT is $14.386 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 6%, and the risk-free rate is 4%. BEA is considering increasing its debt level to a capital structure with 30% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 8%. BEA has a beta of 1.0.

What is the total value of the firm with 30% debt? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.
$   million

1. What is BEA's unlevered beta? Use market value D/S (which is the same as w_d/w_s) when unlevering. Do not round intermediate calculations. Round your answer to two decimal places.
2. What are BEA's new beta and cost of equity if it has 30% debt? Do not round intermediate calculations. Round your answers to two decimal places.
   Beta:  
   Cost of equity:   %
3. What are BEA’s WACC and total value of the firm with 30% debt? Do not round intermediate calculations. Round your answer to two decimal places.
     %

The University of California has two bonds outstanding. Both issues have the same credit rating, a face value of $1,000 and a coupon rate of 3%. Coupons are paid twice a year. Bond A matures in 1 year, while bond B matures in 30 years. The market interest rate for similar bonds is 10%.

Part 1

What is the price of bond A?

Attempt 1/5 for 10 pts.

Part 2

What is the price of bond B?

Attempt 1/5 for 10 pts.

Part 3

Now assume that yields increase to 13%. What is the price of bond A?

Attempt 1/5 for 10 pts.

Part 4

What is now the price of bond B?

A GM and a Ford bond both have 4 years to maturity, a $1,000 par value, a BB rating and pay interest semiannually. GM has a coupon rate of 6.2%, while Ford has a coupon rate of 5.3%.

   Attempt 1/5 for 10 pts.

Part 1

The GM bond trades at 94.59 (percent of par). What is the yield to maturity (YTM)?

Attempt 1/5 for 10 pts.

Part 2

What should be the price of the Ford bond (in $)?

A bond has an annual coupon rate of 4.4%, a face value of $1,000, a price of $1,166.29, and matures in 10 years. What is the bond's YTM?

Boeing has a bond outstanding with 15 years to maturity, a $1,000 par value, a coupon rate of 6.9%, with coupons paid semiannually, and a price of 100.93 (percent of par).

If the company wants to issue a new bond with the same maturity at par, what coupon rate should it choose?

A corporate bond has 16 years to maturity, a face value of $1,000, a coupon rate of 4.8% and pays interest semiannually. The annual market interest rate for similar bonds is 3.3% What is the price of the bond?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $16,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $33,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $7,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $36,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2 $ In Year 3 $ If the WACC is 13%, should the spectrometer be purchased?

Ziege Systems is considering the following independent projects for the coming year: Project Required Investment Rate of Return Risk A $4 million 14.25% High B 5 million 11.75 High C 3 million 9.75 Low D 2 million 8.75 Average E 6 million 12.75 High F 5 million 12.75 Average G 6 million 6.75 Low H 3 million 12.25 Low Ziege's WACC is 10.25%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. Which projects should Ziege accept if it faces no capital constraints? Project A Project B Project C Project D Project E Project F Project G Project H If Ziege can only invest a total of $13 million, which projects should it accept? Project A Project B Project C Project D Project E Project F Project G Project H If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. $ million Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept? Project A Project B Project C Project D Project E Project F Project G Project H What would be the dollar size of its capital budget? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. $ million

Your company is contemplating the purchase of a large stamping machine. The machine will cost $161,000. With additional transportation and installation costs of $5,000 and $12,000​, ​respectively, the cost basis for depreciation purposes is $178,000. Its MV at the end of five years is estimated as $39,000. The IRS has assured you that this machine will fall under a three year MACRS class life category. The justifications for this machine include $39,000 savings per year in labor and $26,000 savings per year in reduced materials. The​ before-tax MARR is 25​% per​ year, and the effective income tax rate is 50​%. Assume the stamping machine will be used for only three​ years, owing to the​ company's losing several government contracts. The MV at the end of year three is $50,000. What is the income tax owed at the end of year three owing to depreciation recapture​ (capital gain)?

Choose the correct answer below.

A. The income tax owed at the end of year three is $11,815.

B. The income tax owed at the end of year three is $24,000.

C. The income tax owed at the end of year three is ​$36,810.

D. The income tax owed at the end of year three is ​$23,629.

E. The income tax owed at the end of year three is ​$18,405.

The answer is A. Can you please show the steps to solve this in Excel?

Assume​ you've generated the following information about the stock of​ Bufford's Burger​ Barns: The​ company's latest dividends of ​$3.51 a share are expected to grow to ​$3.90 next​ year, to ​$4.33 the year after​ that, and to ​$4.81 in year 3. After​ that, you think dividends will grow at a constant 6 ​% rate.
a. Use the variable growth version of the dividend valuation model and a required return of 15 ​% to find the value of the stock.
b. Suppose you plan to hold the stock for three​ years, selling it immediately after receiving the ​$4.81 dividend. What is the​ stock's expected selling price at that​ time? As in part a​, assume a required return of 15 ​%.
c. Imagine that you buy the stock today paying a price equal to the value that you calculated in part a. You hold the stock for three​ years, receiving dividends as described above. Immediately after receiving the third​ dividend, you sell the stock at the price calculated in part b. Use the IRR approach to calculate the expected return on the stock over three years. Could you have guessed what the answer would be before doing the​ calculation?
d. Suppose the​ stock's current market price is actually ​$45.83 . Based on your analysis from part a​, is the stock overvalued or​ undervalued?
e. A friend of yours agrees with your projections of​ Bufford's future​ dividends, but he believes that in three​ years, just after the company pays the ​$4.81 ​dividend, the stock will be selling in the market for ​$56.79 . Given that​ belief, along with the​ stock's current market price from part d​, calculate the return that your friend expects to earn on the stock over the next three years.

The city of Waterbourne has made it a strategic goal to enhance livability in the city. The city has decided to undertake a project that will occur in two phases. During the first phase, the city will connect several of the parks with walking paths. During the second phase, the city will add water features or splash fountains to several of the parks.

The initial cost of the project will be $409250. Annual utilities for maintaining the walking paths and keeping them lit during the early evening are estimated to be $13520, with costs increasing by $157 each subsequent year. The paths will require repaving in year 9 at a cost of $49867 and again in year 19 at a cost of $65295.

The water features and splash fountains will be added to the parks at the end of year 11 at a cost of $222659. The water utilities are estimated to be $16643 per year, increasing by 12% each subsequent year. (The first payment for the water utilities will occur at the end of year 11.)

The city has secured a sponsorship from a local business to help pay for part of the project. The city will receive a grant from the business of $112755 per year, increasing by 7% each subsequent year. The city will receive the grant for 8 years. (The city will receive the first grant payment at the end of year 1.)

Using a nominal annual interest rate of 7% compounded annually and a lifespan of 28 years, what is the present worth of the entire project?

"Derivatives" Please respond to the following:

• The use of derivatives within financial institutions is considered to have contributed the financial crisis in 2008. Assess how the use of derivatives contributed to significant losses in the financial industry, indicating how such losses may be mitigated in the future. Provide a rationale for your response.
• Some economists and bankers believe that derivatives make the market safer. Agree or disagree with this statement, providing support for your position.
• Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.

Garage, Inc., has identified the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 –$ 29,400 –$ 29,400

1 14,800 4,500

2 12,700 10,000

3 9,400 15,600

4 5,300 17,200

1. What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR

Project A %

Project B %

2. Using the IRR decision rule, which project should the company accept?

A) Project A

B) Project B

3. Is this decision necessarily correct?

A) Yes

B) No

4. If the required return is 12 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

NPV

Project A $

Project B $

5. Which project will the company choose if it applies the NPV decision rule?

A) Project A

B) Project B

6.At what discount rate would the company be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Discount rate %

Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for the assets. Last year, the assets produced revenues of $15,000,000. Revenues earned in the next year (i.e., year 1) and in future years are estimated using the information in the table below.

Your staff expects that the following assumptions will hold over the operating period:

• The assets will be viable for another 10 years but will be worthless at the end of the 10 year period
• The assets are qualified by the IRS for depreciation using the straight-line method
• A constant tax rate of 20%

Your staff has also identified three key areas of uncertainty, which include

Develop the annual pro forma after-tax cash flow statement for each scenario.

Note: I am pretty sure the other "experts" who answered the question previously had major flaws in their math.

Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for the assets. Last year, the assets produced revenues of $15,000,000. Revenues earned in the next year (i.e., year 1) and in future years are estimated using the information in the table below.

Your staff expects that the following assumptions will hold over the operating period:

• The assets will be viable for another 10 years but will be worthless at the end of the 10 year period
• The assets are qualified by the IRS for depreciation using the straight-line method
• A constant tax rate of 20%

Your staff has also identified three key areas of uncertainty, which include

For this case, address the following goals (each goal should be shown in a separate worksheet in an Excel workbook; provide labels on each worksheet):

Goal 2- Calculate the NPV and IRR for each scenario. Within the Goal 2 worksheet, discuss/interpret the NPV and IRR values that you have calculated in terms of whether the acquisition should be accepted or rejected.

Please find the gain/loss for each week.

Total profit gained or loss for all 4 weeks.

summarize the comparison between the 5 investments compared to S&P 500.