The Clinic has been asked to provide healthcare services for the upcoming Boston Calling concert event and next year’s event. They are the sole provider for both years. The clinic’s managers will conduct a financial analysis of the overall two year project. An up-front cost of $100,000 prior to the Year 1 event (= Year 0 Today) is needed to get the on-site clinic ready. , A net cash inflow of $250,000 is expected from the event organizers for each of the two years bands will perform ($250,00 both Year 1 & Year 2). However, Ogunquit Clinic has been also been asked to pay a marketing & branding fee as the exclusive provider of on-site health services. This $300,000 fee must be paid at the close of the Boston Calling event in Year 2. (5 points each, 10 points total)a.Assuming a capital cost of 10%, what is project’s net present value (NPV)?b. Assume that the marketing & branding fee does not have to be paid and the only variables are the $100,000 Year 0 Today outflow and the two $250,000 inflows (Saturday & Sunday). What is the project’s internal rate of return (IRR)?

3. Analysis of an expansion project

Companies invest in expansion projects with the expectation of increasing the earnings of its business.

Consider the case of Yeatman Co.:

Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:

This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law.

Determine what the project’s net present value (NPV) would be under the new tax law.

$22,858

$27,430

$26,287

$18,286

Now determine what the project’s NPV would be when using straight-line depreciation.     

Using the      depreciation method will result in the highest NPV for the project.

No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $400 for each year of the four-year project?

$1,365

$1,055

$1,241

$745

The project will require an initial investment of $15,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $18,000, after taxes, if the project is rejected. What should Yeatman do to take this information into account?

Increase the amount of the initial investment by $18,000.

Increase the NPV of the project by $18,000.

The company does not need to do anything with the value of the truck because the truck is a sunk cost.

3. Understanding the IRR and NPV

The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions.

Consider the case of Cold Goose Metal Works Inc.:

Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Omicron is 13.2%, but he can’t recall how much Cold Goose originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Omicron. They are:

The CFO has asked you to compute Project Omicron’s initial investment using the information currently available to you. He has offered the following suggestions and observations:

Given the data and hints, Project Omicron’s initial investment is ________ , and its NPV is ________ (rounded to the nearest whole dollar).

A project’s IRR will ________ if the project’s cash inflows increase, and everything else is unaffected.

CASH CONVERSION CYCLE

Parramore Corp has $11 million of sales, $3 million of inventories, $2 million of receivables, and $1 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.
   days
2. 
   
3. If Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places.
   days
4. 
   
5. How much cash would be freed up, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $
6. 
   
7. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $

Part 1: Consider the Gordon model of constant growth rate assumption. State briefly what this model says about the value of stocks. In 2018, Walmart paid $2.08 in dividends per share. The stock traded for about $96 per share towards the end of the year. Find out a set of inputs to the Gordon growth model (e.g., the assumed growth rate g and the required rate of return r, that make the intrinsic value of the stock equal to the trading price of $96. There can be many combinations; you just need to find out one such combination by trial and error.

Part 2: Suppose you have 10,000 to invest and you can choose up to five companies' stocks (or fewer) to split this investment. Which companies would you choose so that you create a well-diversified portfolio (usually diversification requires more types of investments, but this is a simpler example)? Review the concept of diversification and the role of correlation in Chapter 8. Defend your choice based on chapter 8.

1. Jackson Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 11%. The bonds have a yield to maturity of 12%. What is the current market price of these bonds? Round your answer to the nearest cent.

2. Wilson Wonders' bonds have 15 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 12%. The bonds sell at a price of $1,100. What is their yield to maturity? Round your answer to two decimal places.

Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $500,000. Your management team believes that there is a 60% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike. If the test-marketing phase is successful, then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after tax cash flows of $395,040 in perpetuity beginning in year two. If the test marketing is not successful, Kinston can still go ahead and build the new plant, but the expected annual after tax cash flows would be only $200,000 in perpetuity beginning in year two. Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000. Kinston's cost of capital is 10%. Assuming that Kinston has the ability to sell the prototype in year one for $300,000, the NPV of the Kinston Industries Mountain Bike Project is closest to:

127,490.91

90,000.00

90,909.23

690,240.34

What are the redeeming qualities and shortcomings of the internal rate of return (IRR) method in capital budgeting analysis?

Explain conceptually in detail what the weighted average cost of capital (WACC) is and the role it plays in capital budgeting.

Explain why the opportunity cost and net working capital (NWC) are included, while the financing costs and sunk costs are NOT in the cash flow analysis.

The McDonald Group purchased a piece of property for $1.5 million. It paid a down payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 5% compounded monthly.

-What is the amount of each mortgage payment?

-What is the loan balance at the end of year 5?

-What is the amount of principal that needs to repaid during year 5?

-What is the amount of interest that needs to be repaid during year 5?

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below.

If the corporate tax rate is 30 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Aftertax cost of debt ?

A mutual fund charges 6% front-end load and 3% operating and 12b-1 expenses. At the beginning of the year, the fund has $200 million assets under management and 10 million shares outstanding. During the year the value of assets held by the fund increases by 10% and the fund receives dividends of $2 million. What is the fund's NAV at the end of the year? (The number of mutual fund shares outstanding is still 10 million at the end of the year.)

REH​ Corporation's most recent dividend was $ 2.56 per​ share, its expected annual rate of dividend growth is 5​%, and the required return is now 15​%. A variety of proposals are being considered by management to redirect the​ firm's activities. Determine the impact on share price for each of the following proposed actions.

a.  Do​ nothing, which will leave the key financial variables unchanged.

b.  Invest in a new machine that will increase the dividend growth rate to 9​% and lower the required return to 11​%.

c.  Eliminate an unprofitable product​ line, which will increase the dividend growth rate to 9​% and raise the required return to 19%.

d.  Merge with another​ firm, which will reduce the growth rate to 2​% and raise the required return to 19​%.

e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to  8% and increase the required return to 19​%.

A borrower has the following two financing options: 80% LTV fully amortizing CPM for 25 years at 8% or 90% LTV CPM loan at 9% with similar terms. The borrower is not planning to prepay the loan.

a. Compute the incremental cost of borrowing the additional 10% (any property value should works).

b. What is the incremental cost of borrowing the additional 10% if the lender charges 2 discount points additional on the 90% loan?

c. Redo (b) assuming the borrower prepays the loan after 5 years.