New-Project Analysis

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment's basic price is $74,000, and it would cost another $14,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $33,500. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,500. The machine would have no effect on revenues, but it is expected to save the firm $24,220 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

1. What is the Year-0 net cash flow?

   $  

2. What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3's calculation here.

   Year 1:	$
   Year 2:	$
   Year 3:	$

3. What is the additional cash flow in Year 3 from NWC and salvage?

   $  

4. If the project's cost of capital is 11%, what is the NPV of the project? .

   $  

   Should the chromatograph be purchased?

   -Select-YesNoItem 7

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1. The stocks on ABC Company and XYZ Company have the following returns over the last four years.                                                                                   

a.   Calculate the average return on ABC.                                                               (1 mark)

b.   Calculate the average return on XYZ.                                                               (1 mark)

c.   Calculate the variance and standard deviation on the ABC returns.   (2.5 marks)

d.   Calculate the variance and standard deviation on the XYZ returns.   (2.5 marks)

e.   Using the coefficient of variation (standard deviation/average return) to compare the two stocks, which stock is preferable?                                                   

The Centurion Corp. has 3 million shares of common stock with a current market price of $76.00 per share. The most recent dividend paid (i.e., D₀) on these shares was $2.90. The growth rate for Centurion has been 7.2% in the past and is expected to continue in the future. Centurion has a beta of 1.3, the risk-free rate is 3.6%, and the return on the market is 10.1%

Assume Centurion has $130 million in par value of long-term bonds outstanding that currently sell for $1,091.96 per $1,000 par value. The bonds have a coupon rate of 8% and a maturity of 15 years. Assume semi-annual coupon payments

Now assume Centurion has 500,000 shares of preferred stock with a current market price of $109 per share. The annual dividend on this preferred stock is $9.20 per share.

calculate Centurion’s weighted average cost of capital using all of the information in the previous three questions to calculate market value weights. You may assume that they use the average of the CAPM and constant growth models (without flotation costs) for the cost of common equity

Big-Pear Corp. is considering replacing its existing equipment that is used to produce smart cell phones. This existing equipment was purchase 3 years ago at a base price of $60,000. Installation costs at the time for the machine were $7,000. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $40,000 and for $20,000 in 3 years. The new equipment has a purchase price of $140,000 and is also considered a 5-year class for MACRS. Installation costs for the new equipment are $5,000. The estimated salvage value of the new equipment is $80,000. This new equipment is more efficient than the existing one and thus savings before taxes using the new equipment are $20,000 a year. Due to these savings, inventories will see a one time reduction of $1,000 at the time of replacement. The company's marginal tax rate is 30% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 2?

Congratulations, you have won $1,000,000 in Mass Lottery. Our displeasure is to announce that after taxes your winning is $500,000 (use 10% annual rate) a. How would you like that? b. One lump sum today? c. In 10 annual installments of $50,000? d. In 20 semi-annual installments of $12,500? e. Or, $500,000 in 10 years? Please provide your calculation (on Excel) for each of the options using PV calculations: So, what option do you choose now and why? _________________

Many loans to corporations are quoted today at small risk premiums and profit margins over the London Interbank Offered rate (LIBOR). Englewood Bank has a $25 million loan request for working capital to fund accounts receivable and inventory from one of its largest customers, APEX Exports. The bank offers its customer a floating-rate loan for 90 days with an interest rate equal to LIBOR on 30-day Euro deposits (currently trading at a rate of 4 percent) plus a one-quarter percentage point markup over LIBOR.

(1) What loan rate would the bank offer?

(2) If APEX wants the loan at a rate of 1.014 times LIBOR and the bank agrees to this loan request, what interest rate will attach to the loan if it is made today?

3) What does this customer’s request reveal about the borrowing firm’s interest rate forecast for the next 90 days?

Hint: Use the price leadership model. Show your works.

A speculator is considering the purchase of one three-month put option on USD with a strike price of 97 yen per U.S. dollar. The premium is 0.24 yen per U.S. dollar. The current spot price is 107.81 yen per U.S. dollar and the 90-day forward rate is 71.46 yen/USD. The speculator believes the USD will depreciate to $1.00 versus 93 yen over the next three months. As the speculator’s assistant, you have been asked to prepare the followings: 1. Graph the profit/loss diagram of the put option in an Excel spreadsheet. 2. Determine the speculator’s profit if the USD depreciates to 93 yen/USD. 3. Determine the speculator’s profit/loss if the USD depreciates to the forward rate. 4. Determine the future spot price at which the speculator will only break even.

(13) Mergers

Which two companies do you think would be a good merger? why?

(10) Financial Statements

Give a basic explanation what each of the financial statements does and why it is important. Then pick one statement to go into detail about and share why you picked that statement.

Investment Timing Option: Option Analysis

The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates the project would cost $8 million today. Karns estimates that, once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $9 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 10%. Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 0.111 and that the risk-free rate is 8%. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to three decimal places.

$ ???  million

A company is considering a new 6-year project that will have annual sales of $189,000 and costs of $116,000. The project will require fixed assets of $235,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 40 percent. What is the operating cash flow for Year 2?

$61,848

$59,280

$59,467

$73,880

$54,629

ou plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks:

1. What are the relevant cash flows for valuing a stock using different valuation methods (Free Cash Flow to Equity and Dividend Discount Model)?

2. What are the different ways you can find cost of equity? Which is your preferred method?

3. When is a dividend discount model most suitable? When is it not suitable?

4. What would be the input to Excel Rate function if you are trying to find yearly dividend growth rate for a company which paid $2.5 as dividend exactly 4 years ago and has paid $3.5 today?

5. What is the difference between unsystematic and systematic risk according to the Capital Asset Pricing model?

2. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.

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Required:

2015. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for fiscal 2016 and 2015.
2016. Compute net operating assets (NOA) for 2016 and 2015.
2017. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $3,011.7 million in 2014.
2018. Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity attributable to Snap-On in 2014 is $2,207.8 million.)
2019. What is nonoperating return component of ROE for 2016 and 2015?
2020. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?