Hardy Locks, Inc. common shares sell for $32 per share. The firm expects to set their next annual dividend at $2 per share and it expects future dividends to grow at 8 percent per year, indefinitely. The current risk-free rate is 2 percent, the expected rate on the market is 10 percent, and the stock has a beta of 1.5. Using the constant growth model, the firm's cost of equity is more than 13.75 percent but less than 14.50 percent

Select one:

True

False

Tall Fences, Inc. has a $4 million ($1000 face value) 10-year bond issue selling for 107.5 percent of par that carries a coupon rate of 7.6 percent, paid semi-annually. As a result, the firm’s before-tax component cost of debt is more than 6.75 percent but less than 7.25%

Select one:

True

False

A firm has 70,000 shares of common stock outstanding, 10,000 shares of preferred stock outstanding, and 1,000 bonds with a market value of $994,000. If the common shares are selling for $40 per share and the preferred shares are selling for $45 per share, then the weight used for common stock in the computation of the WACC for this firm is less than 67.5 percent but more than 64.5 percent

Select one:

True

False

Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many instances for hedging purposes. How does a bank mitigate the currency exposure it has created for itself by accommodating the clients’ forward transaction?

Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.56 million per year for 10 years. The opportunity cost of capital is 9.25%, which reflects the project’s business risk.

a. Suppose the project is financed with $4 million of debt and $6 million of equity. The interest rate is 5.25% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in each year of the project's life.

Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. If the firm incurs issue costs of $730,000 to raise the $6 million of required equity, what will be the APV? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number. Negative amount should be indicated by a minus sign.)

Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,240. The opportunity cost of capital is r = 0.24. The borrowing rate is r_D = 0.10, and the tax shield per dollar of interest is T_c = 0.21. ( Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required.)

a. What is the project’s base-case NPV?

b. What is its APV if the firm borrows 35% of the project’s required investment?

On the next seven questions, express monetary answers to the nearest whole dollar and percentages to the
nearest hundredth.

15. The price of a zero-coupon bond with an eight year maturity is $3,852.75. The face value of the bond is
$5,000. What is the yield on the bond? (Assume semi-annual compounding) (Express the percentage to the
nearest hundredth)

16. Calculate the price of a 7.48% coupon bond with 12 years left to maturity and a market interest rate of 8.74%.
Assume interest rates are semiannual and par value is $1,000. (Express the monetary value to the nearest
whole dollar.)

17. A 6.75 percent coupon bond with 12 years left to maturity can be called in 4 years. The call premium is one
year of coupon payments. It is offered for sale at $1,062.75. Assume that interest payments are paid semiannually
and par value is $1,000. What is the yield to call of the bond? (Express the percentage to the
nearest hundredth)

A corporation knows that it will need to borrow 10,000,000 $ in six months' time for a 12-month period. The interest rate at which it can borrow today is 12-month LIBOR plus 25bp. The 12-month LIBOR currently is at 0.90%, but the company wants to cover against the possible rise of the LIBOR in the next 6 months.
The company decides to buy a 6x18 FRA in order to cover the period of 12 months starting 6 months from now. They receive a quote of 1.25% from the bank, and they decide to buy the FRA for a notional of 10,000,000$.
On the settlement date (six months from today), the 12-month LIBOR fixes at 1.10% (so, the interest to be applied to the loan is 1.10% plus 25bp), which is the settlement rate applicable for the company's FRA.

As anticipated by the treasurer, the 12-month LIBOR rose during the 6-month waiting period, hence the company will receive the settlement amount from the FRA seller.

Find the settlement amount.

1. Based on the above case, what will be the cost (the interests paid by that corporation) of that loan?

And how much will have that Company paid in total (because of the loan plus/minus the cost/gain of the FRA)?

2. Based on the previous exercise 3, what if on the settlement date (six months from today), the 12-month LIBOR fixes at 0.75%? what is the value of the settlement amount the company will receive from the FRA seller, if any?

A firm has a 28% tax rate and has decided to issue $250 million of 12-year debt. If it makes a Eurobond offering, the offering would carry an 8. 5% coupon, paid annually, and issuing would cost $2. 25 million. What is the after-tax cost (APY) of borrowing?

A firm has a 28% tax rate and has decided to issue $250 million of 12-year debt. If it makes a U.S. public offering, the offering would carry an 8.5% coupon, paid semiannually, and issuing would cost $2 million. What is the after-tax cost (APY) of borrowing?

Consider the following information on Huntington Power Co.

Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.

Preferred Stock: 10,000 outstanding with par value of $100 and a market value of 105 and $10 annual dividend.

Common Stock: 84,000 shares outstanding, selling for $56 per share, the beta is 2.08

The market risk premium is 5.5%, the risk free rate is 3.5% and Huntington’s tax rate is 32%.

Huntington Power Co. is evaluating two mutually exclusive project that is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2.1% to the cost of capital for both projects.

Project A is a five-year project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls into the five-year MACRS class. The project is estimated to generate $2,050,000 in annual sales, with costs of $950,000. The project requires an initial investment in net working capital of $285,000 and the fixed asset will have a market value of $225,000 at the end of five years when the project is terminated.

Project B requires an initial fixed asset investment of $1.0 million. The marketing department predicts that sales related to the project will be $920,000 per year for the next five years, after which the market will cease to exist. The machine will be depreciated down to zero over four-year using the straight-line method (depreciable life 4 years while economic life 5 years). Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The project will also require an addition to net working capital of $150,000 immediately. The asset is expected to have a market value of $120,000 at the end of five years when the project is terminated.

Use the following rates for 5-year MACRS: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%

1. Calculate WACC for the firm.
2. What is the appropriate discount rate for project A and project B (Risk adjusted rate)?
3. Calculate project A’s cash flows for years 0-5
4. Calculate NPV, IRR and PI for project A
5. Calculate project B’s cash flows for year 0-5
6. Calculate NPV, IRR and PI for project B
7. Which project should be accepted if any and why?
8. What is the exact NPV profile’s crossover rate (incremental IRR)?

There is a bond that has a quoted price of 105.957 and a par value of $2,000. The coupon rate is 6.90 percent and the bond matures in 24 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?

Multiple Choice

5.77%

3.21%

3.09%

4.81%

6.41%

• What are the positive sides of Micro Finance impacts on economic growth

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,400,000 in annual sales, with costs of $960,000. The tax rate is 35 percent and the required return is 15 percent. What is the project’s NPV? (20 Points) Hint: PVIFA = 1-(1+r)-N/r r is the period rate. N is payments or withdrawals.

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,074.44, and currently sell at a price of $1,137.92. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

What return should investors expect to earn on these bonds?

A. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

B. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

C. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

D. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Part B:

Madsen Motors's bonds have 24 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 7%, and the yield to maturity is 10%. What is the bond's current market price? Round your answer to the nearest cent.

Suppose you buy one SPX call option with a strike of 2135 and write one SPX call option with a strike of 2195. What are the payoffs at maturity to this position for S&P 500 Index levels of 2050, 2100, 2150, 2200, and 2250? (A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required.)

Index level          Long call payoff Short call payoff              Total payoff

2050                                      

2100                                      

2150                                      

2200                                      

2250                                      

2.

Suppose you buy 25 February 100 call option contracts. Hendreeks stock is selling for $105.50 per share on the expiration date. How much is your options investment worth? What if the stock price is $101.40 on the expiration date? (Do not round intermediate calculations.)

Your company is looking at a new project in Mexico. The project will cost 1,075,000 pesos. The cash flows are expected to be 375,000 pesos per year for 5 years. The current spot exchange rate is 19.07 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 10%. What is the net present value of this investment in U.S. Dollars?