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 NPV, IRR and PI for project B

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%

Please show your work.

1. Calculate NPV, IRR and PI for project A

Barrison is investigating the possible acquisition of Soulmaster. The two firms have the following basic data:

                                                                  Barrison                     Soulmaster

      Number of shares                             3,000,000                   1,200,000

      Current stock price                           $75.00                        $25.00

The combined firm will result in a synergy gains of $15m.

a.         What is the value of of the combined firm?

b.         What is the NPV of acquisition if Barrison pays $30 in cash for each share of Soulmaster?

c.         What is the NPV of the acquisition if Barrison offers one share of Barrison for every two shares of Soulmaster?

Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 40%. The current stock price is P₀ = $21.50. The last dividend was D₀ = $2.00, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your intermediate calculations.

1. r_s = _______ %
2. WACC = ________ %

Suppose you are given the following two projects A and B with the cash flows below, if the cost of capital is 10%, what is the Profitability Index (PI) of projects A and B?

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Production of the implants will require $1,600,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,400,000 per year, variable production costs are $257 per unit, and the units are priced at $381 each. The equipment needed to begin production has an installed cost of $16,900,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 22 percent the required return is 14 percent.

The MACRS schedule:

a.) What is the NPV of the project?

b.)What is the IRR?

A company is considering replacing one of the old machines used in the manufacturing process. The machine was purchased 2 years ago for $600,000. This machine is being depreciated on a straight-line basis, and it has 4 years of remaining life. When this machine was purchased 2 years ago, it was assumed to have zero salvage value at the end of its useful life of 6 years. Currently, this machine has a market value of $250,000. The company intends to keep this old machine as spare if the replacement happens. The current revenue generated by this machine is $250,000 annually and the cost of operating the machine is $175,000 annually.

The replacement machine will cost of $750,000 and $50,000 for shipping and transportation to the company’s location. The new machine falls into 3-year MACRS (33%, 45%, 15% and 7%). The replacement machine would permit an output expansion, so sales will become $450,000 per year. Even so, the new machine's greater efficiency would cause operating expenses to become $95,000 per year. The new machine would require inventories be increased by $65,000, but accounts payable would simultaneously increase by $10,000. The replacement project life is 4 years. The new machine can be sold at the end of the project’s life for $50,000 while the old machine will not have any value at the end of the 4^th year. The company’s marginal federal-plus-state tax rate is 40%, and its cost of capital is 12%.

What is cash flow CF1 to be used in NPV calculations?

What is the “cornerstone” of the appraisal process

A company is considering three capital budgeting projects. Data relative to each is given below. Each project has a life of 5 years. The company uses the Net Present Value (NPV) method to evaluate capital budgeting projects and its discount rate is 9%.

Project A         Project B         Project C

Initial cash outlay (cost)                     -$5,000,000     -$6,000,000     -$2,500,000

Cash inflows per year                           $1,500,000    $1,800,000     $600,000

Residual value                                       $ 500,000              0                $100,000

1. If the projects are mutually exclusive, which, if any, should the company accept?  Why?

2. If the projects are independent, which, if any, should the company accept?  Why?

3. One of the company’s managers states “To me, no matter what else we do, Project C needs to be our first choice because it has the lowest initial cost of $2,500,000.”  Comment on this manager’s proposal, considering the concepts of NPV and Payback Method.

How does a balance sheet relate to a cash flow statement?

Calculate The Following Elements Used to Derive a Cap Rate Sinking Fund Factor 9- Loan/Holding Period 10 Equity Yield Rate 8% _____________ 10- Loan/Holding Period 10 Equity Yield Rate 9% _____________ 11- Loan/Holding Period 10 Equity Yield Rate 10% _____________ 12- Loan/Holding Period 10 Equity Yield Rate 11% _____________

Calculate The Following Elements Used to Derive a Cap Rate Sinking Fund Factor 9- Loan/Holding Period 10 Equity Yield Rate 8% _____________ 10- Loan/Holding Period 10 Equity Yield Rate 9% _____________ 11- Loan/Holding Period 10 Equity Yield Rate 10% _____________ 12- Loan/Holding Period 10 Equity Yield Rate 11% _____________

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 15 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that the index currently has a P/E ratio of 15. The firm can be compared to the car rental industry as follows: Richmond Car Rental Industry Growth rate in earnings per share 12% 10% Consistency of performance Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years Debt to total assets 25% 40% Turnover of product Slightly below average Average Quality of management High Average Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a 0.50 point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a 0.50 point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm? (Round your answer to 1 decimal place.)

The estimated cashflows for two mutually exclusive projects are shown below.

(A) Using a cost of capital of 14%, which project should be taken based on the NPV amounts?

(B) Calculate the IRR for both projects.  Based on the IRR amounts, which project should be taken?

(C) Why are your answer to parts A and B not the same?

(D) Using a cost of capital of 17%, which project should be taken based on the NPV amounts?

(E) Create an NPV profile for the net cashflows form the two projects with discount rates from 0% to 20% in increments of 1%.  You do not need to create the graph.

Notice in your NPV profile that the two lines cross at about 16%.  This is called the crossover point.

(F) Use the IRR function to calculate the exact cross-over point.

(G) Next use the value you just calculated with the IRR function as the new discount rate for both projects, and calculate the NPV of both projects.  

(H) What do you find from your answers to part G?

1. Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow $1 million (or its Swiss franc equivalent) at her disposal for a short term money market investment. Kavita wonders whether she should make an uncovered interest arbitrage (UIA) transaction. She faces the following quotes:

2. Which currency should she borrow, and how much is the payoff in terms of U.S. dollars in case of uncovered interest arbitrage (UIA) transaction?