Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .7. It’s considering building a new $75 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $8.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6.4 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.9 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 23 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Please Use TI BAII Plus Calculator and Show How You Get the Answer with it.

Management of the SoSadItIsOver Company needs to determine its cost of capital in order to evaluate some large capital purchases. The company's bonds have a yield to maturity of 6%, last dividend paid on common stock was $2.16 per share, current stock price is $47/share, and constant growth of 5% is expected on dividends and earnings. The company's capital structure is 30% debt, 70% equity. There is no preferred stock and the marginal tax rate is 21%.   SHOW ALL WORK.
a) 2 pts. What is the after-tax cost of debt?
b) 4 pts. What is the cost of equity?
c) 6 pts. What is the company's cost of capital (WACC)?

a-1. Cash flow = ________________

a-2. Net cash flow = _____________

b. Given the two investment strategies in (a), which will investors choose?

a: Veblen

b: Knight

I need an answer to question #4 for the business situation - Greetings Inc. stores as well as the Wall Décor division have enjoyed healthy profitability during the last two years.... In a one page memo, provide a recommendation based on the NPV analysis.....

Greetings Inc.: Capital Budgeting

The Business Situation

Greetings Inc. stores, as well as the Wall Décor division, have enjoyed healthy profitability

during the last two years. Although the profit margin on prints is often

thin, the volume of print sales has been substantial enough to generate 15% of

Greetings’ store profits. In addition, the increased customer traffic resulting from

the prints has generated significant additional sales of related non-print products.

As a result, the company’s rate of return has exceeded the industry average during

this two-year period. Greetings’ store managers likened the e-business leverage created

by Wall Décor to a “high-octane” fuel to supercharge the stores’ profitability.

This high rate of return (ROI) was accomplished even though Wall Décor’s

venture into e-business proved to cost more than originally budgeted. Why was it

a profitable venture even though costs exceeded estimates? Greetings stores were

able to generate a considerable volume of business for Wall Décor. This helped

spread the high e-business operating costs, many of which were fixed, across

many unframed and framed prints. This experience taught top management that

maintaining an e-business structure and making this business model successful

are very expensive and require substantial sales as well as careful monitoring of

costs.

Wall Décor’s success gained widespread industry recognition. The business

press documented Wall Décor’s approach to using information technology to

increase profitability. The company’s CEO, Robert Burns, has become a frequent

business-luncheon speaker on the topic of how to use information technology to

offer a great product mix to the customer and increase shareholder value. From

the outside looking in, all appears to be going very well for Greetings stores and

Wall Décor.

However, the sun is not shining as brightly on the inside at Greetings. The

mall stores that compete with Greetings have begun to offer prints at very competitive

prices. Although Greetings stores enjoyed a selling price advantage for a

few years, the competition eventually responded, and now the pressure on selling

price is as intense as ever. The pressure on the stores is heightened by the fact that

the company’s recent success has led shareholders to expect the stores to generate

an above-average rate of return. Mr. Burns is very concerned about how the

stores and Wall Décor can continue on a path of continued growth.

Fortunately, more than a year ago, Mr. Burns anticipated that competitors

would eventually find a way to match the selling price of prints. As a consequence,

he formed a committee to explore ways to employ technology to further reduce

costs and to increase revenues and profitability. The committee is comprised of

store managers and staff members from the information technology, marketing,

finance, and accounting departments. Early in the group’s discussion, the focus

turned to the most expensive component of the existing business model—the

large inventory of prints that Wall Décor has in its centralized warehouse. In addition,

Wall Décor incurs substantial costs for shipping the prints from the centralized

warehouse to customers across the country. Ordering and maintaining

such a large inventory of prints consumes valuable resources.

One of the committee members suggested that the company should pursue

a model that music stores have experimented with, where CDs are burned in the

store from a master copy. This saves the music store the cost of maintaining a

large inventory and increases its ability to expand its music offerings. It virtually

guarantees that the store can always provide the CDs requested by customers.

Applying this idea to prints, the committee decided that each Greetings store

could invest in an expensive color printer connected to its online ordering system.

This printer would generate the new prints. Wall Décor would have to pay a royalty

on a per print basis. However, this approach does offer certain advantages. First,

it would eliminate all ordering and inventory maintenance costs related to the

prints. Second, shrinkage from lost and stolen prints would be reduced. Finally,

by reducing the cost of prints for Wall Décor, the cost of prints to Greetings stores

would decrease, thus allowing the stores to sell prints at a lower price than competitors.

The stores are very interested in this option because it enables them to

maintain their current customers and to sell prints to an even wider set of customers

at a potentially lower cost. A new set of customers means even greater

related sales and profits.

As the accounting/finance expert on the team, you have been asked to perform

a financial analysis of this proposal. The team has collected the information

presented in Illustration CA 4-1.

Illustration CA 4-1

Information about the proposed capital investment project

Instructions

Mr. Burns has asked you to do the following as part of your analysis of the capital

investment project.

1. Calculate the net present value using the numbers provided. Assume that annual cash

flows occur at the end of the year.

2. Mr. Burns is concerned that the original estimates may be too optimistic. He has suggested

that you do a sensitivity analysis assuming all costs are 10% higher than expected

and that all inflows are 10% less than expected.

3. Identify possible flaws in the numbers or assumptions used in the analysis, and identify

the risk(s) associated with purchasing the equipment.

4. In a one-page memo, provide a recommendation based on the above analysis.

Include in this memo: (a) a challenge to store and Wall Décor management and (b) a

suggestion on how Greetings stores could use the computer connection for related

sales.

Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $21,600 per year until the end of that person’s life. The insurance company expects this person to live for 15 more years and would be willing to pay 8 percent on the annuity. How much should the insurance company ask this person to pay for the annuity?

Earleton Manufacturing Company has $2 billion in sales and $800,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

a. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answer completely. Round your answer to the nearest whole number.

b. What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.

c. If Earleton's sales increase 35%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest whole number.

SAP (a German company) bought Qualtrics for $8 billion in 2018. The deal was to close in 12 months. The current exchange rate between USD and Euro was $1.185 at the time of the deal. The exchange rate forecast was for Euro to depreciate against the USD, but the exact decline is not known. SAP decided to hedge with derivatives and purchased enough options for USD. The call option with strike price of $1.18 per Euro is selling for the price of $0.005 USD. The put option with strike price of $1.18 is selling for $0.01. Which option should SAP use? What is the profit/loss from the hedge if the exchange rate turns out to be $1.165 in 12 months? What about if the rate is $1.19?

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France and will receive €200 million in six months. The current spot exchange rate is $1.2400/€ and the six-month forward rate is $1.26000/€. Boeing can buy a six-month put option on the Euro with an exercise price of $1.2500/€ for a premium of $0.030/€. Currently, the six-month interest rate is 2.40% per annum in the United States. Boeing believes that the Euro would likely appreciate from its current level, but would still like to hedge its foreign exchange exposure.

1. Explain how Boeing should do a forward hedge. Compute the guaranteed dollar proceeds from the Air France sales if Boeing decides to hedge using a forward contract.

2. If Boeing decides to hedge using put options on the Euro, what would be the “expected” net dollar proceeds from the Air France sale? Assume that Boeing regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

3. At what future spot exchange rate do you think Boeing will be indifferent between the option hedge and forward hedge?

4. Illustrate your answers with the appropriate post-hedging net $ proceed charts, labeling your foreign exchange rates and net proceeds properly.

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

Why is this AFN different from the one when the company pays dividends?

A. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.

B. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.

C. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.

D. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.

E. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $14000 and has 700 shares of stock outstanding. Board also has $14000 in assets and has $7000 in debt financed at an interest rate of 9.50% and has 350 shares of stock outstanding. Assume perfect capital markets.

Calculate the level of EBIT that would make earnings per share the same for Ski and Board.

$

Place your answer to the nearest dollar. If applicable, your answer should NOT include a comma

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $6 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%, and the forecasted retention ratio is 25%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. Now assume the company's assets totaled $4 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation?

Q2. Company B earned $20 million before interest and taxes on revenues of $60 million last year. Investment in fixed capital was $12 million, and depreciation was $8 million. Working capital investment was $3 million. The company expects earnings before interest and taxes (EBIT), investment in fixed and working capital, depreciation, and sales to grow at 12% per year for the next five years. After five years, the growth in sales, EBIT, and working capital investment will decline to a stable 4% per year, and investments in fixed capital and depreciation will offset each other. The company’s tax rate is 20%. Suppose that the weighted average cost of capital is 12% during the high growth stage and 8% during the stable stage. The calculation of FCFF in year 1 through year 5 is shown in the following table:

Finish the table and use WACC model to calculate the value of the company.(please show the details)(50 points)

An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $11.8 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.16 million. Under Plan B, cash flows would be $2.0967 million per year for 20 years. The firm's WACC is 12%.

1. Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero enter "0". Negative value should be indicated by a minus sign.

   Discount Rate	NPV Plan A	NPV Plan B
   0%	$ million	$ million
   5	million	million
   10	million	million
   12	million	million
   15	million	million
   17	million	million
   20	million	million

   Identify each project's IRR. Round your answers to two decimal places. Do not round your intermediate calculations.

   Project A %

   Project B %

   Find the crossover rate. Round your answer to two decimal places. Do not round your intermediate calculations.
   %