Zulu car rental corporation is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over 5 years using the straight line method. The new cars are expected to generate $140,000 per year in earnings before taxes and depreciation for 5 years. The company is entirely financed by equity and has a 35% tax rate. The required return on the company’s unlevered equity is 13% and the new fleet will not change the risk of the company. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity firm? Suppose the company can purchase the fleet of cars for $395,000. Additionally, assume the company can issue $260,000 for 5 year, 8% debt to finance the project. All principal will be repaid in one balloon payment at the end of the 5th year. What is the adjusted present value (APV) of the project?
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|
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: |
| Time | Salary | ||||
| 0 | $ | 6,700,000 | |||
| 1 | $ | 5,300,000 | |||
| 2 | $ | 5,800,000 | |||
| 3 | $ | 6,300,000 | |||
| 4 | $ | 7,700,000 | |||
| 5 | $ | 8,400,000 | |||
| 6 | $ | 9,200,000 | |||
|
All salaries are to be paid in lump sums. The player has asked you as his agent to renegotiate the terms. He wants a $10.2 million signing bonus payable today and a contract value increase of $2,200,000. He also wants an equal salary paid every three months, with the first paycheck three months from now. If the interest rate is 5.7 percent compounded daily, what is the amount of his quarterly check? Assume 365 days in a year. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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Define what a reverse mortgage is? Why might someone who is retired think about doing a reverse mortgage?
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The approximate after-tax cost of debt for a 20-year, 7 percent, $1,000 par value bond selling at $960 (assume a marginal tax rate of 40 percent) is
Select one:
a. 4.41 percent.
b. 5.15 percent.
c. 7 percent.
d. 7.35 percent.
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Suppose you are given the following financial statement information for 2015 and 2016. Calculate the operating cash flows (OCF) for 2016. (Enter a whole number).
| Income Statement (2016) | Balance Sheet | ||||
| Sales | $9,352 | 2015 | 2016 | ||
| Cost of goods sold | $3,612 | Cash | $2,450 | $2,856 | |
| Other Expenses | $95 | Accounts Receivable | $1,690 | $1,780 | |
| Depreciation | $1,250 | Inventory | $3,570 | $3,460 | |
| EBIT | $4,395 | Current Assets | $7,710 | $8,096 | |
| Interest | $45 | Net Fixed Assets | $4,289 | $4,319 | |
| EBT | $4,350 | Total Assets | $11,999 | $12,415 | |
| Taxes (30%) | $1,305.00 | ||||
| Net income | $3,045.00 | Accounts Payable | $1,278 | $1,478 | |
| Dividends | $2,436.00 | Notes Payable | $2,568 | $2,658 | |
| Addition to Retained Earnings | $609.00 | Current Liabilities | $3,846 | $4,136 | |
| Long-term Debt | $2,985 | $2,929 | |||
| Total Equity | $5,168 | $5,350 | |||
| OCF | =??? | Total L + E | $11,999 | $12,415 | |
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Toshi Numata, FX analyst at Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both U.S. dollar and yen interest rates have remained relatively fixed over the past few weeks. Toshi wonders if he should try an interest arbitrage strategy. Toshi's research associates — and their prediction models — are predicting the spot rate to move to ¥100.00/$ 90 days from today. Assume each year has 360 days and the interest rate for short loans is priced using the simple interest rate method.
Table 2. – Use for Questions a) to c)
Assumptions Value
Arbitrage funds available (¥) YEN 80,000,000
Equivalent arbitrage funds available ($) USD 1,000,000
Spot rate (¥/$) 80.00
90-day forward rate (¥/$) 90.00
180-day forward rate (¥/$) 95.00
U.S. dollar LIBOR rate p.a. for the next 180 days 2.000%
Japanese yen LIBOR rate p.a. for the next 180 days 0.000%
a) Calculate the expected gain in $ from an Uncovered Interest Arbitrage (UIA) strategy using the expected spot rate in 90 days predicted by Toshi’s research associates.
b) The actual spot rate 90 days from today turned out to be72.00 (¥/$) instead of 100 (¥/$) as predicted. Discuss how Toshi’s interest arbitrage strategy in question a) is affected.
c) Discuss how a Covered Interest Arbitrage strategy is different from an Uncovered Interest Arbitrage strategy.
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Hicks Health Clubs, Inc., expects to generate an annual EBIT of $502,000 and needs to obtain financing for $1,140,000 of assets. Its tax bracket is 39%. If the firm uses short-term debt, its rate will be 8.0%, and if it uses long-term debt, its rate will be 9.0%. By how much will their earnings after taxes change if they choose the more aggressive financing plan instead of the more conservative plan? (Amounts in parentheses indicate negative value.)
Multiple Choice
$11,954
($11,954)
($6,954)
$6,954
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An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland. The following information is available
Initial spot exchange rate (AUD/CHF) 1.0775-1.0825
Australian three month LIBOR rate (deposit – loan) 4.75-5.25% p.a.
Swiss three month LIBOR rate (deposit – loan) 2.25-2.75% p.a.
Australian lending/borrowing spread +1.5%p.a.
Swiss lending/borrowing spread +0.5%p.a.
Required: (a) If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken.
(b) If the ending spot exchange rate turned out to be (AUD/CHF) 1.0675-1.0725, would your decision have been profitable.
(c) Determine the profit or loss from your decision.
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XYZ Company’s machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $5,500 per year for each year of its remaining life and can be sold for $20,000 at the end of its useful life. A new machine can be purchased for $120,000, including the installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year. Sales revenue will not be affected. At the end of its useful life, the machine is estimated to be sold at $10,000. We will use MARCS depreciation, and the machine will be depreciated over its 5-year property class life. The old machine can be sold today for $35,000.
*The tax rate is 35%
*WACC is 16%
a) what is the amount of the initial cash flow at Year 0 if the new machine is purchased?
b)Calculate the after-tax salvage value of the new machine at the end of the project?
c)Calculate the incremental cash flows that will occur at the end of years 1-5?
*Use excel cell reference for the questions for the above questions
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Can all business processes be redesigned? Why or why not?
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As of September 2012, Google (GOOG) had no debt. Suppose the firm's managers are considering issuing zero-coupon debt due in 16 months with a face value of
$ 165.7
billion, and using the proceeds to pay a special dividend. Google currently has a market value of
$ 231.3
billion and the risk-free rate is
0.28 %
Using an implied volatility
σ=38.60%,
answer the following:
a. If Google's current equity beta is 1.16,
estimate Google's equity beta after the debt is issued.
b. Estimate the beta of the new debt.
(Note: Make sure to round all intermediate calculations to at least five decimal places.)
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You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.16%, then how much should you be willing to pay for the bond?
Present value=
payment=
future value=
annual rate=
periods=
compounding=
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. Outline the various components of the U.S. money supply as it exists today
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Consider the following two bond issues.
Bond M: 4% 30-year bond
Bond N: 6% 30-year bond
Neither bond has an embedded option. Both bonds are trading in the market at the same yield.
Which bond will fluctuate more in price when interest rates change? Why?
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