Precision Machining Corporation has been growing steadily over the past decade. Demand for the company’s products continues to rise, so management has decided to expand the production facility; $2 800 000 has been set aside for this over the next four years.
Management has developed two different plans for expanding over the next four years: Plan A and Plan B. Plan A would require equal amounts of $750 000, one year from now, two years from now, three years from now, and four years from now. Plan B would require $300 000 now, $700 000 one year from now, $900 000 two years from now, and $975 000 four years from now.
The company has decided to fund the expansion with only the $2 800 000 and any interest it can earn on it. Before deciding which plan to use, the company asks its treasurer to predict the rates of interest it can earn on the $2 800 000. The treasurer expects that Precision Machining Corporation can invest the $2 800 000 and earn interest at a rate of 4.5% p.a. compounded semi-annually during Year 1, 5.0% p.a. compounded semi-annually during Years 2 and 3, and 5.5% p.a. compounded semi-annually during Year 4. The company can withdraw part of the money from this investment at any time without penalty.
Questions
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AFN Equation
Broussard Skateboard's sales are expected to increase by 25% from $7.0 million in 2016 to $8.75 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax 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? Do not round intermediate calculations. Round your answer to the nearest dollar.
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Aaron's Rentals has 50,000 shares of common stock outstanding at a market price of $38 a share. The company has a beta of 1.2 and the market risk premium is 8%, with risk free rate of 3.5%. The outstanding bonds mature in 10 years, have a total face value of $800,000, a face value per bond of $1,000, and a market price of $987.60 each. The bonds pay 6% coupon. The tax rate is 30 percent. What is the firm's weighted average cost of capital?
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You're considering a project with initial investment of $120,000. The project is expected to generate $65,000 in cash flow for 3 years and then the company has to pay $50,000 to shut down the operation in year 4. If your cost of capital is 12%, would you carry out the project?
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We are examining a new project. We expect to sell 5,500 units per year at $69 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $69 × 5,500 = $379,500. The relevant discount rate is 19 percent, and the initial investment required is $1,540,000. After the first year, the project can be dismantled and sold for $1,260,000. Suppose you think it is likely that expected sales will be revised upward to 8,500 units if the first year is a success and revised downward to 4,100 units if the first year is not a success. |
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a. |
If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places. e.g., 32.16.) |
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b. |
What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places. e.g., 32.16.) |
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| Click here to read the eBook: Forecasted Financial Statements
PRO FORMA INCOME STATEMENT Austin Grocers recently reported the following 2016 income statement (in millions of dollars):
For the coming year, the company is forecasting a 35% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 65% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.
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After a detailed analysis on the risks and returns of the stock market and Stock XYZ (current price=€50), you conclude that the price of XYZ is unlikely to change a lot during the course of the next 3 months. You decide to bet on this analysis and establish a short straddle position, by simultaneously writing 100 puts and 100 calls with maturity of 3 months and a strike price of €50. The premium you receive for writing each put/call is €2.50.
What is the maximum profit of your position? What should the stock price be, in order to realize this maximum gain?
Report the lower and higher bounds for XYZ’s price 3 months from now that provide you with a non-negative return on your position.
Draw a profit diagram separately for your a) short position on puts, b) short position on calls, and c) total position
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ToylandToyland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $11 million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows:
|
Annual Net Cash Inflows |
||
|
Year |
Toy action |
Sandbox toy |
|
figure project |
project |
|
|
1. . . . . . . . . . . . . |
$371,500 |
$540,000 |
|
2. . . . . . . . . . . . . |
371,500 |
340,000 |
|
3. . . . . . . . . . . . . |
371,500 |
330,000 |
|
4. . . . . . . . . . . . . |
371,500 |
260,000 |
|
5. . . . . . . . . . . . . |
371,500 |
40,000 |
|
Total |
$1,857,500 |
$1,510,000 |
ToylandToyland
will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%.
Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $ 100 comma 000$100,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass ToylandToyland's payback period screening rule?
Calculate the toy action figure project's payback period.
First enter the formula, then calculate the payback period. (Enter amounts in dollars, not millions. Round your answer
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Identify the types and sources of bank risk and explain how to control them.
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Brower, Inc. just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per year.
a. Determine the NPV for this project. Should Brower build the plant
b. b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedis per U.S. dollar over the course of the three years? Should Brower construct the plant then?
Please show how to solve without using excel, thank you.
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% Financed With Debt rd
0% ---
25 8.0%
33 8.5
45 10.0
55 12.0
If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Bernie’s Burgers is in the 28 percent state-plus-federal corporate tax bracket, its beta is 1.27, the risk-free rate is 6 percent, and the expected return on the market is 11 percent.
b.Calculate the cost of capital for each capital structure.
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