. Sure-cure pharmaceutical Co Ltd. is contemplating investing in a machine for its manufacturing processes. The machine will be used to manufacture a product known as “Curex”. The machine will cost Sh.5 million and will incur installation costs amounting to Sh.500,000. The machine is expected to have an economic life of 5 years and a re-sale value of Sh.1 million at the end of this period.

The acquisition of this machine is expected to cause in working capital to increase by Kshs 2.5 Million at the beginning of the economic life of the machine. The net change in working capital will be recovered at the end of the machine’s economic life.

The quantity of “Curex” expected to be manufactured and sold in each year will be as follows:

            Additional information:

1. Each unit of “Curex” is expected to be sold at Sh.100 in year However, the price is expected to increase by 10% annually thereafter.
2. The variable cost per unit of “Curex” is estimated at Sh.20 in year 1. In subsequent years, this cost will rise at the same rate as the increase in the selling price.
3. Fixed costs per annum excluding depreciation are estimated at sh.0.5 million.
4. The company applies the straight line method of depreciation for all its fixed assets.
5. The company’s cost of capital is 12%.
6. Corporation tax rate is 30%.

Required:

Using the net present value (NPV) technique, advise the company on whether the machine should be purchased.                                                                                                      

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 8%, and the market’s average return was 12%. Performance is measured using an index model regression on excess returns.

a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)

Sharpe ratio: Stock A = Stock B =

Treynor Measure: Stock A = Stock B =

A project has an initial cost of $64,675, expected net cash inflows of $12,000 per year for 10 years, and a cost of capital of 13%. What is the project's NPV?

A company is projected to have a free cash flow of $368 million next year, growing at a 5% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4% in perpetuity. The company's cost of capital is 8.9%. The company owes $99 million to lenders and has $11 million in cash. If it has 218 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. (e.g., $4.32 = 4.3)

Consider a 2-year European put with a strike price of $52 on a stock whose current stock price is $50. Suppose that there are two time steps, and in each time step the stock price either moves up by 30% or moves down by 30%. Also suppose that risk-free rate is 7% per annum with continuous compounding. What is the value of the European put option?

The current price of a non-dividend paying stock is $40. Use a two-step tree to value a European call option on the stock with a strike price of 42 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding. What is the European call option price when u = 1.1 and d = 0.9 ?

Suppose you are a Chief Financial Officer (CFO) of a UK based listed Part A - company. The company is currently trading at £10 per share and 10 million shares in issue. The total market value of the issued share capital of the company is £100 million. You have been requested to write a report to the board of directors with respect to raising an additional funding of £50 million to enable the next stage of development of international projects to be carried out. Note 2: For the report in Part A, it should critically review the advantages and disadvantages of the main funding options and have many appropriate academic references to strengthen your discussion. Further, your report should form the basis for a discussion at the next board meeting. In particular, you are required to include the different financing choices available through the equity and debt markets.

Part B - This additional funding will allow the business to become more global with the opportunity to develop a market in numerous countries with payment being made in the local currency. The directors are conservative in their attitude to risk. You have been requested to provide a report to the directors critically evaluating alternative derivatives including forwards, futures, options and swaps that are available in the market in order to minimize the risk with respect to payment in international currencies. : For the report in Part B. it should critically discuss and compare the use of derivatives including forwards, futures, options and swaps to hedge Foreign Exchange (FX) Risk. With reference to appropriate academic references, discussions must include: • how it works in mitigating FX risk. advantages and disadvantages of each type of derivative in managing FX risk.  

Can you please assist in answering Part B in bold. thank you

Your firm is contemplating the purchase of a new $400,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $31,000 at the end of that time. You will be able to reduce working capital by $30,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 21 percent.

a. What is the aftertax salvage value of the equipment?

b. Suppose your required return on the project is 8 percent and your pretax cost savings are $136,000 per year. What is the annual OCF? What is the NPV of the project?

c. Suppose your required return on the project is 8 percent and your pretax cost savings are $90,000 per year. What is the annual OCF? What is the NPV of the project?

Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,200. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your answer to 2 decimal places.)

PRICE OF THE BOND____________

b. Do you think the bonds will sell for the price you arrived at in part a?

• Yes

• No

Kurz Manufacturing is currently an​ all-equity firm with 17 million shares outstanding and a stock price of $ 14.00 per share. Although investors currently expect Kurz to remain an​ all-equity firm, Kurz plans to announce that it will borrow $ 55 million and use the funds to repurchase shares. Kurz will pay interest only on this​ debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a 35 % corporate tax rate.  

a. What is the market value of​ Kurz's existing assets before the​ announcement?

b. What is the market value of​ Kurz's assets​ (including any tax​ shields) just after the debt is​ issued, but before the shares are​ repurchased?

c. What is​ Kurz's share price just before the share​ repurchase? How many shares will Kurz​ repurchase?

d. What are​ Kurz's market value balance​ sheet, and share price after the share​ repurchase?

a. What is the market value of​ Kurz's existing assets before the​ announcement?

The market value of​ Kurz's existing assets before the announcement is ​$________ million. ​ (Round to one decimal​ place.)

b. What is the market value of​ Kurz's assets​ (including any tax​ shields) just after the debt is​ issued, but before the shares are​ repurchased?

The market value of​ Kurz's assets​ (including any tax​ shields) just after the debt is​ issued, but before the shares are repurchased is

​$_________ million.  ​(Round to one decimal​ place.)

c. What is​ Kurz's share price just before the share​ repurchase? How many shares will Kurz​ repurchase?

​Kurz's share price just before the share repurchase is $________ (Round to the nearest​ cent.) The number of shares that Kurz will repurchase is _______ million. ​ (Round to two decimal​ places.)

d. What are​ Kurz's market value balance​ sheet, and share price after the share​ repurchase?

The market value of assets is $________ million.  ​(Round to one decimal​ place.)

The debt is ​$_________ million. ​ (Round to the nearest​ integer.)

The market value of equity is ​$_______ million.  (Round to one decimal​ place.)

Share price after repurchase is $_______ (Round to two decimal places​).

Assume that the % expected return for security A and the market M for a good, normal and bad economy (probabilities .3,.4,.3) are 20, 16, and 10 for A and 8, 4, and 12 for M. Also assume that you invest 40% in A and 60% in M. Compute the standard deviation for a portfolio of A and M.

1. How does financing with bonds differ from financing with stock? Think about this in terms of company ownership and risk to company. Why not borrow money from a bank?

What is the net present value (NPV) of a project that has an initial cash outflow of $19,851, at time 0, and the following cash inflows? The required return is 13.0%.  DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ROUND ANSWER TO THE NEAREST DOLLAR.

a. After completing its capital spending for the year, U Manufacturing has $1,000 extra cash. U’s managers must choose between investing the cash in Treasury bonds that yield 8% or paying the cash out to investors who would invest in the bonds themselves.

i. If the corporate tax rate is 35%, what personal tax rate would make the investors equally willing to receive the dividend or to let U invest the money?

ii. Is the answer to part i) reasonable? Explain.

b. The desire for high current income is a valid explanation of preference for high current dividend policy. Comment on the validity of this statement.

HKW Corporation is considering buying a machine that costs $540,000. The machine will be
depreciated over 5 years by the straight-line method and will have zero salvage value. The
company can also lease the machine with year-end payments of $145,000. The company can
issue bonds at 9% interest rate. If the corporate tax rate is 35%, should the company buy or
lease? Explain.