Suppose that Big Kahuna Burger (BKB) currently trades for $1100 and the 6-month risk free rate is 2%. Using Put-Call Parity, what is the price of a six-month call option on BKB with a strike price of $1000? A six-month put on BKB with a strike price of $1000 trades for $43.91 and a six-month put on BKB with a strike price of $1100 trades for $87.08.
In: Finance
Kellog’s CFO is in the process of determing the firm’s WACC. The information he collected from the balance sheet and the capital markets, as well as his estimates of the cost of the compnomnet of capital is presented in the following table. Please help him to estimate the WACC of the firm . The company is facing a tax rate of 35%
Show work and calculations
|
Component |
Book Value |
Number Outstaning |
Current market price |
Component cost |
|
Debt |
150,000,000 |
150,000 |
1,075 |
7.6% |
|
Preferred stocks |
45,000,000 |
1,500,000 |
40 |
10.53 |
|
Common Stocks |
190,000,000 |
4,500,000 |
45.57 |
11.36% |
In: Finance
|
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.28 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,750,000 in annual sales, with costs of $652,000. The project requires an initial investment in net working capital of $330,000, and the fixed asset will have a market value of $300,000 at the end of the project. |
| a. | If the tax rate is 23 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) |
| b. | If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.) |
In: Finance
You have just been hired by IBM in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new type of tablet.
The project has an expected life of 5 years
Development of the new system will initially require an initial capital expenditure equal to 10% of IBM’s gross property, plant, and equipment in 2018 (balance sheet). The project will then require an additional capital expenditure investment equal to 10% of the initial investment in the first year of project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years.
First-year revenues for the new product are expected to be 3% of IBM’s total revenue for 2018 (income statement). The new product’s revenues are expected to grow at 15% for the second year, 10% for the third, and 5% annually for the final two years of the expected life of the project.
Assume that initial capital expenditure incurred in year 0 will be depreciated using a straight line method over a five-year life.
Calculate average gross profit margin for 2015-2018 and use it to calculate project’s costs.
Calculate IBM’s average NWC/Sales for 2015-2018 and use it to calculate net working capital required in years 1 through 5 of the project.
Calculate average tax expense for 2015-2018 (tax expense/pretax income) and apply it to calculate free cash flows.
Balance sheet:
| 12/31/18 | 12/31/17 | 12/31/16 | 12/31/15 | |
| Cash | ||||
| Cash And Cash Equivalents | 11,379,000,000 | 11,972,000,000 | 7,826,000,000 | 7,686,000,000 |
| Short Term Investments | 618,000,000 | 608,000,000 | 701,000,000 | 508,000,000 |
| Net Receivables | 29,820,000,000 | 30,649,000,000 | 28,188,000,000 | 27,353,000,000 |
| Inventory | 1,682,000,000 | 1,583,000,000 | 1,553,000,000 | 1,551,000,000 |
| Other Current Assets | 1,000,000 | -1,000,000 | -1,000,000 | 0 |
| Total Current Assets | 49,146,000,000 | 49,735,000,000 | 43,888,000,000 | 42,504,000,000 |
| Gross property, plant and equipment | 32,461,000,000 | 32,331,000,000 | 30,134,000,000 | 29,341,000,000 |
| Accumulated Depreciation | -21,668,000,000 | -21,215,000,000 | -19,303,000,000 | -18,616,000,000 |
| Net property, plant and equipment | 10,793,000,000 | 11,116,000,000 | 10,831,000,000 | 10,725,000,000 |
| Equity and other investments | 226,000,000 | 122,000,000 | 104,000,000 | 475,000,000 |
| Goodwill | 36,265,000,000 | 36,788,000,000 | 36,199,000,000 | 32,021,000,000 |
| Intangible Assets | 3,088,000,000 | 3,741,000,000 | 4,689,000,000 | 3,486,000,000 |
| Other long-term assets | 296,000,000 | 572,000,000 | 729,000,000 | 571,000,000 |
| Total non-current assets | 74,237,000,000 | 75,620,000,000 | 73,584,000,000 | 67,987,000,000 |
| Total Assets | 123,382,000,000 | 125,356,000,000 | 117,470,000,000 | 110,495,000,000 |
| Total Revenue | 10,207,000,000 | 6,986,000,000 | 7,513,000,000 | 6,461,000,000 |
| Accounts Payable | 6,558,000,000 | 6,451,000,000 | 6,209,000,000 | 6,028,000,000 |
| Taxes payable | ||||
| Accrued liabilities | 3,941,000,000 | 4,510,000,000 | 4,705,000,000 | 4,353,000,000 |
| Deferred revenues | 11,165,000,000 | 11,552,000,000 | 11,035,000,000 | 11,021,000,000 |
| Other Current Liabilities | 7,251,000,000 | 1,000,000 | 1,000,000 | -1,000,000 |
| Total Current Liabilities | 38,227,000,000 | 37,363,000,000 | 36,275,000,000 | 34,269,000,000 |
| Long Term Debt | 35,605,000,000 | 39,837,000,000 | 34,655,000,000 | 33,428,000,000 |
| Deferred taxes liabilities | 3,696,000,000 | 545,000,000 | 424,000,000 | 253,000,000 |
| Deferred revenues | 3,445,000,000 | 3,746,000,000 | 3,600,000,000 | 3,771,000,000 |
| Other long-term liabilities | 1,719,000,000 | 1,721,000,000 | 1,778,000,000 | 2,063,000,000 |
| Total non-current liabilities | 68,226,000,000 | 70,268,000,000 | 62,803,000,000 | 61,802,000,000 |
| Total Liabilities | 106,453,000,000 | 107,631,000,000 | 99,078,000,000 | 96,071,000,000 |
| Common Stock | 55,151,000,000 | 54,566,000,000 | 53,935,000,000 | 53,262,000,000 |
| Retained Earnings | 159,206,000,000 | 153,126,000,000 | 152,759,000,000 | 146,124,000,000 |
| Accumulated other comprehensive income | -29,490,000,000 | -26,592,000,000 | -29,398,000,000 | -29,607,000,000 |
| Total stockholders' equity | 16,796,000,000 | 17,594,000,000 | 18,246,000,000 | 14,262,000,000 |
| Total liabilities and stockholders' equity | 123,382,000,000 | 125,356,000,000 | 117,470,000,000 | 110,495,000,000 |
Income Statements:
| 12/31/18 | 12/31/17 | 12/31/16 | 12/31/15 | |
| Total Revenue | 79,590,000,000 | 79,139,000,000 | 79,920,000,000 | 81,742,000,000 |
| Cost of Goods Sold | 42,655,000,000 | 42,913,000,000 | 41,625,000,000 | 41,057,000,000 |
| Gross Profit | 36,935,000,000 | 36,226,000,000 | 38,295,000,000 | 40,685,000,000 |
| Research Development | 5,379,000,000 | 5,787,000,000 | 5,751,000,000 | 5,247,000,000 |
| Selling General and Administrative | 18,863,000,000 | 19,555,000,000 | 20,479,000,000 | 19,894,000,000 |
| Operating Income or Loss/EBITDA/EBIT | 12,693,000,000 | 10,884,000,000 | 12,065,000,000 | 15,544,000,000 |
| Interest Expense | 723,000,000 | 615,000,000 | 630,000,000 | 468,000,000 |
| Total Other Income/Expenses Net | -1,482,000,000 | 17,000,000 | -339,000,000 | 421,000,000 |
| Income Before Tax | 10,488,000,000 | 10,286,000,000 | 11,096,000,000 | 15,497,000,000 |
| Income Tax Expense | 2,619,000,000 | 5,642,000,000 | 449,000,000 | 2,581,000,000 |
| Net Income | 7,869,000,000 | 4,644,000,000 | 10,647,000,000 | 12,916,000,000 |
In: Finance
Perform an incremental analysis of the two finalist projects using the data provided below.
The company uses a MARR of 10% and depreciates its assets using 7-year MACRS. The company’s effective income tax rate is 25%.
Project 1: Milling machines Equipment cost: Two (2) machines that each cost $380,000 including trade-in allowance and sales tax. The total cost of the freight and handling is expected to be $25,000. The total cost to install the machines is $30,000. Total testing and startup costs to place the machines into service are estimated to be $32,000. Useful life: 8 years. It is estimated that the machines can be sold for a total of $105,000 at the end of the project.
Each machine requires one operator at a time at a rate of $32.00 per hour. The plant operates 4080 hours per year. Total maintenance labor costs are estimated to be 20% of operating hours at $22.00 per hour. Total annual direct materials are estimated at $290,000. Manufacturing overhead exclusive of depreciation is expected to be an additional $270,000 per year.
Revenues are expected to be $1,025,000 each year as a result of this project. The project would run for 8 years.
Project 2: Painting Line Equipment cost: $315,000 including trade-in allowance and sales tax. The total cost for freight and handling is expected to be $15,000. The total cost to install the line is $35,000. Testing and startup costs to place the line in service are estimated to be $24,000. Useful life: 8 years. It is estimated that the line can be sold for a total of $70,000 at the end of the project.
The line requires one operator at a time a rate of $30.00 per hour and one helper at a time at a rate of $19.75 per hour. The plant operates 4080 hours per year. Total annual direct materials are estimated at $150,000. Maintenance labor costs are estimated to be 20% of operating hours at $19.00 per hour. Manufacturing overhead exclusive of depreciation is expected to be $220,000 per year.
Revenues are expected to be $635,000 for the first year as a result of the project and are expected to increase by 2% each year throughout the project. The project would run for 8 years.
In: Finance
Cash conversion cycle American Products is concerned about managing cash effi-ciently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Goods sold total $20 million, and purchases are $15 million. a. Calculate the firm’s operating cycle. b. Calculate the firm’s cash conversion cycle. c. Calculate the amount of resources needed to support the firm’s cash conversion cycle. d. Discuss how management might be able to reduce the cash conversion cycle
In: Finance
Hatch Inc. have bonds in issue with a 7 per cent coupon rate. Bonds in Fortuna Inc. have a 4 per cent coupon rate. Both bonds sell at a discount, have face values of $1000, make annual payments, have a yield to maturity (YTM) of 9 per cent and have five years to maturity, Calculate the current yield for each bond
In: Finance
|
M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8 million. The company expects a total annual operating cash flow of $1.4 million for the next 10 years. The relevant discount rate is 10 percent. Cash flows occur at year-end. |
| a. |
What is the NPV of the new video game? |
| b. |
After one year, the estimate of remaining annual cash flows will be revised either upward to $2.3 million or downward to $295,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.7 million. What is the revised NPV given that the firm can abandon the project after one year? |
In: Finance
|
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.2 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,020,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.3 million in revenues with $5.3 million in operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The market value of the equipment over the life of the project is as follows: |
| Year | Market Value ($ millions) | |||||
| 1 | $ | 14.20 | ||||
| 2 | 11.20 | |||||
| 3 | 8.70 | |||||
| 4 | 2.05 | |||||
| a. |
Assuming Hand Clapper operates this project for four years, what is the NPV? |
| b-1 |
Compute the project NPV assuming the project is abandoned after only one year. |
| b-2 |
Compute the project NPV assuming the project is abandoned after only two years. |
| b-3 |
Compute the project NPV assuming the project is abandoned after only three years. |
In: Finance
|
The Cornchopper Company is considering the purchase of a new harvester. |
|
The new harvester is not expected to affect revenue, but operating expenses will be reduced by $13,200 per year for 10 years. |
|
The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $68,000 and has been depreciated by the straight-line method. |
| The old harvester can be sold for $21,200 today. |
| The new harvester will be depreciated by the straight-line method over its 10-year life. |
| The corporate tax rate is 22 percent. |
| The firm’s required rate of return is 13 percent. |
|
The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. |
|
All other cash flows occur at year-end. |
|
The market value of each harvester at the end of its economic life is zero. |
|
Determine the break-even purchase price in terms of present value of the harvester. This break-even purchase price is the price at which the project’s NPV is zero. |
In: Finance
Wildhorse Corporation is financed with debt, preferred equity,
and common equity with market values of $25 million, $13 million,
and $32 million, respectively. The betas for the debt, preferred
stock, and common stock are 0.3, 0.5, and 1.2, respectively. The
risk-free rate is 4.00 percent, the market risk premium is 6.01
percent, and Wildhorse’s average and marginal tax rates are both 30
percent.
Excel Template
(Note: This template includes the problem statement as it
appears in your textbook. The problem assigned to you here may have
different values. When using this template, copy the problem
statement from this screen for easy reference to the values you’ve
been given here, and be sure to update any values that may have
been pre-entered in the template based on the textbook version of
the problem.)
(a1)
What is the company’s cost of capital? (Round intermediate calculation to 4 decimal places, e.g. 1.2512 and final answers to 3 decimal places e.g. 5.215%.)
| Costs of debt | % | ||
| Costs of common equity | % | ||
| Costs of preferred equity |
Costs of debt ? Costs of common Equity? Costs of preferred equity ?
In: Finance
Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.
| Year | 1 | 2 | 3 | 4 | 5 |
| FCF | -$22.86 | $38.3 | $43.2 | $51.3 | $56.5 |
The weighted average cost of capital is 12%, and the FCFs are
expected to continue growing at a 3% rate after Year 5. The firm
has $26 million of market-value debt, but it has no preferred stock
or any other outstanding claims. There are 19 million shares
outstanding. Also, the firm has zero non-operating assets. What is
the value of the stock price today (Year 0)? Round your answer to
the nearest cent. Do not round intermediate calculations.
$ ______ per share
According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock.
The statement above is -Select-truefalse
In: Finance
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.
\
1.69
3.90
3.32
3.55
In: Finance
We are evaluating a project that costs $1,920,000, has a 6-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 94,500 units per year. Price per unit is $38.43, variable cost per unit is $23.60, and fixed costs are $839,000 per year. The tax rate is 23 percent and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best case NPV/ Worst case NPV?
In: Finance
Oriole Industries management is planning to replace some
existing machinery in its plant. The cost of the new equipment and
the resulting cash flows are shown in the accompanying table. The
firm uses an 18 percent discount rate for projects like this.
Should management go ahead with the project?
| Year | Cash Flow | |
|---|---|---|
|
0 |
-$3,278,800 | |
|
1 |
956,210 | |
|
2 |
894,100 | |
|
3 |
1,235,500 | |
|
4 |
1,331,060 | |
|
5 |
1,523,500 |
What is the NPV of this project? (Enter negative
amounts using negative sign e.g. -45.25. Do not round discount
factors. Round other intermediate calculations and final answer to
0 decimal places, e.g. 1,525.)
|
The NPV is ? |
$enter The NPV in dollars rounded to 0 decimal places |
"The NPV is ? "
In: Finance