Given that company X has a policy of risk adjusting their WACC of 12% by plus or minus 3% for above and below average risk projects respectively, which of the following independent projects are accepted using NPV?
Project: A B C
Risk: Average Below Above
CF0 -10 -20 -25
CF1 5 10 5
CF2 5 10 5
CF3 4 7 10
CF4 4 3 20
Go / No Go Go / No Go Go / No Go
NPV ________ ________ ________
Please give thorough explanation and step by step instruction. Very important to learn this one!
In: Finance
In: Finance
Negus Enterprises has an inventory conversion period of 55 days, an average collection period of 47 days, and a payables deferral period of 29 days. Assume that cost of goods sold is 80% of sales. Assume a 365-day year. Do not round intermediate calculations.
What is the length of the firm's cash conversion cycle? Round your answer to the nearest whole number.
days
If annual sales are $4,854,500 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar.
$
How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.
In: Finance
In: Finance
A project has annual cash flows of $8,000 for the next 10 years and then $9,500 each year for the following 10 years. The IRR of this 20-year project is 13.16%. If the firm's WACC is 9%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.
In: Finance
In: Finance
Masterson, Inc., has 6 million shares of common stock outstanding. The current share price is $84, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $145 million, has a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $130 million, has a coupon rate of 4 percent, and sells for 107 percent of par. The first issue matures in 24 years, the second in 9 years. Suppose the most recent dividend was $5.00 and the dividend growth rate is 4.9 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 25 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
In: Finance
Use the following
information about a hypothetical government security dealer named
J.P. Groman. (Market yields are in parentheses; amounts are in
millions.)
| Assets | Liabilities and Equity | |||||||
| Cash | $ | 22 | Overnight repos | $ | 213 | |||
| 1-month T-bills (7.17%) | 99 | Subordinated debt | ||||||
| 3-month T-bills (7.37%) | 99 | 7-year fixed (8.67%) | 162 | |||||
| 2-year T-notes (7.62%) | 62 | |||||||
| 8-year T-notes (9.08%) | 112 | |||||||
| 5-year munis (floating rate) (8.32% reset every six months) | 37 | Equity | 56 | |||||
| Total | $ | 431 | Total | $ | 431 | |||
a. What is the repricing or funding gap if the
planning period is 30 days? 91 days? 2 years? (Recall that cash is
a non-interest-earning asset.)
b. What is the impact over the next 30 days on net
interest income if all interest rates rise by 50 basis
points?
c. The following one-year runoffs are expected:
$11 million for two-year T-notes, $21 million for the eight-year
T-notes. What is the one-year repricing gap?
d. If runoffs are considered, what is the effect
on net interest income at year-end if interest rates rise by 50
basis points?
In: Finance
Problem 10-20
Present Value of Costs
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 11%, and the projects' expected net costs are listed in the table:
| EXPECTED NET COST | ||
| Year | Conveyor | Forklift |
| 0 | -$500,000 | -$200,000 |
| 1 | -120,000 | -160,000 |
| 2 | -120,000 | -160,000 |
| 3 | -120,000 | -160,000 |
| 4 | -120,000 | -160,000 |
| 5 | -20,000 | -160,000 |
In: Finance
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