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
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises. The upfront investment required to launch the product is
$ 12$12
million. The product will generate free cash flow of
$ 0.71$0.71
million the first year, and this free cash flow is expected to grow at a rate of
4 %4%
per year. Gupta has an equity cost of capital of
10.6 %10.6%,
a debt cost of capital of
6.73 %6.73%,
and a tax rate of
38 %38%.
Gupta maintains a debt-equity ratio of
0.900.90.
a. What is the NPV of the new product line (including any tax shields from leverage)?
b. How much debt will Gupta initially take on as a result of launching this product line?
c. How much of the product line's value is attributable to the present value of interest tax shields?
a. What is the NPV of the new product line (including any tax shields from leverage)?
The NPV of the new product line is
$nothing
million. (Round to two decimal places.)
b. How much debt will Gupta initially take on as a result of launching this product line?
Debt will be
$nothing
million. (Round to two decimal places.)
c. How much of the product line's value is attributable to the present value of interest tax shields?
The amount of the product line's value that is attributable to the present value of interest tax shields is
$nothing
million. (Round to two decimal places.)
In: Finance
In mid-2009, Ralston Purina had AA-rated, six-year bonds outstanding with a yield to maturity of
3.68 %3.68%.
At the time, similar maturity Treasuries had a yield of
2.68 %2.68%.
a. If Ralston Purina’s bonds were risk-free, what is your estimate of the expected return for
these bonds?
b. If you believe Ralston Purina's bonds have
0.9 %0.9%
chance of default per year and that expected loss rate in the event of default is
39 %39%,
what is your estimate of the expected return for these bonds?
a. If Ralston Purina’s bonds were risk-free, what is your estimate of the expected return for
these bonds?
The estimate of the expected return for these bonds is
nothing%.
(Round to two decimal places.)c. If you believe Ralston Purina's bonds have
0.9 %0.9%
chance of default per year, and that expected loss rate in the event of default is
39 %39%,
what is your estimate of the expected return for these bonds?The estimated expected return for these bonds will be
nothing%.
(Round to two decimal places.)
In: Finance
Kurz Manufacturing is currently an all-equity firm with
1717
million shares outstanding and a stock price of
$ 5.00$5.00
per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow
$ 50$50
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
30 %30%
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
$nothing
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
$nothing
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
$nothing.
(Round to the nearest cent.) The number of shares that Kurz will repurchase is
nothing
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
$nothing
million. (Round to one decimal place.)The debt is
$nothing
million. (Round to the nearest integer.)The market value of equity is
$nothing
million. (Round to one decimal place.)Share price after repurchase is
$nothing.
(Round to two decimal
places.)
Enter your answer in each of the answer boxes.
In: Finance
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises. The upfront investment required to launch the product is
$ 8
million. The product will generate free cash flow of
$ 0.77
million the first year, and this free cash flow is expected to grow at a rate of
4 %
per year. Gupta has an equity cost of capital of
10.6 %
,
a debt cost of capital of
7.14 %
,
and a tax rate of
32 %
.
Gupta maintains a debt-equity ratio of
0.40
.
a. What is the NPV of the new product line (including any tax shields from leverage)?
b. How much debt will Gupta initially take on as a result of launching this product line?
c. How much of the product line's value is attributable to the present value of interest tax shields?
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 correlation between A and M.
-7.44
-.57
-.67
.45
In: Finance