Based on the class text book- Principles of Managerial Finance by Gitman & Zutter - Chapter 5-Time Value of Money and Chapter 8- Risk and Return and other additional readings,
Explain the models of Risk and Return.
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $768,000 is estimated to result in $256,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $112,000. The press also requires an initial investment in spare parts inventory of $32,000, along with an additional $4,800 in inventory for each succeeding year of the project. Required : If the shop's tax rate is 31 percent and its discount rate is 8 percent, what is the NPV for this project? (Do not round your intermediate calculations.)
This question reminds me of the scam emails you always receive stating some unknown relative has died leaving millions from a foreign account. Stating all you have to do is give them some time of personal information, and they will deposit it into your account. This is where the rule of thumb where if it sounds too good to be true, then it probably is plays out. Much to the same effect if you are being offered an investment opportunity where the returns are high with low risk or as the statement says safe. It is without question some type of scam. The rule of thumb with investment is low-risk yields low return while high risk yields a high return. However, there are very few places where you will find a safe investment thesis, not a reality within the realm of investing capital in any shape or fashion. There, however conservative investment plans you could look into, but they will provide conservative returns as well. What type of investment strategies does everyone like to employ?
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.30 (given its target capital structure). Vandell has $10.63 million in debt that trades at par and pays an 7.6% interest rate. Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 4% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 7% and the market risk premium is 4%.
Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.7 million, $3.5 million, and $3.96 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 4% rate. Hastings plans to assume Vandell’s $10.63 million in debt (which has an 7.6% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.448 million, after which the interest and the tax shield will grow at 4%.
Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent. Do not round intermediate calculations. Please include step by step.
which among these is plausible:
1. Zero based budgeting
2. Activity based budgeting
3. Rolling budget.
CALCULATE THE COST OF DEBT;
Walmart has at least 50 long-term bonds, the weighted average yield on these bonds is 3.2%. On the other hand, a simplified cost of debt can be calculated as the interest expenses divided by two year average of book value of debt. For Walmart, the book and market value of debt is nearly identical. This estimated cost of debt is 4.49%.
For our purposes, we will take the average, and use 3.85% as the pre-tax cost of debt (preliminary).
Now that we have the average pre-tax cost of debt, we need to account for the underwriter spread. We are simplifying from flotation costs calculated for equity. The adjusted pre-tax cost of debt should be estimated rate (from above)/(1-UW spread). Estimated pre-tax cost after accounting for underwriter spread and other flotation costs (the total of 1.5%). We calculate this adjusted pre-tax cost of debt as: original pre-tax estimate/(1-flotation cost %)
1) What is the adjusted pre-tax cost of debt (rd)? [show your work below]
WEIGHTED AVERAGE COST OF CAPITAL
1) What is the Weighted average cost of capital? Be sure to show your inputs in your WACC above and be sure to adjust for taxes as appropriate.
2) Discuss: Is this weighted average cost of capital a “good” hurdle rate to use for all new Walmart projects?
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .45, but the industry target debt-equity ratio is .40. The industry average beta is 1.10. The market risk premium is 6.1 percent and the risk-free rate is 4.7 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 25 percent. The project requires an initial outlay of $885,000 and is expected to result in a $113,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 4 percent until the end of the fifth year and remain constant forever thereafter.
Calculate the NPV of the project.
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $768,000 is estimated to result in $256,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $112,000. The press also requires an initial investment in spare parts inventory of $32,000, along with an additional $4,800 in inventory for each succeeding year of the project.
If the shop's tax rate is 31 percent and its discount rate is 8 percent, what is the NPV for this project? (Do not round your intermediate calculations.)
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,140,000 and will last for 6 years. Variable costs are 37 percent of sales, and fixed costs are $165,000 per year. Machine B costs $4,390,000 and will last for 10 years. Variable costs for this machine are 30 percent of sales and fixed costs are $114,000 per year. The sales for each machine will be $8.78 million per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis.
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A? (Do not round your intermediate calculations.)
If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B? (Do not round your intermediate calculations.)
Why is bank lending to large corporations more difficult than making loans to small firms? What additional factors are involved in this process? Do banks have some additional tools to help in assessing credit risk of large firms? What are some examples
Mozart Inc.’s $98,000 taxable income for 2017 will be taxed at the 35% corporate tax rate. For tax purposes, its depreciation expense exceeded the depreciation used for financial reporting purposes by $27,000. Mozart has $45,000 of purchased goodwill on its books; during 2017, the company determined that the goodwill had suffered a $3,000 impairment of value for financial reporting purposes. None of the goodwill impairment is deductible for tax purposes. Mozart purchased a three-year corporate liability insurance policy on July 1, 2017, for $36,000 cash. The entire premium was deducted for tax purposes in 2017. Required:
1.Determine Mozart’s pre-tax book income for 2017.
2.Determine the changes in Mozart’s deferred tax amounts for 2017.
3.Calculate tax expense for Mozart Inc. for 2017.
Your firm is contemplating the purchase of a new $666,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $64,800 at the end of that time. You will be able to reduce working capital by $90,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 17 percent and your pretax cost savings are $191,700 per year.
|What is the NPV of this project?|
|$-44,325.31 $-43,411.39 $-47,981.01 $-47,067.09 $-45,696.20|
|What is the NPV if the pretax cost savings are $266,250 per year?|
|$119,811.66 $110,683.15 $117,529.53 $108,401.02 $114,106.34|
At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
|$236,424.95 $223,668.78 $186,677.98 $213,017.88 $202,366.99|
Why do many mutual funds currently sell 3 different classes of shares? - What are the differences among the three types. - What factors should you consider in choosing one type?
Emma Jones s plain to move this coming summer. She has not yet decided whether she wants to rent or buy a property here in Mississippi. Her monthly budget is $1500 to cover any housing expenses including rent or owners' costs (example: mortgage, hazard insurance, property taxes, and Home Owner Association fees). Estimated the maximum house value she can afford to buy. Assume the mortgage is fixed rate, 30 years maturity, 80% LTV, with no points. The interest rate that she was quoted is 4.8% with monthly payments. The value; the hazard insurance premium is 0.5% per year, and that on average you should consider $50 per month for maintenance.
Determine the required monthly payment for the mortgage and maximum house value she can afford if she buys?