What is the after-tax cost of debt for a firm with 4% bonds priced at 93% of par with 23 years to maturity and semi-annual coupons?

- Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $2 million of debt financing at 8% interest. The all-equity firm will have a value of $4 million with 400,000 shares outstanding. The leveraged firm will have 200,000 shares outstanding. Assume there are no taxes. a. What is the EPS for the unlevered and levered capital structures assuming operating income is $240,000? b. What is the EPS for the unlevered and levered capital structures assuming operating income is $400,000? c. At what operating income would Alpha Company be indifferent between the two capital structures? d. Create a graph with operating income on the horizontal axis and EPS on the vertical axis. Show on the graph how EPS varies with operating income for the two capital structures.

2. List and define the five categories of ratios generally used in financial statement analysis.

1. Explain the key items of interest to the following groups of people when completing a financial statement analysis:

-investors,

-creditors

-and management.

1. A company is considering an investment in a new project which would require $39,000 worth of capital expenditures and an increase of $45,000 in net working capital that will be recovered at the end of the project. Each year, starting at the end of the first year, the operating cash flows of the project will be $32,000 for 3 years. The project is so risky and so crazy its WACC is 16%. What is the net present value of the project?

   		($14.42)
   		$10.99
   		$12.97
   		$153.36
   		None of these

A company is considering a 5-year project that opens a new product line and requires an initial outlay of $84,000. The assumed selling price is $99 per unit, and the variable cost is $55 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 11% per year, what is the financial break-even point? (Answer to the nearest whole unit.)

Sideshow Bob's Circus is considering replacing its current Whack a mole machines with a new and improved model. The old machines cost $800000 6 years ago and is being depreciated to zero using 10 year straight line depreciation. These old whack a mole machines has a current salvage value of $250000. THe new machines, the wacky mole cost $1000000 tpday and would be depreciated to zero using 5 year straight line depreciation and would have a five year useful life. Revenues would rise $50000 annually and operating costs would decrease $150000 annually if the old machines are replaced. The company's marginal tax rate is 25%.

1) Refer to Sideshow Bob's circus, what is the year 2 operating cash flow for this potential replacement project if Sideshow Bob's tax rate is 25%?

A) $180000

B) $60000

C) $200000

D) $150000

***Correct answer: A

2) Refer to Sideshow Bob's Circus, what is the initial cash flow for this potential replacement project if Sideshow Bob's tax rate is 25%?

A) -$732,500

B) -$982,500

C) -$750,000

D) -$767,500

***Correct Answer: A

How do you get these two answers? Pls show all work!

GXY Corp. has a WACC of 15%, a cost of debt capital of 5%, and a market value debt-to-equity ratio of 0.10. GXY Corp. is not subject to taxation. Suppose that GXY Corp. increased it market value debt-to-equity ratio to 0.35, What will be the change in GXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5?

a. The PJX5 will cost $1.85 million fully installed and has a 10 year life. It will be depreciated to a book value of $268,795.00 and sold for that amount in year 10.

b. The Engineering Department spent $44,639.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,644.00.

d. The PJX5 will reduce operating costs by $344,885.00 per year.

e. CSD’s marginal tax rate is 27.00%.

f. CSD is 62.00% equity-financed.

g. CSD’s 10.00-year, semi-annual pay, 6.96% coupon bond sells for $990.00.

h. CSD’s stock currently has a market value of $20.24 and Mr. Bensen believes the market estimates that dividends will grow at 4.10% forever. Next year’s dividend is projected to be $1.63.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $23.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.21 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.65 million per year and cost $2.37 million per year over the 10-year life of the project. Marketing estimates 20.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 15.00%. Find the IRR (internal rate of return)

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.04 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.90 million per year and cost $2.32 million per year over the 10-year life of the project. Marketing estimates 14.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 35.00%. The WACC is 14.00%. Find the NPV (net present value).

Jenner’s common stock is currently selling at $ 30 per share. Dividends of $ 1 are expected to be paid at the end of the year (t = 1). The required rate-of-return on this stock is 12%.

(a) If dividends are expected to grow at a 10% rate indefinitely, find the value of the stock.

(b) If dividends are expected to grow at a 15% rate over the next 3 years, then at 11% for years 4 and 5, and 6% forever beginning in year 6:

(1) Find the dividends for years 1 through 6.

(2) Find the value of the stock at the end of year 5.

(3) Find the value of the stock at the end of year 3.

(4) Find the value of the stock now at t = 0.

(5) Does the current value of the stock change if you plan on selling it at the end of year 5? at the end of year 3? Explain.

QUESTION 121

1. A bank owns a portfolio of Treasury bonds but wants to hedge its position. Which of the following would make the most sense?

   		a. Buy call options on Treasury bonds.
   		b. Buy futures contracts on Treasury bonds.
   		c. Sell futures contracts on Treasury bonds.
   		d. Sell put options on Treasury bonds.

QUESTION 122

1. What is the primary risk to investors when hedging with futures contracts?

   		a. Basis fluctuations.
   		b. Futures prices may increase.
   		c. Futures prices may decrease.
   		d. Insufficient funds to meet margin requirements and maintain the futures position.

Explain interest rate swaps with diagrams.