The life of the project is 5 years. A feasibility study has been undertaken at a cost of $2 million. The study concluded that at the end of the project the cost of restoring the environment of the mine would be approximately $ 1.2 million. The project would require capital equipment of $8 million. The shipping and installation costs for this equipment are around $40,000. This equipment will be depreciated on a straight‐line basis over the life of the project to a book value of zero. At the end of the project, the equipment will be salvaged for $30000 but half of this amount will be used up for cleaning up costs and strengthening the foundations of the floor directly below the equipment when the equipment is removed. The project will result in additional revenue of $7 million per year and will incur additional costs (excluding depreciation) of $2.5 million per year. If this project is not undertaken then the area could have been leased out to another company for an annual rent of $ 750,000. The corporate tax rate is 30% and the required rate of return for projects of this risk level is 9%. Required: (a) Determine the cash flows associated with this project . (b) Compute the NPV and IRR for this project. ‘(c) Advise if you would recommend the project, with reasons.
In: Finance
What are the key characteristics of the following market anomalies: (include a theoretical justification of each)
- Size
- Value
- Low Beta
In: Finance
Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs
$ 6 comma 600$6,600
today and promises to pay
$ 2 comma 200$2,200,
$ 2 comma 500$2,500,
$ 2 comma 500$2,500,
$ 2 comma 000$2,000
and
$ 1 comma 700$1,700
over the next 5 years. Or, Bill can invest
$ 6 comma 600$6,600
in project B that promises to pay
$ 1 comma 300$1,300,
$ 1 comma 300$1,300,
$ 1 comma 300$1,300,
$ 3 comma 400$3,400
and
$ 4 comma 100$4,100
over the next 5 years.
(Hint:
For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is
recovered.)
a. How long will it take for Bill to recoup his initial investment in project A?
b. How long will it take for Bill to recoup his initial investment in project B?
c. Using the payback period, which project should Bill choose?
d. Do you see any problems with his choice?
In: Finance
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Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $65,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. |
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Assume the firm goes through with the proposed recapitalization. b-1. Calculate the return on equity (ROE) under each of the three economic scenarios. b-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. |
Assume the firm has a tax rate of 21 percent.
c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession.
c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization.
c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.
In: Finance
A U.S.-based importer, Zarb, invests $1000 in a risk-free 180-day Switzerland bond with a 4% annual Swiss francs return. He plans to lock in the dollar return by selling the Swiss francs in the forward market. Assume that the spot exchange rate is 1.66 Swiss francs per dollar and the 180-day forward exchange rate is 0.6 dollar per Swiss francs. What's the expected annual dollar return?
In: Finance
1. Discuss the purpose of a listing agreement.
2. Briefly discuss the 3 types of listing agreements and identify the listing agreement that is most commonly used.
3. Describe the minimum elements a listing agreement should include.
4. Absent of a specific written agreement between the real estate broker and the seller, can a broker charge the seller for any other expenses (advertising, overhead, sales expenses) the broker incurrs in marketing the property?
5. Discuss the purpose of the safety clause found in most listing agreements.
6. Explain the purpose of the purchase agreement.
7. Would you purchase a property using a land contract? Explain...
8. A lease (rental agreement) sets out the rights and responsibilities of the landlord and tenant. Briefly describe the elements of a valid lease.
9. What is the purpose of an option agreement?
10. Compare an option agreement and a right of first refusal
In: Finance
Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company’s unlevered equity is 12.7 percent and the pretax cost of the firm’s debt is 6.5 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $19,600,000. Variable costs amount to 65 percent of sales. The tax rate is 25 percent and the company distributes all its earnings as dividends at the end of each year.
a. If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
b. What is the required return on the firm’s levered equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c-1. Use the weighted average cost of capital method to calculate the value of the company. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
c-2. What is the value of the company’s equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
c-3. What is the value of the company’s debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
d. Use the flow to equity method to calculate the value of the company’s equity. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
In: Finance
A three-year old 10-year 8% semi-annual coupon bond is selling at $1,200 today. If the yield increases by 25 basis points, how much of the price change is due to
convexity of the bond? (Face Value = $1,000)
In: Finance
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M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $7.1 million. The company expects a total annual operating cash flow of $1.31 million for the next 10 years. The relevant discount rate is 11 percent. Cash flows occur at year-end. |
| a. |
What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) |
| b. |
After one year, the estimate of remaining annual cash flows will be revised either upward to $2.21 million or downward to $286,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.61 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) |
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In: Finance
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We are examining a new project. We expect to sell 5,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $64 × 5,000 = $320,000. The relevant discount rate is 13 percent, and the initial investment required is $1,610,000. After the first year, the project can be dismantled and sold for $1,210,000. Suppose you think it is likely that expected sales will be revised upward to 8,000 units if the first year is a success and revised downward to 3,600 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 16,000. Note that abandonment is an option if the project is a failure. |
| a. |
If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
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An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Riggs, Inc., a non-dividend-paying common stock, with six months until expiration. She would like the put to have a strike price of $34 and the call to have a strike price of $63. The current price of the stock is $45 per share. Marie can borrow and lend at the continuously compounded risk-free rate of 5 percent per year and the annual standard deviation of the stock’s return is 50 percent. |
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Use the Black-Scholes model to calculate the total cost of the collar that Marie is interested in buying. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
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Handler Corp. has a zero coupon bond that matures in five years with a face value of $91,000. The current value of the company’s assets is $87,000 and the standard deviation of its return on assets is 38 percent per year. The risk-free rate is 6 percent per year, compounded continuously. |
| a. |
What is the value of a risk-free bond with the same face value and maturity as the current bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | What is the value of a put option on the company’s assets with a strike price equal to the face value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-1. | Using the answers from (a) and (b), what is the value of the company’s debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c-2. | Using the answers from (a) and (b), what is the continuously compounded yield on the company’s debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d-1. | Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 47 percent per year. What is the new value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| d-2. | What is the new continuously compounded yield on the debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| e-1. | If the company restructures its assets, how much will bondholders gain or lose? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| e-2. | If the company restructures its assets, how how much will stockholders gain or lose? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
Please answer the question below, thanks!
1. Suppose a company has estimated the following cash flows in each of the next three years for operations in various countries.
|
Year |
New Zealand |
Japan |
|
1 |
160 NZD |
16,415 JYP |
|
2 |
174 NZD |
17,844 JYP |
|
3 |
181 NZD |
18,401 JYP |
If the USD/JPY is 100 and the USD/NZD is 110, what are the expected cash flows in each of the next three years?
.
2. If the Euro ask price is $1.35 and the Euro bid price is $1.28, what is the bid-ask spread in percentage terms?
.
3. States THREE factors that influence exchange rates.
In: Finance
If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.05. The company has a target debt-equity ratio of .55. The expected return on the market portfolio is 10 percent and Treasury bills currently yield 3.2 percent. The company has one bond issue outstanding that matures in 30 years, a par value of $1,000, and a coupon rate of 6.1 percent. The bond currently sells for $1,055. The corporate tax rate is 24 percent.
c. What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
In: Finance
National Electric Company (NEC) is considering a $45.12 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $4.17 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.2 percent and its cost of equity is 12 percent. The company’s target debt-to-value ratio is 60 percent. The project has the same risk as the company’s existing businesses and it will support the same amount of debt. The tax rate is 22 percent.
Calculate the weighted average cost of capital. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Calculate the net present value of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
In: Finance