In: Finance
Types of budgets employed by the organization (operating, capital, cash, statistical, FTE, etc.)
In: Finance
Question 6:
Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. What affect it can have on the company’s financial statements. Discuss.
In: Finance
ABC Ltd. issued $3,000,000 bond that has 15% coupon rate paid semiannually. The bond has a face value of $1000 and will mature 12 years from now. The company has just paid a divided of $6.50 per share on its 50,000 ordinary shares. The company forecasted to maintain a growth rate of 5% in dividends in future. The company has 20,000 preference shares with $100 face value which has a market price of $120 per share. Requirements: 1. What is the value of the bond if required rate of return is 12%? 2. What is the price of the company's ordinary shares if required rate of return is 18%? 3. What is the dividend rate of the company's preference share if rate of return is 14%? 4. What is the market value of the firm? 5. Calculate the capital structure of the company by identifying weight of the financing and equity? 6. Compute the weighted average cost of capital (WACC) under the traditional tax system. Tax rate is 30% and use Dividend Growth model (DGM)
In: Finance
Question 11.
Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? Rationalize your selection.
a. Company Heidee has more net income.
b. Company Heidee pays less in taxes.
c. Company Heidee has a lower equity multiplier.
d. Company Heidee has a higher ROA.
e. Company Heidee has a higher times interest earned (TIE) ratio.
In: Finance
Determining net cash flows for a new boat Jan and Deana have been dreaming about owning a boat for some time and have decided that estimating its cash flows will help them in their decision process. They expect to have a disposable annual income of
$23,600. Their cash flow estimates for the boat purchase are as follows:
Negotiated price of the new boat 
$69,600 
Sales tax rate (applicable to purchase price) 
6.2 % 
Boat tradein 
$ 0 
Estimated value of new boat in 4 years 
$39,800 
Estimated monthly repair and maintenance 
$ 814 
Estimated monthly docking fee 
$504 
Using these cash flow estimates, calculate the following:
a. The initial investment.
b. Operating cash flow.
c. Terminal cash flow.
d. Summary of annual cash flow. (Note: Assume that Jan and Deana plan on selling the boat in 4 years.)
e. On the basis on their disposable annual income, what advice would you give Jan and Deana regarding the proposed boat purchase?
In: Finance
A twomonth European put option on a nondividendpaying stock is currently selling for $2.00. The stock price is $52, the strike price is $55, and the riskfree interest rate is 5% per annum. What opportunities are there for an arbitrageur?
In: Finance
Analysis of an expansion project
Companies invest in expansion projects with the expectation of increasing the earnings of its business.
Consider the case of McFann Co.:
McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:
Year 1 
Year 2 
Year 3 
Year 4 


Unit sales  3,000  3,250  3,300  3,400 
Sales price  $17.25  $17.33  $17.45  $18.24 
Variable cost per unit  $8.88  $8.92  $9.03  $9.06 
Fixed operating costs  $12,500  $13,000  $13,220  $13,250 
This project will require an investment of $10,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s fouryear life. McFann pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law.
Determine what the project’s net present value (NPV) would be under the new tax law.
$26,608
$23,947
$30,599
$31,930
Now determine what the project’s NPV would be when using straightline depreciation.
Using the depreciation method will result in the highest NPV for the project.
No other firm would take on this project if McFann turns it down. How much should McFann reduce the NPV of this project if it discovered that this project would reduce one of its division’s net aftertax cash flows by $600 for each year of the fouryear project?
$1,582
$1,396
$2,047
$1,861
The project will require an initial investment of $10,000, but the project will also be using a companyowned truck that is not currently being used. This truck could be sold for $4,000, after taxes, if the project is rejected. What should McFann do to take this information into account?
Increase the NPV of the project by $4,000.
Increase the amount of the initial investment by $4,000.
The company does not need to do anything with the value of the truck because the truck is a sunk cost.
In: Finance
Question 4:
What are some economic factors that affect the capital requirements? Explain
In: Finance
Question 3:
What are the various ways through which transfer of capital takes place between the savers and investors? Discuss with the help of examples.
In: Finance
What is the price per share based on the equity free cash flow model?
Year 1:
Revenue: 630
Fixed costs: 120
Variable costs: 200
Additional investments in NWC: 10
Additional investments in operating longterm assets: 70
Depreciation: 60
Interest expenses: 35
Newly issued debt: 25
Principal repayment: 15
Cost of equity, Rs: 0.14
Corporate tax rate: 0.40
Growth rate per year:
from year 1 through year 5: 0.12
After year 5: 0.05
Market value:
Shortterm debt: 100
Longterm debt: 600
Preferred Stock:
Market price per share: 10
Number of shares: 10
Common Stock:
Market price per share: 18
Number of shares: 100
a. $16.39*
b. $13.09
c. $15.33
d. $14.21
In: Finance
In: Finance
A European call option and put option on a stock both have a strike price of $25 and an expiration date in four months. Both sell for $4. The riskfree interest rate is 6% per annum, the current stock price is $23, and a $1 dividend is expected in one month. Identify the arbitrage opportunity open to a trader.
In: Finance
The Nelson Company has $1,875,000 in current assets and $625,000 in current liabilities. Its initial inventory level is $312,500, and it will raise funds as additional notes payable and use them to increase inventory.
How much can Nelson's shortterm debt (notes payable) increase without pushing its current ratio below 1.9? Round your answer to the nearest cent. $
What will be the firm's quick ratio after Nelson has raised the maximum amount of shortterm funds? Round your answer to two decimal places.
In: Finance
A stock price is currently $200. Over each of the next two sixmonth periods it is expected to go up by 10% or down by 10%. The riskfree interest rate is 6% per annum with continuous compounding. What is the value of a oneyear European call option with a strike price of $200?
In: Finance