Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $331. Variable cost per unit $188 Units sold 488 Fixed costs $5,750 Interest expense $16,184 Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?
In: Finance
Cash Discounts
Suppose a firm makes purchases of $3.55 million per year under terms of 3/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations.
Nominal cost | % |
Effective cost | % |
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After inheriting $50,000 you open up two separate brokerage accounts and divide your
inheritance equally in both accounts ($25,000 in each). You use only these funds to
trade in two stocks for two months at the end of which you clear both your positions and
evaluate your performance. Assume the following:
- You pay $50 per transaction (use only your inheritance as source of funds)
- Call money rate is 3.5% (APR compounded daily – 365 days a year)
- Initial margin is 50% and maintenance margin is 30%. The maximum amount in
‘borrowed’ funds is based on the number of ‘whole’ shares.
- Only your equity funds in the short arrangement earn interest.
- Treat each account separately for purposes of this assignment.
On 7/1 you did the following:
1. Buy stock SOFT for $40 (account 1) and short stock XESLA for $250 (account 2)
using initial margin is 50% in each of the two accounts. Provide the following
information (it is advisable to answer 1 and 2 one account at a time):
a. For each account, describe the price change (increase or decrease) that would
be desirable.
b. Number of shares bought/sold of each stock.
c. Amount of money borrowed for the margin trade in each account.
d. The price will you receive a margin call for each account.
2. Suppose you close out of each position at the end of the two months at the following
prices:
a. Suppose SOFT price has increased to $50.
b. Suppose SOFT price has decreased to $30.
c. Suppose XESLA price has increased to $275.
d. Suppose XESLA price has decreased to $225.
For each ending price, evaluate your performance by computing the following:
• The holding period return of each account2
• The annualized holding period return of each account.
3. Assume that you did not pay brokerage fees what would be the difference in
performance in each account in #2 above?
4. Compute the holding period return of the combined accounts (portfolio) when the
prices of the stocks increase (ignore # 3 above).
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Lindsey was recently hired by Swift Ltd. as a junior budget analyst. She is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. She must give her analysis and recommendation to the capital budgeting committee.
Lindsey has a B.S. in accounting from CWU (2014) and passed the CPA exam (2017). She has been in public accounting for several years. During that time she earned an MBA from Seattle U. She would like to be the CFO of a company someday--maybe Swift Ltd.-- and this is an opportunity to get onto that career track and to prove her ability.
As Lindsey looks over the financial data collected, she is trying to make sense of it all. She already has the most difficult part of the analysis complete -- the estimation of cash flows. Through some internet research and application of finance theory, she has also determined the firm’s beta.
Here is the information that Lindsey has accumulated so far:
The Capital Budgeting Projects
She must choose one of the four capital budgeting projects listed below:
Table 1
t |
A |
B |
C |
D |
0 |
(22,500,000) |
(24,000,000) |
(23,000,000) |
(21,000,000) |
1 |
9,600,000 |
7,700,000 |
8,200,000 |
7,500,000 |
2 |
9,600,000 |
8,400,000 |
8,200,000 |
6,900,000 |
3 |
4,500,000 |
9,800,000 |
6,500,000 |
5,400,000 |
4 |
4,500,000 |
4,900,000 |
5,900,000 |
4,500,000 |
Risk |
Average |
Average |
High |
Low |
Table 1 shows the expected after-tax operating cash flows for each project. All projects are expected to have a 4 year life. The projects differ in size (the cost of the initial investment), and their cash flow patterns are different. They also differ in risk as indicated in the above table.
The capital budget is $20 million and the projects are mutually exclusive.
Capital Structures
Swift Ltd. has the following capital structure, which is considered to be optimal:
Debt |
30% |
Preferred Equity |
15% |
Common Equity |
55% |
100% |
Cost of Capital
Lindsey knows that in order to evaluate the projects she will have to determine the cost of capital for each of them. She has been given the following data, which he believes will be relevant to her task.
(1)The firm’s tax rate is 35%.
(2) Swift Ltd. has issued a 8% semi-annual coupon bond with 14 years term to maturity. The current trading price is $960.
(3) The firm has issued some preferred stock which pays an annual 8.5% dividend of $50 par value, and the current market price is $52.
(4) The firm’s stock is currently selling for $35 per share. Its last dividend (D0) was $2.00, and dividends are expected to grow at a constant rate of 5%. The current risk free return offered by Treasury security is 2.8%, and the market portfolio’s return is 10.80%. Swift Ltd. has a beta of 1.1. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 3.5%.
(5) The firm adjusts its project WACC for risk by adding 2.5% to the overall WACC for high-risk projects and subtracting 2.5% for low-risk projects.
Lindsey knows that Swift Ltd. executives have favored IRR in the past for making their capital budgeting decisions. Her professor at Seattle U. said NPV was better than IRR. Her textbook says that MIRR is also better than IRR. She is the new kid on the block and must be prepared to defend her recommendations.
First, however, Lindsey must finish the analysis and write her report. To help begin, she has formulated the following questions:
(1) What is the estimated cost of common equity using the CAPM approach?
(2) What is the estimated cost of common equity using the DCF approach?
(3) What is the estimated cost of common equity using the bond-yield-plus-risk-premium approach?
(4) What is the final estimate for rs?
Table 2
A |
B |
C |
D |
|
WACC |
||||
NPV |
||||
IRR |
||||
MIRR |
Instructions
1.Your answers should be Word processed, submitted via Canvas.
2.Questions 5, 8, 9, and 11 are discussion questions.
3.Place your numerical solutions in Table 2.
4.Show your steps for calculation questions.
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Your employer has just transferred you to beautiful Winnipeg. Since you anticipate being at the branch here for some time, you have decided to purchase a condo downtown. The condo you want to purchase is being listed at $385,000. The mortgage officer at your financial institution has informed you that the current rate on mortgages is 4.80%, compounded semi‐annually. Fortunately, you are a prudent saver and have managed to amass the 10% down payment in your savings account. You have decided to take the mortgage on an 18‐year amortization period hoping that this will keep the every second week (26 payments/year) payments manageable.
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The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $3.1 million in annual pretax cost savings. The system costs $7.9 million and will be depreciated straight-line to zero over 5 years. Wildcat's tax rate is 23 percent, and the firm can borrow at 7 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.76 million per year. Lambert's policy is to require its lessees to make payments at the start of the year. |
a. |
What is the NAL for Wildcat? (A negative answer should be indicated by a minus sign. 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 maximum lease payment that would be acceptable to 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.) |
a.NAL?
b.Maximum lease payment?
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Porsche is expected to sell approximately 60,000 cars in the U.S. in 2019. I'll let you estimate an average selling price across Porsche models. For this example, let's assume that all the sales happen in December of 2019. Also, assume that Porsche has fully hedges their U.S. dollar exposure (based on predicted sales) using futures or forward contracts at a rate of $1.10 per Euro. What happens in the following situations:
a. the Dollar/Euro exchange rate remains unchanged and sales are as predicted
b. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are as predicted.
c. the Euro falls against the Dollar and the exchange rate moves to $1.25 per Euro. Sales are as predicted.
d. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% higher than expected.
e. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% lower than expected.
Be specific in your answers. Where does Porsche lose money, and how much? Where does Porsche make money and how much? What is the overall effect on Porsche's income in their home currency? FYI, you can make the Euro currency symbol in Word by using CRTL + ALT + E.
In: Finance
In: Finance
While the operating budget process is underway in June, the capital budget process must also begin. Describe what should be happening in the capital budget
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In: Finance
Alset Inc. hires you as a consultant, manufacturers of fine personalized drone. The market for
drones is growing quickly. The firm purchased some land three years ago for $1.44 million
expecting to use it as a toxic waste dump site. Few months ago Alset Inc. hired another firm to
dispose of all toxic materials. Based on a recent appraisal, the firm believes the current market
value of the land for $1.54 million on an after-tax basis. In four years, the land could be sold for
$1.64 million after taxes. The land will be utilized for the project.
The firm also hired a marketing firm to analyze the personalized drone market, at a cost of
$129,000. An excerpt of the marketing report is as follows:
The flying car industry will have a rapid expansion in the next four years. With the brand name
recognition that Alset brings to bear, we feel that the company will be able to sell 4,200, 5,100,
5,700, and 4,600 units each year for the next four years, respectively. Again, capitalizing on the
name recognition of Alset, we feel that a premium price of $690 can be charged for each
personalized drone. Because these drones appear to be a fad, we feel at the end of the four-year
period, sales should be discontinued.
Alset believes that fixed costs for the project will be $445,000 per year, and variable costs are 10
percent of sales. The equipment necessary for production will cost $3.9 million and will be
depreciated according to a three-year MACRS schedule. At the end of the project, the equipment
can be scrapped for $420,000. Net working capital of $129,000 will be required immediately.
Alset has a 40 percent tax rate, and the required return on the project is 14 percent.
Three year MACRS Schedule
Recovery Year
3-Year
1. 33.33%
2. 44.45%
3. 14.81%
4. 7.41%
1. What is the NPV of the project? Based on the NPV would you accept or reject this project?
2. What is the IRR of the project? Based on the IRR would you accept or reject this project?
3. What is the discounted payback? Based on the discounted payback would you accept or reject
this project?
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Changing cash conversion cycle Camp Manufacturing turns over its inventory 55 times each year, has an average payment period of 3636 days, and has an average collection period of 5959 days. The firm has annual sales of $3.9 million and the cost of goods sold of $2.2million. (Use a 365-day year.)
a. Calculate the firm's operating cycle and cash conversion cycle.
b. What is the dollar value of inventory held by the firm?
c. If the firm could reduce the average age of its inventory from 73
days to 63 days, by how much would it reduce its dollar investment in working capital?
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BC Co.’s assets consist of $20 thousands in cash and three investment projects. The firm hasno debt outstanding. The company can borrow and lend at 12% per year. Each project lasts foronly one year. The table below lists the cash flows from the projects at the initial date (t= 0)and at the end of the year (t= 1). Cash outflows are listed as negative numbers, while cashinflows are listed as positive. All figures are in thousands of dollars.
0 1
Project x -200 +240
Project y +100 -134
Project z -100 +108
1. Calculate the Internal Rate of Return (IRR) of each project.
2. Which projects should the firm invest in and why?
3. How much would you pay today, before any investments have been made, to buy this
firm?
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Old World Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering inventory every other month (which is 6 times per year). A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, what is the extra total cost of the current policy compared with the total cost of the optimal policy? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box. Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $15 per unit Total sales for year = 1,000 units Safety stock = 0
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1.What is Capital Asset Pricing Model (CAPM)? What is it used for ?
a) There have been discussions about how useful the Capital Asset Pricing Model (CAPM), does it actually work or is "beta dead"?
b) Why is the model important in Finance ?
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