BONDS – Problem
Huskies Corp. issued 9-year $750,000 bond on January 1, 2006 with coupon rate of 10%. The bond pays interest semiannually every June 30 and December 31, with the principal to be paid at the end of year 9. The effective market interest rate at the issuance date is 8%.
a. Calculate the proceeds and show clearly what you use for RATE, NPER, PMT, FV ?
b. What journal entry was recorded at issuance?
c. What annual coupon rate would Huskies have to offer in order to obtain total proceeds of $750,000 on the issuance of these bonds
d. UNRELATED to above. Labradors Inc. repurchased the bond which has been issued several years ago and which has a Face Value of $800,000 and unamortized premium of $42,000. The bond was repurchased at 106. Record the journal entry that the company made when it repurchased the bond.
In: Finance
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We are evaluating a project that costs $520,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 73,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 21 percent and we require a return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. |
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Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
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Grunewald Industries sells on terms of 1/10, net 40. Gross sales last year were $4,416,500 and accounts receivable averaged $482,500. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers? (Hint: Calculate daily sales based on a 365-day year, calculate the average receivables for discount customers, and then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places!
In: Finance
ABC Plc is considering an investment between two mutually exclusive projects with the following annual cash flows:
ANNUAL CASH FLOWS
Year Project A Project B
0 $-50,000 $-80,000
1 30,000 40,000
2 30,000 40,000
3 30,000 40,000
4 30,000 40,000
5 30,000 40,000
ABC Plc requires a 16 percent rate of return on projects of this nature.
Required:
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FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the costs is $196,200 per year. Once in production, the bike is expected to make $293,055 per year for 10 years. The cash inflows begin at the end of year 7.
For parts A-C, assume the cost of capital is 10.7%
a. Calculate the NPV of this investment opportunity. Should the company make the investment?
b.Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
c. How long must development last to change the decision? For parts d-f, assume the cost of capital is 13.9%
d. Calculate the NPV of this investment opportunity. Should the company make the investment
e. How much must this cost of capital estimate deviate to change the decision?
f. How long must development last to change the decision?
In: Finance
A local family business is facing a dilemma. Dottie’s Grocery has been a landmark company in a small city located in the United States. Over the past 45 years, what began as a single fresh fruit and vegetable store, has now become a full-service grocery store chain with many stores throughout the city. Dottie’s is incorporated with only 7 shareholders, which are all family members. They are faced with a decision on how to raise much needed capital to maintain its current business operations and to allow the possibility of growth in the future. The family believes it needs an additional $23 million dollars. This sum is too large for a bank line of credit and no one in the family has additional funding to invest into the company. The family is considering other alternatives.
One alternative is to publicly issue debt (corporate bonds), the other alternative is to issue common stock to the public. Using your expertise in financial management, you have been asked by the management team of Dottie’s Grocery to conduct an analysis of the current situation and provide a summary of your recommendations. In your summary you must:
Superior papers will explain the following elements:
In: Finance
Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.2 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .51, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects.
| a. | Calculate the required return for the project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the maximum cost the company would be willing to pay for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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In: Finance
| Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.61 million after taxes. In five years, the land will be worth $7.91 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.04 million to build. The following market data on DEI’s securities are current: |
| Debt: |
90,200 6.9 percent coupon bonds outstanding, 23 years to maturity, selling for 94.9 percent of par; the bonds have a $1,000 par value each and make semiannual payments. |
| Common stock: | 1,500,000 shares outstanding, selling for $94.10 per share; the beta is 1.21. |
| Preferred stock: | 70,000 shares of 6.25 percent preferred stock outstanding, selling for $92.10 per share. |
| Market: | 7.05 percent expected market risk premium; 4.85 percent risk-free rate. |
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DEI’s tax rate is 21 percent. The project requires $830,000 in initial net working capital investment to get operational. |
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DEI’s tax rate is 21 percent. The project requires $830,000 in initial net working capital investment to get operational. |
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| a. | Calculate the project’s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (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, e.g., 1,234,567.) |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.51 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) |
| d. | The company will incur $2,310,000 in annual fixed costs. The plan is to manufacture 13,100 RDSs per year and sell them at $10,500 per machine; the variable production costs are $9,700 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) |
| e. | Calculate the project's net present value. (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) |
| f. | Calculate the project's internal rate of return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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In: Finance
A loan of $100,000 is made today. The borrower will make equal repayments of $3613.5 per month with the first payment being exactly one month from today. The interest being charged on this loan is constant (but unknown). For the following two scenarios, calculate the interest rate being charged on this loan, expressed as a nominal annual rate compounded monthly in percentage:
(a) The loan is fully repaid exactly after 31 monthly repayments, i.e., the loan outstanding immediately after 31 repayments is exactly 0.
(b) The term of the loan is unknown but it is known that the loan outstanding 2 years later equals to $28733.72.
In: Finance
| Consider the following information on Stocks I and II: |
| State of Economy | Probability of State of Economy |
Rate of Return if State Occurs |
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| Stock I | Stock II | ||
| Recession | .21 | .040 | −.36 |
| Normal | .61 | .350 | .28 |
| Irrational exuberance | .18 | .210 | .46 |
| The market risk premium is 11.6 percent, and the risk-free rate is 4.6 percent. | |
| a. | Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.) |
| b. | Calculate the beta and standard deviation of Stock II. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.) |
| c. | Which stock has the most systematic risk? |
| d. | Which one has the most unsystematic risk? |
| e. | Which stock is “riskier”? |
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In: Finance
You are attempting to value a call option with an exercise price of $75 and one year to expiration. The underlying stock pays no dividends, its current price is $75, and you believe it has a 50% chance of increasing to $95 and a 50% chance of decreasing to $55. The risk-free rate of interest is 10%. Based upon your assumptions, calculate your estimate of the the call option's value using the two-state stock price model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Value of the call $
In: Finance
Hands Insurance Company issued a $90 million, 1-year, zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year). The proceeds were used to fund a $100 million, 2-year commercial loan at 10 percent annual interest. Immediately after these transactions were simultaneously closed, all market interest rates increased 2 percent .
a. What is the true market value of the loan investment and the liability after the change in interest rates?
b. What impact did these changes in market value have on the market value of the equity?
c. What was the duration of the loan investment and the liability at the time of issuance?
d. Use these duration values to calculate the expected change in the value of the loan and the liability for the predicted increase of 2 percent in interest rates.
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Penny Company has an opportunity to sell some equipment for $40,000. Such a sale will result in a tax-deductible loss of $4,000. If the equipment is not sold, it is expected to produce net cash inflows after taxes of $8,000 for the next 10 years. After 10 years, the equipment can be sold for its book value of $4,000. Assume a 40% federal income tax rate.
Management currently has other opportunities that will yield 18%. Using the net present value method, show whether the company should sell the equipment. Prepare a schedule to support your conclusion.
In: Finance
What is option trading strategies (hedging, speculative strategies to bet on price direction and volatility)?
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What is designing a currency swap using comparative advantage?
In: Finance