Question

Question 4

0.00%

Refer to Questions 2 and 3. The land for the factory will cost

$270,000

.

The factory will cost

$5,930,000

to build and construction will take two

years with construction costs payable in equal installments at the start of each

year. The factory will operate for 20 years; however, at the end of the fifth, tenth,

and fifteenth year of operation, refurbishment costs will be

$930,000

.

At the end of its 20 year lifespan, the land can be resold for

$290,000

.

There is a 70% probability that the factory's net operating cash flows will be

$790,037

; however, there is a 30% chance that net cash flows will only be

$526,068

. You may assume that net operating cash flows flow at the end of

each year.

a) What are the Expected net operating cash flows per year?

$

Enter Answer

(1 Mark)(Round your answer to 2 decimal places)

b) What is the Internal Rate of Return for the project?

Enter Answer

%

(1 Mark)(Round your answer to one one-hundreth of a percent)

c) What is the Net Present Value of the project?

$

Enter Answer

(1 Mark)(Round your answer to 2 decimal places)

d) Should Anna recommend that the J Corporation build the factory?

Yes

} Check only one box

No

Question 2
Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is				1.9%	and the market risk-premium is				6.1%	.
a) What is the beta of J Corp.'s stock?
(1 Mark)(Round your answer to two decimal places)
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?												%
(2 Mark)(Round your answer to one one-hundreth of a percent)										↑
Year	J Corp. Return (%)	Market Return (%)								Enter your Final Answer Here
1	-2.63	-3.70
2	6.59	8.59
3	9.85	12.93
4	9.10	11.93
5	-6.38	-8.70
6	12.04	15.85
7	27.60	36.60
8	9.95	13.06
9	5.18	6.70
10	7.34	9.59
11	-4.07	-5.63
12	-0.37	-0.70

Question 3							0.00
Refer to Question 2. Now that Anna has determined an appropriate rate
of return for J Corp.'s stock, she must calculate the firm's Weighted Average
Cost of Capital (WACC). There are currently				51.5	Million
J Corp. common shares outstanding. Each share is currently priced at
$7.69	. As well, the firm has		5,000	bonds outstanding and each
bond has a face value of $10,000, a yield to maturity of					3.59%	and a
quoted price of		$10,159.30	. J Corp.'s tax rate is 30%.
J Corp. has no preferred shares outstanding.
What is J Corp.'s WACC?							%
(Round your answer to one one-hundredth of a percent)					↑
					Enter your Final Answer Here

Answer 1

a. Expected Net Operating Cash flow = = 0.7* 790,037 + 0.3*526068 = 710846.3

b. Cost of land will be outflow today

Land resale at end of 20 year

Using IRR function in excel, and plotting all CFS

Year	Land	Factory	Refurbishment	Salvage Value	Net Op Cash Flow	Total CF
0	-270000	-296500			710846.3	144346.3
1		-296500			710846.3	414346.3
2		-296500			710846.3	414346.3
3		-296500			710846.3	414346.3
4		-296500			710846.3	414346.3
5		-296500	-930000		710846.3	-515654
6		-296500			710846.3	414346.3
7		-296500			710846.3	414346.3
8		-296500			710846.3	414346.3
9		-296500			710846.3	414346.3
10		-296500	-930000		710846.3	-515654
11		-296500			710846.3	414346.3
12		-296500			710846.3	414346.3
13		-296500			710846.3	414346.3
14		-296500			710846.3	414346.3
15		-296500	-930000		710846.3	-515654
16		-296500			710846.3	414346.3
17		-296500			710846.3	414346.3
18		-296500			710846.3	414346.3
19		-296500			710846.3	414346.3
20				290000	710846.3	1000846

Discount rate not given. Cannot find answer without it.