A firm that is looking to raise capital in the near future. To prepare for potential investors, you determined that you need the WACC of your firm. Your firm is currently structured in such a way that the debt-to-equity ratio is 0.4.

1. Since the company size is comparable with publicly traded micro-cap companies, you started analyzing the Wilshire Micro-Cap ETF, which represents a basket of micro-cap US companies. The current price of this EFT is $29.97. At inception 6.25 years ago it traded at $15.45. In a comparable period, the 3-month T-Bills, which you consider risk free, returned 0.35% annually.

   a.) What was the annualized return for the reference micro-cap ETF?
   b.) During the period considered, what was the risk premium of micro-cap stocks?
   c.) Historically your company has produced equity returns that indicate a beta to the general micro-cap market of around 1.25. Assuming this number will remain stable, what should your cost of equity be?

2. Your only debt outstanding in the market is a single bond with the following parameters:

    10 yrs until maturity
    semiannual coupons with an (annual) coupon rate of 7%
    current market price of 95 (as a percentage of the notional amount)

What is your cost of debt?

3. Given the results from 1 and 2, what is your firm's WACC?

Please provide steps and formulas.

QUESTION 3 Deep Down Mining Corp. (DDM) is a publicly traded, Canadian-based mining operation with various mines located throughout Canada. Investors benchmark earnings compared to market expectations and to other similar companies.
DDM’s loan facility with a consortium of banks stipulates that DDM’s long-term debt cannot exceed 1.5 times the book value of its equity. DDM is not currently in danger of breaching this covenant, but is planning some acquisitions that will increase its debt significantly and bring its debt-to-equity ratio much closer to the stipulated maximum. Wherever feasible, DDM prefers to adopt accounting policies that increase short-term profitability, to keep the equity base strong.
As part of its compensation package, DDM awards bonuses to its executives on an annual basis. The primary criterion considered by the board of directors when determining the size of the bonuses to be awarded to the executives overseeing the production side of the mine is the firm’s actual earnings before interest and taxes (EBIT) compared to the budgeted EBIT for the year.
Projected financial results for the Xavier mine, an open-pit gold mine in northern British Columbia, are shown below. However, projections are notoriously unreliable, because the selling price of gold per ounce fluctuates significantly from year to year. When prices are high, the mine increases production volume and when prices are low, production volume is reduced. The results below are based on expected high price/high volume in Year 2 and low price/low volume in Year 3, but the opposite situation might unfold, or prices might be constant. Extraction costs are stable per tonne processed, and are projected to increase by inflation only.
Projected financial results — Xavier mine (in $’000s)
Year 1 Year 2 Year 3 Volume 110,000 154,000 88,000 Sales price $1,500 $2,100 $1,250 Revenue1 $165,000 $323,400 $110,000 Extraction2 88,000 126,896 74,687 Administration3 20,000 20,600 21,218 Earnings before interest, taxes, depreciation and amortization (EBITDA) $ 57,000 $175,904 $ 14,095 Depreciation4 10,000 10,000 10,000 EBIT $ 47,000 $165,904 $ 4,095

1 1,000,000 tonnes mined; 0.11 ounces recovered per tonne processed; Year 1, C$1,500 sales price per ounce; 1,000,000 tonnes mined × 0.11 = 110,000; 110,000 × $1,500 = $165 million; Year 2, C$2,100 sales price per ounce; 1,400,000 tonnes mined × 0.11 = 154,000; 154,000 × $2,100 = $323.4 million; Year 3, C$1,250 sales price per ounce; 800,000 tonnes mined × 0.11 = 88,000; 88,000 × $1,250 = $110 million
2 C$800 per ounce recovered with an inflation factor of 3% per year. For year 1: 110,000 × $800 = $88 million; Year 2 154,000 × ($800 × 1.03) = $126.896 million; Year 3 88,000 × ($800 × 1.03 × 1.03) = $74.687 million
3 Inflation factor of 3% per year. Will not be materially affected by changes in throughput.
4 Depreciation expense excluding the new Jaw Crusher.
A brand-new class of equipment has recently been purchased by DDM for the Xavier mine.
Details of the equipment
• Jaw Crusher model XY2 is to be used in the Xavier mine and costs $10.5 million. • The manufacturer advises that the maximum capacity is 1.6 million tonnes per year. Your engineering staff has indicated that this throughput is probably on the high side and could only be achieved in ideal circumstances. • Your counterparts in other mining companies that use similar machinery advise that the maximum capacity of this machine, when allowing for shutdowns for maintenance and emergency repairs, is closer to 1.4 million tonnes per year. They also advise that, as the machine ages, the capacity declines by about 5% per year, because the time lost for maintenance and repair shutdowns increases as the machine ages. • The manufacturer advises that the estimated useful life of the Jaw Crusher model XY2 varies depending on its usage, per the following table: Yearly production (% of maximum) Estimated maximum useful life 75% to 100% 10 years 16 million tonnes 50% to 75% 15 years 18 million tonnes 25% to 50% 25 years 20 million tonnes

• Your research has determined that it is difficult to resell Jaw Crushers that are more than five years old due to the ongoing advances of technology for this type of equipment, as well as the prohibitive dismantling and shipping costs.

Other information
• DDM uses the cost model to subsequently measure the value of all its property, plant, and equipment (PPE). • DDM currently uses the straight-line method to depreciate all its depreciable nonmining PPE. The depreciation method used by DDM to depreciate PPE directly involved in mining operations is governed by the nature of the PPE. Straight-line, double-declining-balance, and units-of-production methods are all used in various circumstances at other mines. When DDM uses the double-declining-balance method of depreciation, the rate used is two times the percentage used in the straight-line method. • Based on geological surveys, management estimates that the ore body1 of the Xavier mine is approximately 15 million tonnes. DDM expects that it will extract an average of 1 million tonnes of ore from the gold mine annually, thus taking about 15 years to exhaust the ore body. Actual volume will change yearly based on the price of gold. It is not uncommon for the tonnage extracted from mines to be significantly different from that originally projected. • The senior vice president of extraction has suggested that DDM should adopt the straight-line method to depreciate the Jaw Crusher because he would like to extract the same volume of ore each year.
Required:
Brian, the company’s chief financial officer, has asked you, the financial controller and a CPA, to make recommendations with respect to an appropriate depreciation method for the brand-new class of equipment recently purchased by DDM for the Xavier mine.
Prepare a memo to Brian analyzing each of the three most widely used depreciation methods. Your memo should include a summary of pertinent information and do the following: • Identify and explain what each of the methods entails and then evaluate the advantages and disadvantages of each method. • Determine whether each of the three depreciation methods would be suitable and explain why or why not. • Recommend the estimated equipment life to be used; however, use management’s assumptions of a 15-year useful life when calculating depreciation expense. • Determine the estimated residual value to be used when calculating depreciation expense. • Recommend a depreciation method. Quantify the impact on DDM’s projected EBIT for each option under consideration.

Office Problem (Use the attached spreadsheets as a guide)

Property:             Office One, Anytown, U.S.A.

Acquisition date:         December 31, 1999

Purchase Price:           2000 NOI @ 10% CAP RATE

Deal Terms:                65% financed with debt, 9% interest-only, 10-year term

35% equity ownership

Base Year 1999:         Rental Income                   $1,600,000

Escalation Income             $              0

Less:         Janitorial & Cleaning       $   330,000

Labor                    $   215,250

Utilities                         $     60,000

Management Fee         $     80,000

Real Estate Taxes         $     80,000

Assumptions:              Vacancy Rate :        9%

                                   Growth Rates:          Rental      Income            5% Annually

                                                             Janitorial & Cleaning       3% Annually

Utilities                     3% Annually

                                                             Management Fee              3% Annually

In 2001, Labor and Real Estate Taxes escalate by 13.07 and 10%, respectively, and remain at those levels for the remainder of the holding period. Tenant pays the increase over the stated Base Year.

Sell on December 31, 2004

Selling Expenses- 5% of sale price (2005 NOI @ 10% Cap Rate)

Depreciable Basis = 80% of cost (calculate depreciation using straight-line method)

Owner’s Ordinary Tax Rate: 39.6%

Use Post-1997 capital gains & recapture tax rates (20% & 25% respectively)

REQUIRED:

9A) Pro-forma Analysis for both Pre-Tax and After- Tax scenarios

9B) Calculations for:

Adjusted Basis

Capital Gains and Recapture Taxes

Net Sales Proceeds

Break Even Occupancy (2000 & 2004)

Cash-on-Cash Returns (annually)

Gross Rent Multiplier ((2000 & 2004)

Debt Service Coverage (2000 & 2004)

Before and After Tax IRR

Before and After Tax NPV @12%

Many investors and financial analysts believe the Dow Jones Industrial Average (DJIA) gives a good barometer of the overall stock market. On January 31, 2006, 9 of the 30 stocks making up the DJIA increased in price (The Wall Street Journal, February 1, 2006). On the basis of this fact, a financial analyst claims we can assume that 30% of the stocks traded on the New York Stock Exchange (NYSE) went up the same day.

A sample of 57 stocks traded on the NYSE that day showed that 28 went up.

You are conducting a study to see if the proportion of stocks that went up is is significantly more than 0.3. You use a significance level of α=0.10α=0.10.

What is the test statistic for this sample? (Report answer accurate to three decimal places.)
test statistic =___________

What is the p-value for this sample? (Report answer accurate to four decimal places.)
p-value = ___________

Please show me step by step how you got the P-vaule!!!!!!

Interpreting and Applying Disclosures on Property and Equipment
Following are selected disclosures from the Rohm and Haas Company (a specialty chemical company) 2005 10-K.

The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter.

IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset ... When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable...We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value. In 2005, $81 million of asset impairments were recognized for the impairment of certain finite-lived intangible assets and fixed assets across several of our chemical businesses and our Electronic Materials segment.

(a) Compute the PPE (land, buildings and equipment) turnover for 2005 (Sales in 2005 are $7,994 million). (Round your answer to two decimal places.)
Answer

(b) Rohm and Haas reported depreciation expense of $422 million in 2005. Estimate the useful life, on average, for its depreciable PPE assets. (Round your answer to two decimal places.)
Answer

years

(c) By what percentage are Rohm and Haas' assets "used up" at year-end 2005? (Round your answer to two decimal places.)
Answer

%

Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project: The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities) Ramblin Wreck, Inc. Financial Data: STOCK DATA: BOND DATA: Current Price Per Share $30.00 Current Price Per Bond $931.00 # of Shares 2.00 million # of bonds 20,000.00 Book Value $50 million Annual Coupon Rate 8.00% Face Value Per Bond $1,000 Maturity 10 years The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 8.00%. Ramblin Wreck, Inc. has a beta of 1.44. The tax rate is 36.00%.

What is the yield to maturity on Ramblin Wreck, Inc. bonds?

What is the cost of equity?

What is the weight in debt for the project?

What is the WACC for the project?

What is the NPV of the project? (express in millions, so 1000000 would be 1.00)

Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project:

The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million

The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities)

Ramblin Wreck, Inc. Financial Data:

The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 7.00%. Ramblin Wreck, Inc. has a beta of 1.49. The tax rate is 37.00%.

What is the NPV of the project? (express in millions, so 1000000 would be 1.00)

Submit

Answer format: Currency: Round to: 2 decimal places.

Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project:

The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million

The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities)

Ramblin Wreck, Inc. Financial Data:

The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 6.00%. Ramblin Wreck, Inc. has a beta of 1.44. The tax rate is 38.00%.

What is the WACC for the project?

Submit

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))