Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset falls into the 3-year MACRS class (MACRS schedule). The project is estimated to generate $1,765,000 in annual sales, with costs of $664,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345,000 at the end of the project.
| a. |
If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? |
| b. | If the required return is 11 percent, what is the project's NPV? |
In: Finance
Heavy Metal Corporation is expected to generate the following
free cash flows over the next five years:
(in millions)
Year 1 : 54.4
Year 2: 66.2
Year 3: 79.5
Year 4: 73.6
Year 5: 80.2
Thereafter, the free cash flows are expected to grow at the industry average of 4.5% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14.6%:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess cash, debt of $304 million, and 41 million shares outstanding, estimate its share price.
In: Finance
The cash flows for three independent projects are found below.
Year 0 (Initial investment) Project A $(45,000) Project B $(120,000) Project C $(460,000)
Year 1 $12,000 $ 30,000 $ 220,000
Year 2 $14,000 $ 30,000 $ 220,000
Year 3 $ 19,000 $ 30,000 $ 220,000
Year 4 $ 27,000 $ 30,000 -
Year 5
a. Calculate the IRR for each of the projects. b. If the discount rate for all the three projects is 16 percent, which projects or projects would you want to undertake? c. What is the net present value of each projects where the appropriate discount rate is 16 percent? a. The IRR of project A is.
In: Finance
|
Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $5.94 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $462,000. The project requires an initial investment in net working capital of $660,000. The project is estimated to generate $5,280,000 in annual sales, with costs of $2,112,000. The tax rate is 23 percent and the required return on the project is 9 percent. What is the net cash flow in year 0? Year 1? year 2? and Year 3? What is the NPV? |
In: Finance
Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when it is complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $4.20. It expects zero growth in the next year. In years 2 and 3, 5% growth is expected, and in year 4, 16% growth. In year 5 and thereafter, growth should be a constant 9% per year. What is the maximum price per share that an investor who requires a return of 17% should pay for Home Place Hotels common stock?
In: Finance
Your company is looking at updating its production process by adding a new piece of equipment. The company uses a 9% cost of capital in its capital budgeting decisions. The new equipment will cost $350,000 and the company expects the following annual cash flows for 5 years as a result of the purchase (note that year 1 is negative): Year 1 (10,000) Year 2 45,000 Year 3 127,000 Year 4 168,000 Year 5 145,000 A) Calculate the Net Present Value (NPV) of the acquisition project. B) Calculate the Internal Rate of Return (IRR) of the acquisition project. C) Should the company purchase the new equipment? Explain.
In: Finance
PART I:
Suppose a firm is considering the following project (all figures in $ thousands):
To undertake the project the firm will need to make a one-time investment of $137,500 in year 0. This specialized equipment can be depreciated using the straight-line method over the seven years, with a salvage value of $5,600 in year 7.
Your sales and marketing team tell you that they estimate sales of 7,500 units in year 1, rising by roughly 35% per year through year 5, then declining by 45% each year through year 7. They assume the product is dead at that point, with 0 units demanded/sold in year 8.
The inflation rate is forecast to be 1.5% in year 1, rising by a constant to 2.8% in year 5, then leveling off. The firm’s real cost of capital is forecast to be 9.3% in year 1 and projected to increase by 2.5% each year through year 7. The tax rate is estimated to be a level 39%.
Sales revenue per unit is expected to be $15.30 in year 1. Variable cost per unit is estimated at $10.20 in year 1. Cash fixed costs will be $17,940 in year 1. All will grow with inflation.
What is the project NPV under these assumptions?
PART II:
Consider the same problem as above, but modify it as follows:
Direct labor, materials, selling expenses, and other variable costs are forecast to be $5.20, $4.70, $2.30, and $0.80, respectively in year 1 and grow with inflation.
Lease payment, property taxes, administration, advertising, and other cash fixed costs are expected to be $6,100, $1730, $4680, $2,120, and $2730, respectively in year 1 and grow with inflation.
What are the Total Variable Cost per Unit and Total Cash Fixed Costs?
PART III:
Consider the same problem as in Part II. Assume that the product life-cycle of seven years is a reasonable bet, but you are concerned about the real demand for your product. This is a fairly new product, and demand may be more or less than your sales team believes. Further, if this (and other) risky projects take longer than expected, the firm’s cost of capital may increase (because you are a ‘riskier’ borrower to your creditors).
Analyze the sensitivity of your project (NPV) to the unit sales factor and to the cost of capital. Draw some conclusions about the project given your sensitivity analysis. Your boss wants to know whether it’s a go or not, why you think so, and about which assumptions you are most concerned. Please explain.
** This was all the information given
In: Finance
Please review carefully the data in “Data Table 1” below. These data are for actual mortgage products and rates offered by one of the largest banks in Canada on two different dates and were recorded in the morning of January 17, 2018 and February 11, 2018. Many questions in this assignment relate to the data in this table and also to the article “Everyone’s Mortgage is About to Get More Expensive,” published on Jan 17, 2018 in MacLean’s and appeared on the Internet. The announcement of the rate increase by the Bank of Canada occurred in the afternoon of the same day
| Mortgage Product | Date 1 | Bank 1 | Date 2 | Bank 1 |
| Prime Rate | 17-Jan-18 | 3.20% | 11-Feb-18 | 3.45% |
| Mortgage Prime Rat | 17-Jan-18 | 3.35% | 11-Feb-18 | 3.60% |
| 1-year fixed closed | 17-Jan-18 | 3.04% | 11-Feb-18 | 3.04% |
| 2-year fixed closed | 17-Jan-18 | 3.24% | 11-Feb-18 | 3.24% |
| 3-year fixed closed | 17-Jan-18 | 3.34% | 11-Feb-18 | 3.34% |
| 4-year fixed closed | 17-Jan-18 | 3.89% | 11-Feb-18 | 3.89% |
| 5-year fixed closed | 17-Jan-18 | 5.14% | 11-Feb-18 | 5.14% |
| 6-year fixed closed | 17-Jan-18 | 5.14% | 11-Feb-18 | 5.14% |
| 7-year fixed closed | 17-Jan-18 | 5.30% | 11-Feb-18 | 5.30% |
| 10-year fixed closed | 17-Jan-18 | 6.10% | 11-Feb-18 | 6.10% |
| Convertible 6 months | 17-Jan-18 | 3.14% | 11-Feb-18 | 3.14% |
| 1-year fixed open | 17-Jan-18 | 4.50% | 11-Feb-18 | 4.50% |
| 5-year variable closed | 17-Jan-18 | 2.75% | 11-Feb-18 | 2.95% |
| 5-year variable open | 17-Jan-18 | 4.35% | 11-Feb-18 | 4.60% |
2. What is the monthly mortgage payment for the 1-year fixed rate closed mortgage on January 17, 2018? The amortization period is 25 years and the mortgage amount to be loaned out is $750,000.
3. What is the monthly mortgage payment for the 1-year fixed rate closed mortgage on January 17, 2018? The amortization period is 20 years and the mortgage amount to be loaned out is $750,000.
4. What is the semi-annual mortgage payment for the 1-year fixed rate closed mortgage on January 17, 2018? The amortization period is 25 years and the mortgage amount to be loaned out is $750,000
5. Provide the amortization schedule in an Excel sheet format
for the 1-year fixed rate closed mortgage for the first years,
based on 25 years of amortization periodand $750,000 mortgage
loan.
You MUST show or describe sufficiently every detail of your
computational work on each column of the amortization schedule.
6. Reconsider Question 2 and suppose that the interest rate for the 1-year fixed rate closed mortgage goes up to 4% at the end of the year (or the beginning of the second year). What is the monthly mortgage payment for the same 1-year fixed rate closed mortgage in the second year of the mortgage?
7. Provide the amortization schedule in an Excel sheet format for the same 1-year fixed rate closed mortgage above for the second year. You MUST show or describe sufficiently every detail of your computational work on each column of the amortization schedule
8. Consider a borrower who is contemplating either the 5-year variable open mortgage or the 5-year variable closed mortgage in the amount of $750,000 over the 25-year amortization periodon January 17, 2018. Compute the prepayment penalties as a percent of the mortgage amount.
9. On January 17, 2018, the interest rate difference is (i) 1.60% between the 5-year variable open and the 5-year variable closed contracts and (ii) 1.46% between the 1-year fixed closed and 1-year fixed open contracts. Both differences are supposed to capture the effect of the pre-payment penalties on the interest rates. One would expect a relatively constant premium for the prepayment penalties on the same day. Explain why the pre-payment premium is not constant on January 17, 2018.
In: Finance
Entries for Bonds Payable and Installment Note Transactions
The following transactions were completed by Montague Inc., whose fiscal year is the calendar year:
| Year 1 | |
| July 1. | Issued $8,540,000 of five-year, 10% callable bonds dated July 1, Year 1, at a market (effective) rate of 11%, receiving cash of $8,218,144. Interest is payable semiannually on December 31 and June 30. |
| Oct. 1. | Borrowed $290,000 by issuing a 10-year, 7% installment note to Intexicon Bank. The note requires annual payments of $41,289, with the first payment occurring on September 30, Year 2. |
| Dec. 31. | Accrued $5,075 of interest on the installment note. The interest is payable on the date of the next installment note payment. |
| Dec. 31. | Paid the semiannual interest on the bonds. The bond discount amortization of $32,186 is combined with the semiannual interest payment. |
| Year 2 | |
| June 30. | Paid the semiannual interest on the bonds. The bond discount amortization of $32,186 is combined with the semiannual interest payment. |
| Sept. 30. | Paid the annual payment on the note, which consisted of interest of $20,300 and principal of $20,989. |
| Dec. 31. | Accrued $4,708 of interest on the installment note. The interest is payable on the date of the next installment note payment. |
| Dec. 31. | Paid the semiannual interest on the bonds. The bond discount amortization of $32,186 is combined with the semiannual interest payment. |
| Year 3 | |
| June 30. | Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $193,114 after payment of interest and amortization of discount have been recorded. (Record the redemption only.) |
| Sept. 30. | Paid the second annual payment on the note, which consisted of interest of $18,831 and principal of $22,458. |
Required:
1. Journalize the entries to record the foregoing transactions. For compound transactions, if an amount box does not require an entry, leave it blank or enter "0". When required, round your answers to the nearest dollar.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Year 1 | |||
| July 1 | |||
| Oct. 1 | |||
| Dec. 31-Note | |||
| Dec. 31-Bond | |||
| Year 2 | |||
| June 30 | |||
| Sept. 30 | |||
| Dec. 31-Note | |||
| Dec. 31-Bond | |||
| Year 3 | |||
| June 30 | |||
| Sept. 30 | |||
2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
a. Year 1 $
b. Year 2 $
3. Determine the carrying amount of the bonds
as of December 31, Year 2.
$
In: Accounting
Entries for Bonds Payable and Installment Note Transactions
The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year
Year 1
| July 1. | Issued $8,890,000 of five-year, 7% callable bonds dated July 1, Year 1, at a market (effective) rate of 8%, receiving cash of $8,529,470. Interest is payable semiannually on December 31 and June 30. |
| Oct. 1. | Borrowed $200,000 by issuing a 10-year, 6% installment note to Nicks Bank. The note requires annual payments of $27,174, with the first payment occurring on September 30, Year 2. |
| Dec. 31. | Accrued $3,000 of interest on the installment note. The interest is payable on the date of the next installment note payment. |
| 31. | Paid the semiannual interest on the bonds. The bond discount amortization of $36,053 is combined with the semiannual interest payment. |
|
Year 2 June 30. |
Paid the semiannual interest on the bonds. The bond discount amortization of $36,053 is combined with the semiannual interest payment. |
| Sept. 30. | Paid the annual payment on the note, which consisted of interest of $12,000 and principal of $15,174. |
| Dec. 31. | Accrued $2,772 of interest on the installment note. The interest is payable on the date of the next installment note payment. |
| 31. | Paid the semiannual interest on the bonds. The bond discount amortization of $36,053 is combined with the semiannual interest payment. |
|
Year 3 June 30. |
Recorded the redemption of the bonds, which were called at 98. The balance in the bond discount account is $216,318 after payment of interest and amortization of discount have been recorded. Record the redemption only. |
| Sept. 30. | Paid the second annual payment on the note, which consisted of interest of $11,090 and principal of $16,084. |
| Date | Account | Debit | Credit |
|---|---|---|---|
| Year 1 | |||
| July 1 | |||
| Oct. 1 | |||
| Dec. 31-Note | |||
| Dec. 31-Bond | |||
| Year 2 | |||
| June 30 | |||
| Sept. 30 | |||
| Dec. 31-Note | |||
| Dec. 31-Bond | |||
| Year 3 | |||
| June 30 | |||
| Sept. 30 | |||
Required:
Round all amounts to the nearest dollar.
1. Journalize the entries to record the foregoing transactions. If an amount box does not require an entry, leave it blank.
2. Indicate the amount of the interest expense in (a) Year 1 and (b) Year 2.
a. Year 1 $
b. Year 2 $
3. Determine the carrying amount of the bonds
as of December 31, Year 2.
$
In: Accounting