Finance Final

A company just issued a dividend of 4 dollars. Last year the company's dividend was 3.8 and the year before it was 3.5. If you expect future dividends to grow at a constant rate and you estimate the future growth in dividends based on averaging of the past dividend growth rates, what is your estimate of the cost of equity knowing that the current stock price is 79 dollars

HW 10.1 12.31%

G industries has a beta of 1.3. the risk free rate is 3% and the market expected return is 8%. What is your estimate of the company's cost of equity?

HW 10.2 9.5%

Rob corporation is trying to determine its cost of debt. It currently has a debt with 8 years to maturity and a coupon of 5%. If the bond is selling for 850 what is your estimate of the cost of debt? If the tax rate is 20% what is the after tax cost of debt?

HW 10.3 7.56%, 6.05%

Your firm has a target debt to equity ratio of 0.45. You estimate your firms cost of debt is 6% and cost of equity is 12%. If the tax rate is 25% what is the weighted average cost of capital?

HW 10.4 9.675%

Green Corporation has a WACC of 8.6%. Its cost of equity is 10% and its after tax cost of debt is 6.4%. What is the company's target debt to equity ratio?

HW 10.5 .63

A firm is comparing two different capital structures: An all-equity plan and a levered plan. For the all-equity plan, the firm would have 230,000 shares outstanding. For the levered plan, the firm would issue $2 million in debt and have 110,000 shares outstanding. The interest rate on the debt is 5%, and there are no taxes. Calculate the break-even EBIT and explain which plan would generate a higher EPS is EBIT ends up above the break-even number

HW 11.1 191667

A firm is comparing two different capital structures: An all-equity plan and a levered plan. For the all-equity plan, the firm would have 230,000 shares outstanding. For the levered plan, the firm would issue $2 million in debt and have 110,000 shares outstanding. The interest rate on the debt is 5%, and there are no taxes. Use M&M Proposition I to find the value of the firm and the stock price under each of the two proposed plans.

HW 11.2 Pl= 16.67 Vu=Vl=383334 Pu= 16.67 (share price is constant with M&M Prop. 1 NO Taxes)

Farma corporation currently has 5,800 shares outstanding and each share is worth $57. EBIT is expected to remain at $32,000 per year forever. The interest rate on new debt is 6% and taxes are assumed to be zero. The company is considering changing its capital structure to one with 25% debt. a) What is your cash flow if you own 100 shares? b) What will be your cash flow if the firm converted to the new capital structure? c) Show how you can "unlever" your shares and re-create the original cash flow you got from the firm before the change in capital structure.

HW 11.3 a) 551.72 b) 621.63 c) sell 25% of shares and lend out proceeds at 6% --> 551.72

Sami dogfood has a debt to equity ratio of 1.3. Its tax rate is 20% and its cost of debt is 4%. If the company's WACC is 10% what is the company's unlevered cost of equity capital?

HW 11.4 11.3%

Red corporation and Blue corporation are similar companies with different capital structures. Red is an all equity firm with a value of equity of $830,000, while Blue has an equity value of $420,000 and the remaining is perpetual debt with an interest rate of 4%. Assume no taxes and that EBIT is expected to be $65,000 a year in perpetuity a) What is the expected rate of return for a shareholder of Red? b) What is the expected rate of return for a shareholder of Blue? c) Show how an investor can generate the same return as that of Blue by investing in Red and using homemade leverage.

HW 11.5 a) 7.83% b) 11.57% c) borrow 97% go what you have and invest all (197%) in the unlevered firm

A firm expects to be able to generate an EBIT of $138,000 in perpetuity. The firm can borrow at 4.8% but currently has no debt. Its cost of equity is 10% and its tax rate is 21%. Find the current value of the firm as well as the value of the firm if it changes its capital structure and borrows $85,000.

HW 11.6 Vu= 1,090,200 Vl= 1,108,050

The CFO of the company estimates an EBIT of $30,000 for next year. She expects this EBIT to grow at a 2% rate forever. The company currently has no debt, and its cost of equity is 11%. The company's tax rate is 20% and its cost of debt is 4%. a) Calculate the company's current value as well as its value if it wants to have its value be 50% debt and 50% equity. b) What will be the company's cost of equity under the levered capital structure?

HW 11.7 a) Vu= 266,667 Vl= 296,297 b) 16.6%

A 20 year maturity 4% annual coupon bond is callable in 3 years at a call price of $1200. It currently sells for $1150. What is the YTM if not called (Answer 2.53% or 2.99%). What is the YTM if called at the earliest possible date (this is called yield to call)(Answer either 4.86% or 4.35%) ?

HW 5.10 2.99, 4.86

The yield to maturity on a one year bond is 3%. The yield to maturity on a two year bond is 5%. What is the one year forward rate?

HW 5.11 7%

A bond sells for $1030 and its YTM is 6%. If the yield increases by 0.5% the price of the bond falls to $1010. What is the bonds duration?

HW 5.6 4.12

Find the duration of a 5% annual coupon bond if it has 3 years to maturity and a yield to maturity of 7%.

HW 5.7 2.856

A pension plan is obligated to make payments of $2 million, $3million, and $4 million in each of the next three years, respectively. Find the duration of the pension fund's payment if interest rates are 5%.

HW 5.8 2.19

A pension plan is obligated to make payments of $2 million, $3million, and $4 million in each of the next three years, respectively. Interest rates are 5%. If the pension plan wants to fully immunize its payments above, and it only invests in a one year zero coupon bond and in a 5 year zero coupon bond, how much of its portfolio should be invested in each of these bonds?

HW 5.9 .7 in the one year, .3 in the 5 year

What is the dividend of a preferred stock if the required rate of return is 5% and the stock is currently trading at a price of $45.5?

HW 6.1 2.275

If the firm pays a quarterly dividend of $0.87 and the discount rate is 5% (annual) what will be the value at the end of the year of all four dividend payments?

HW 6.2 3.54

A company just paid an annual dividend of $2. What is the expected dividend ten years from today if dividends are expected to grow at 4.2% per year over this period?

HW 6.4 3.017

Jones corporation just paid a dividend of $2. This dividend is expected to grow at 5% indefinitely. What is the current stock price if the required return for the stock is 10%?

HW 6.5 42

A stock currently selling for $43 pays a dividend which grows at constant rate of 4% indefinitely. What is the capital gains yield on the stock?

HW 6.6 4%

Zorba Foods just paid a dividend of $2.5. Dividends are expected to grow at 4% indefinitely. Investors require an expected return of 10% for the first two years and a return of 7% thereafter. What is the current stock price?

HW 6.7 82.06

AL & Zon Corporation is not expected to pay any dividends over the next four years. After that the company is expected to start paying a dividend of $1.5 which is expected to grow at a 3.8% rate indefinitely. What is the current stock price if the discount rate is 12%?

HW 6.8 11.63

LaLa clothing corporation is growing rapidly. Dividends are expected to grow at a rate of 25% over the next three years and then go down to a constant 4.5% rate thereafter. If the company just paid a dividend of $0.95 and shareholders rate of return is 10% what is the current stock price?

HW 6.9 30.18

Gold Corporation uses a payback cutoff of three years. Calculate the payback for the following two projects and decide whether these should be accepted CF Project X: -54k, 18k, 21k, 19k, 10k CF Project Y: -64k, 12k, 15k, 30k, 150k

HW 7.1 2.79, 3.04

Calculate the NPV of the projects given that the discount rate is 7%. Should either of these projects be accepted based on the NPV rule? CF Project X: -54k, 18k, 21k, 19k, 10k CF Project Y: -64k, 12k, 15k, 30k, 150k

HW 7.2 4.3k, 99.24k

A firm makes investment decisions based on the IRR rule. What is the IRR for the following project and should the firm accept the project if shareholders require an expected return of 12%. CFs: -27.8, 5, 9, 12, 10 Either 10% or 13%

HW 7.3 10%, reject

A project requires and initial outlay of 65,000 today and is expected to generate a cash flow of 12,000 for each of the next ten years. If shareholders require an 8% return is this a good project based on NPV? What is the IRR of the project (10% or 13%)?

HW 7.4 NPV= 15520 IRR= 13%

Consider the following two mutually exclusive projects Year Project A Project B 0 -12,000 -12,000 1 5,000 6,000 2 5,000 4,000 3 6,000 5,000 What is the IRR for each project (use Excel), what is the cross over rate, and what is the range of discount rates for which either project should be accepted?

HW 7.5 IRR A= 15% IRR B= 13% Cross-over rate= 62-63% Choose A when r<15%. Choose neither if it's >15%. Never choose B.

The Cool Corporation is considering a new flavored ice cream. The project will require an initial investment of 180,000 and is expected to generate an annual cash flow of 12,500. The company expects that this cash flow will grow at a 3% rate forever. If shareholders require a 12% return on their investment what is the NPV of the project?

HW 7.6 -41,111, reject

The Cool Corporation is considering a new flavored ice cream. The project will require an initial investment of 180,000 and is expected to generate an annual cash flow of 12,500. The company expects that this cash flow will grow at a 3% rate forever. Shareholder's require a 12% return. If the Cool corporation above is unsure about the growth rate in cash flows, what is the minimum constant growth rate that would make the project a worthwhile investment?

HW 7.7 5%

Consider the following project estimated cash flow: Sales $540,500, Costs $345,000, Depreciation $77,000, tax rate 21%. What is the EBIT and the OCF?

HW 8.1 118500, 170615

Boats R Us currently sells 30,000 boats a year for $20,000 each and 12,000 luxury models for $49,000. The company wants to introduce a new boat to its product line and expects to sell 15,000 units for $30,000. The CFO estimates that the introduction of the new boat will boost the sales of the luxury boat by an additional 2,000 per year but will reduce the sales of the cheaper boat by 1500 units per year. What is the annual sales amount that we should use for evaluating this project?

HW 8.2 518,000,000

An asset costs 540,000 and is depreciated straight line over six years to an expected salvage value of 60,000. If the asset is used for three years and then sold for 200,000, what is the after-tax cash flow from the sale?

HW 8.3 200000+100000T

Your firm is considering a seven year project with an initial investment of 3.5m that can be depreciated straight line to zero over the life of the project. After that the machine will be worthless. The project is expected to generate sales of 200,000 units per year, have fixed costs of 300,000 and variable costs of 25. If your firm expects the selling price to be 39 per unit what is the OCF and NPV of the project? Assume that the tax rate is 25% and that the discount rate is 8%.

HW 8.4 6.91M

Your firm is considering purchasing a new computerized ordering system for $450,000 that can be depreciated straight line to zero over the 5 years of the project. It will be sold for $20,000 at that point. The new ordering system will save you $120,000 in pretax costs every year. It will also reduce your need for working capital by the amount of $40,000 (this is a one-time reduction). What is the IRR of the project if the firms tax rate is 25%? (use Excel)

HW 8.5 10%

A company is considering a five year project with the following information: Initial investment in fixed assets= $530,000. These assets will be depreciated straight line to a zero salvage value over five years. Product price is expected to be $30, variable costs are $12 and fixed annual costs are estimated to be $150,000. The expected quantity sold is 20,000 and the tax rate is 20%. What is the sensitivity of the OCF to a change in the product price going down to $25?

HW 9.1 16k

A project requires an initial investment of 844,000 which can be depreciated straight line to a salvage value of 100,000 over the 6 year life of the project. Sales are projected to be 66,000 units per year. Price per unit is 55, variable cost is 34, and fixed cost is 389,000 per year. The tax rate is 30% and the rate of return to investors is 8%. What is the NPV of the project and what is the sensitivity of NPV to a 100 unit increase in projected sales?

HW 9.2 67.95 (~70)

You estimate the following data: P=54, VC=33, FC=15,000, initial investment 32,000. Assume for simplicity no taxes and that investors require a 9% rate of return. If the project is expected to last for ten years what is the financial break-even quantity?

HW 9.3 951.7

We Sell Sports corporation has decided to sell a new line of bicycles for $715. Based on a marketing study, which had cost $20,000, the company estimates that the bikes will have a variable cost of $400 and are expected to generate sales of 30,000 units per year. The company has determined that adding this new line will also increase sales of helmets by 4,000 units. These helmets are priced at $59 and have a variable cost of $30. Production of the new bicycles will require an increase in net working capital of $34,000. The company currently has fixed costs per year of $450,000 and is estimating that those will increase by $150,000 per year due to the new line. Finally, the new line requires an investment of 3,500,000 in new equipment. This will be depreciated straight line to zero over the ten-year life of the project. If the tax rate is 20% and shareholders require a return of 12% what is the financial break-even price of the new bicycle.

HW 9.4 424.197

A stock is expected to pay a dividend of $3 and has a dividend yield of 6%. If its total one-year return is expected to be 9% what is your estimate of next year's stock price?

HW6.3 51.5

We Sell Sports corporation has decided to sell a new line of bicycles for $715. Based on a marketing study, which had cost $20,000, the company estimates that the bikes will have a variable cost of $400 and are expected to generate sales of 30,000 units per year. The company has determined that adding this new line will also increase sales of helmets by 4,000 units. These helmets are priced at $59 and have a variable cost of $30. Production of the new bicycles will require an increase in net working capital of $34,000. The company currently has fixed costs per year of $450,000 and is estimating that those will increase by $150,000 per year due to the new line. Finally, the new line requires an investment of 3,500,000 in new equipment. This will be depreciated straight line to zero over the ten-year life of the project. If the tax rate is 20% and shareholders require a return of 12% what is the NPV, the IRR (use Excel), and the PP of the project?

Hw 8.6 NPV= 39,434,462 PP=.46 IRR=215%