FIN 401 Lecture Notes - Lecture 11: Liquidating Distribution, Capital Structure, Net Income
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SHOW WORK on EXCEL and EXPLAIN ANSWERS on all problems.
You are thinking of buying a miniature golf course to operate. It is expected to generate cash flows of $45,000 per year in years one through three and $55,000 per year in years four through eight. If the appropriate discount rate is 12%, what is the most you would pay for this golf course?
Your team is evaluating two mutually exclusive projects. The initial cost of each investment is $50,000. The probability of the cash flows is shown below. If the project will have a 5 year life and the appropriate cost of capital is 9% calculate the following:
| Probability | CF(A) | CF(B) |
| 10% | (34,000) | (13,500) |
| 25% | (8,500) | 2,125 |
| 30% | 17,000 | 19,000 |
| 25% | 42,500 | 31,875 |
| 10% | 68,000 | 46,750 |
Expected value
NPV
Standard deviation
IRR
MIRR
Use the information below for the next problem
| Depreciation | 34,000 |
| EBIT | 179,000 |
| Investment in Operating Assets | 69,000 |
| Tax Rate | 34% |
| Find the free cash flow |
3. Calculate the free cash flow
Use the following information for the next problem
| The Security Market Line | ||
| Security X | Market | |
| Beta | 0.76 | 1 |
| Expected Return | ? | 12% |
| If the risk free rate is | 2.80% | |
| Find the expected return on security X | ||
4. What is the expected return for Security X?
Use the following information for the next three problems,
| Year | Cash Flow | |
| 1 | $12,500 | |
| 2 | $14,000 | |
| 3 | $10,000 | |
| 4 | $11,000 | |
| 5 | $16,000 |
5. What is the NPV of above project if the initial investment was $35,000?
6. Calculate the IRR assuming a cost of capital of 11%.
7. Calculate the MIRR of the project assuming a cost of capital of 11%. ___________________________________________________________________________
8. Suppose that you are approached with an offer to purchase an investment that will provide cash flows of $1,600 per year for 18 years. The cost of purchasing this investment is $9,200. You have an alternative investment opportunity, of equal risk, that will yield 9% per year. What is the NPV that makes you indifferent between the two options?
___________________________________________________________________
9. The Claustrophobic Solution, Inc., a residential window and door manufacturer, has the following historical record of earnings per share (EPS) from 2015 to 2007:
| 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | |
| EPS | $1.28 | $1.22 | $1.18 | $1.13 | $1.10 | $1.05 | $1.00 | $0.95 | $0.90 |
The companyâs payout ratio has been 57% over the last nine years and the last quoted price of the firmâs share of stock was $15. Flotation costs for new equity will be 7%. The company has 34,000,000 of common shares of stock outstanding and a debt-equity ratio of 0.45.
If dividends are expected to grow at the same arithmetic average growth rate of the last nine years, what is the dividend payment per share in 2016?
_________________________________________________________________________-
Use the following data for the next 3 questions
The following are the company sales from 2000-2015
| Year | Xylophone |
| 2000 | $230 |
| 2001 | $573 |
| 2002 | $994 |
| 2003 | $1,683 |
| 2004 | $3,192 |
| 2005 | $6,140 |
| 2006 | $8,892 |
| 2007 | $13,586 |
| 2008 | $18,376 |
| 2009 | $29,476 |
| 2010 | $33,598 |
| 2011 | $44,208 |
| 2012 | $58,473 |
| 2013 | $96,368 |
| 2014 | $149,306 |
| 2015 | $209,397 |
Fit an exponential trend curve to the data- show the equation
Calculate the projected sales in 2016
What is the CAGR over the 2000-2015 period?
____________________________________________________________-
Use the following data for the next 3 problems
Roxieâs Surf Shop is expanding their product line, adding a high end surf board to their existing basic product.
Their fixed costs for the equipment needed for the new boards is $5700 per month.
The new board will cost $278 per board and they can be sold for $450.
How many new boards per month will they need to sell to breakeven quantity per month?
If the fixed costs are reduced to $4800 per month what is the new breakeven quantity?
If the fixed costs stay at $5300 and they want to have at least $1000 per month in profit how many boards should they sell?
Use the information below for the next 4 answers
Debt 5,000 bonds par $1,000 with a maturity 20 years; semi annual compounding. Coupon rate 8%. Price $1,310.
Preferred 50,000 shares of 3% par value $100 stock. Current price $63.00.
Common stock 72,000 shares currently selling for $87.00. The beta of the firm is 1.17, the risk free rate is 2.78%, Market return (Rm) =8.6%.
Cost of debt
Cost of preferred
Cost of equity
WACC
Use the following data for the remaining problems.
Capstone Quarry is analyzing whether a new contract proposal will be a good idea. The relevant data is shown below. The net working capital will be paid in the same time period as the cost of the equipment and will be recovered at the end of the project. Remember to calculate the after-tax gain or loss of salvage as part of your terminal cash flow.
| Capstone Quarry Company Contract Analysis | |
| Amount of Rock Salt per Year | 23,000 Tons |
| Revenue per Ton | $ 145 |
| Cost of Equipment | $ 2,750,000 |
| Life(years) | 5 |
| MACRS Class | 5 |
| Fixed Cost per year | $ 475,000 |
| Var Cost/Ton | $ 85 |
| Actual Salvage | $ 105,000 |
| Change in NWC | $ 85,000 |
| Required Return | 12% |
| Tax Rate | 34% |
Find the cash flows for each year
Net present value
Payback period
Discounted payback
IRR
MIRR
Hint:
| Annual Cash Flows for Capstone Quarry | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Initial Outlay | ||||||
| Unit Sales | ||||||
| Sales | ||||||
| Variable Costs | ||||||
| Fixed Costs | ||||||
| Depreciation | ||||||
| Taxable Cash Flows | ||||||
| Taxes | ||||||
| Add: Depreciation | ||||||
| Annual After-Tax Cash Flow | ||||||
| Terminal Cash Flow | ||||||
| Total Annual Cash Flows | ||||||
