Homework Help for Finance
Finance deals with the management of money thorugh techniques and tools such as investing, borrowing, lending, budgeting, saving, and forecasting.
The Pizza Company is considering a new three-year expansion project. The key data are shown below:
• The company hired a consulting firm to help evaluate the project and paid the
consulting fee of $60,000.
• The company owns the space. If company did not invest in the project, it can receive after-tax rental fee for $300,000 per year for 3 years. However, if the company invested in the project, it will use the space for the project.
• The fixed cost to produce pizza is required at $150,000 per year.
• It is estimated that 50,000 units will be sold in the first year and that 40,000 units and 30,000 units will be sold in the second and third years respectively.
• Each pizza is expected to sell for $25 and the production cost will be $15 per unit.
• The sales price and variable cost should increase with inflation. Expected inflation rate per year is 5%.
• The project requires an initial investment in working capital of $500,000, which will be required in each year at 10% of revenue in the following year.
• The purchase of the machinery at the start of the project is $1,000,000. The shipping and installation cost are $200,000. The machinery will be depreciated straight-line to zero. It is estimated that the machinery can be sold at the end of the project for $250,000.
• To finance the project, the company would need to take a one-million dollar loan at 8% interest rate p.a. from HSBC over the life of the project. Annual interest expense is $80,000.
• The corporate tax rate is 34%.
• The Pizza Company is evaluating its cost of capital under alternative financing arrangements. In consultation with the consulting firm, the Pizza Company expects to be able to issue new Debt at Par with a coupon rate of 8% (coupons paid annually) and to issue new preferred stock with a $4 per share dividend at $32 a share. The common stock of the Pizza Company is currently selling for $22 a share while its book value is $6. The Pizza Company expects to pay a total dividend of $525,000 for its 200,000 common shares outstanding next year. Market analysts foresee a growth in dividends of the company at the rate of 4% per year. The Pizza Company raises capital using 30% bond, 20% preferred stock, and 50% common stock.
a. What is the cost of capital (WACC) of the Pizza Company?
b. Calculate the NPV of the project using the cost of capital calculated in part (a).
Should the project be accepted?
You are evaluating two different dough mixing machines:
• The Techron I costs $150,000, has a three-year life, and has pretax operating costs of $32,000 per year.
• The Techron II costs $255,000, has a five-year life, and has pretax operating costs of $19,000 per year.
For both machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $20,000. If your tax rate is 35% and your discount rate is 12%, which machine do you prefer? Why?
Horizon Investment Corporation has 9 million shares of common stocks outstanding; 250,000 shares of preferred stock outstanding (annual preferred dividend rate of 4.5%, par value = $100); and 105,000 semiannual bonds outstanding with annual coupon rate
of 8% and par value of $1,000 each. The company also has an outstanding bank loan at Bank of America (BOA) with a current book value of $15,500,000 and interest rate of 6.5% per annum.
The common stock currently sells for $24 a share and has a beta of 1.15, a book value of $18 a share.
The preferred stock currently sells for $94 per share
The bonds have 15 years to maturity and are currently traded at par.
The market risk premium is 8.5%; T-bills are yielding 5% and tax rate is 35%.
a. Calculate the firm’s market value of Debt and market value of equity.
b. Calculate the firm’s WACC Provide your calculation here:
- Late arriving bills pertaining to the 2021 fiscal year were:
- Office Supplies $56.20
- Repair Boxes Expenses $26.85
- Truck Expense $563.85
Note: The total for all these expenses above is $646.90
- Office supplies on hand at December 31st are valued at $360 *(put this on the balance sheet)
- Unexpired prepaid car insurance at December 31st is calculated at $510.95 * (put this on the balance sheet)
- Depreciation is calculated on a straight-line basis:
- The Equipment cost $9500 and was expected to last for 10 years. It was estimated that it would be worth $1500 at the end of that time.
- The Truck cost $19 500 and was expected to last for 5 years. It was estimated that it would be worth $3500 at the end of that time.
Hint: You need to calculate the depreciation cost for each item above
- The Repairing Tools at December 31st are valued at $350 *(put this number on the balance sheet)
- Under “Repairing Materials Used” on the trial balance for $25 369.20, there is still $2850 worth of materials left.
Hint: Put this figure of $2850 on the balance sheet undeBr current assets! Then figure out the difference between what you had at the beginning subtracting what you used, and this becomes the expense for the income statement
- Engine Repair Revenue of $1 600 was recorded (but not paid for) in December 2021 but this amount is for two Repair services that would be completed in January 2022.
How would these transaction be listed on a worksheet(Trial balance,Adjustments,Balance Sheet and Income statement)
Maine Lobster Market (MLM) provides fresh seafood products to customers. It allows customers to pay with cash, an in-house credit account, or a credit card. The credit card company charges Maine Lobster Market a 4% fee, based on credit sales using its card. From the following transactions, prepare journal entries for Maine Lobster Market.
Pat paid $800 cash for lobster. The cost to MLM was $480.
Pat purchased 30 pounds of shrimp at a sales price per pound of $25. The cost to MLM was $18.50 per pound and is charged to Pat’s in-store account.
Pat purchased $1,200 of fish with a credit card. The cost to MLM is $865.
Assume that countries A and B are of similar size, that they have similar economies, and that the
government debt levels of both countries are within reasonable limits. Assume that the regulations in
country A require complete disclosure of financial reporting by issuers of debt in that country, but that
regulations in country B do not require much disclosure of financial reporting. Explain why the
government of country A is able to issue debt at a lower cost than the government of country B.
- The Booth Company’s sales are forecasted to increase from $1,000 in 2006 to
$2,000 in 2007. Here is the December 31, 2006, balance sheet:
Booth’s fixed assets were used at full capacity during 2006. All assets and spontaneous liabilities increase at the same rate as sales. Booth’s after-tax profit margin is forecasted to be 5 percent, and its payout ratio will be 60 percent. What is Booth’s additional funds needed (AFN) for the coming year?
TPDM Electronics is evaluating 2 investment situations. Assuming a required rate of return of 14%, determine for each project (a) the payback period, (b) the net present value, and (c) the profitability index. The tax rate is 25 % (not on the salvage value). The initial investments required and earning before taxes are shown below:
Year 0 1 2 3 4. 5
Earning before taxes 95,000 90,000 92,000 100,000 105,000
The company expects to depreciate its 5 year assets on a straight-line basis. Final salvage value of the asset after 5 years is $50,000. Project B
Year 01234 5
Earning before taxes
45,000 40,000 42,000 50,000 47,000 salvage value
The company expects to depreciate its 5 year assets on a straight-line basis. Final of the asset after 5 years is $40,000.
A Project costs $130,000 and is expected to generate year-end cash inflows of $40, 000, $30,000, $72, 000, $ 91,000 and $ 100,000 in years 1 through 5. The opportunity cost of capital for the company is 15%.
- Evaluate the project suitability based on the NPV approach
- Evaluate the project suitability based on the Payback period approach
- Evaluate the project suitability based on the Profitability Index approach
Explain how you can use internal rate of return to evaluate a project