Homework Help for Finance

Carnes Cosmetics Co.'s stock price is $74.50, and it recently paid a $1.50 dividend. This dividend is expected to grow by 19% for the next 3 years, then grow forever at a constant rate, g; and rs =14%. At what constant rate is the stock expected to grow after Year 3? Round your answer to two decimal places. Do not round your intermediate calculations.

Final Finishing is considering three mutually exclusive alternatives for a new polisher. Each alternative has an expected life of 10 years and no salvage value. Polisher 1 requires an initial investment of $20,000 and provides annual benefits of $4,465. Polisher 2 requires an initial investment of $10,000 and provides annual benefits of $1,770. Polisher 3 requires an initial investment of $15,000 and provides annual benefits of $3,580. MARR is 15%/year.

Show the comparisons and internal rates of return used to make your decision

discussion question you are to discuss why there is a need for the statement of cash flows and how is the statement of cash flows used by companies. Please post your response. Minimum 150 words.

Discuss what kind of products are made using job order cost accounting and why

If you deposit $100 today in an account that pays 5% annual interest, how much will you have after 10 years? $61.39 $162.89 $772.17 $1,257.79

You are considering building a factory. The initial cost to build the factory is $3 billion. The factory will last 5 years and you plan to use straight line depreciation and depreciate the factory to a book value of $0 billion. Sales from the factory are expected to be 3 billion each year for the next 5 years and costs (other than depreciation) are 50% of revenues. Additional capital expenditures of $100 million will be required at the end of each of for the next 5-years (i.e., at t=1, 2, 3, 4 and 5). Inventories and A/P (account payable) will immediately rise by $500 million and $100 million respectively and remain at these levels until returning to back to original levels at the end of the project (t=5). A/R (account receivable) will rise by $400 million after the 1st year (i.e., at t=1) and remain at that level until falling back to original levels at the end of the projects life (t=5). If the WACC for the project is 15%, the tax rate is 40%.

(a) What is the project’s NPV?

(b) It turns out that you are using an existing structure that you built 5 years ago. You could have rented out the building for the equivalent of $100 million each year. How does this affect your decision?

-How could you profit if you see these rates on the spot exchange market? e$/£ = 1.6; e$/Fr = 0.6; eFr/£ = 3.2. Question options:

1) Use Fr to buy $; then use $ to buy £; last use £ to buy Fr

2) Use $ to buy Fr; then use Fr to buy £; last use £ to buy $

3) Use £ to buy $, then use $ to buy Fr, last use Fr to buy £.

4) Use Fr to buy £, then use £ to buy $, last use $ to buy £.

5) All of the above.

-When many more international students come to the United States to pursue a bachelor's or a graduate degree, how does this event affect the exchange rate of US dollar? Question options:

1) US dollar is appreciated.

2) US dollar is depreciated.

3) The event does not affect the exchange rate of US dollar.

4) It is impossible to determine.

As the chief financial officer of the Orient Express, you are offered the following two mutually exclusive projects.

Cash Flow ($)

Year Project A Project B

0 -5,000 -100,000

1 3,500 65,000

2 3,500 65,000

a. What are the IRRs of these two projects?

b. If you are told only the IRRs of the projects, which would you choose?

c. What did you ignore when you made your decision in part (b)?

d. According to the NPV rule, which of these two projects should be pursued? Assume a 15 percent discount rate.

Suppose you are offered $5,000 today but must make the following payments.

Year Cash Flows ($)

0 5,000

1 -2,500

2 -2,000

3 -1,000

4 -1,000

a. What is the IRR of this offer?

b. If the appropriate discount rate is 10 percent, should you accept this offer?

c. If the appropriate discount rate is 20 percent, should you accept this offer?

d. What is the NPV of the offer if appropriate discount rate is 10 percent? 20 percent?

e. Are the decisions under the NPV rule in part (d) consistent with those of the IRR rule?

Question 2: Suppose the market portfolio has an expected return of 10% and a standard deviation of returns of 25%. The risk-free rate is 5%. Assume that the CAPM holds. a) What is the expected return of a stock that has a beta of 2? b) What is the expected return of the “best” portfolio that has a standard deviation of returns of 70%? That is, how high an expected return can you get if you are willing to hold a portfolio with σp = 70%?

Inflation is expected to be 3% in the year 2014, 4% in the year 2015, and 3.5% in the year 2016. Real interest is 3%, the liquidity premium for the borrower is 1%, and the default risk premium is 1% for 2014 and increases by 1% for every year. Calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory holds.

Use the information from the question above to calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory does not hold.

Which bond would have the greatest change in value given a 1% increase in the required rate of return on all bonds?

An 8% coupon one-year bond.

An 8% coupon consol bond.

All bonds would have the same change in value.

An 8% coupon 20-year bond.

Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $450 million and its 2014 depreciation expense will be $65 million. Barrington's 2014 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2014 will be $30 million. The firm's free cash flow is expected to grow at a constant rate of 6% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 9%; the market value of the company's debt is $2.35 billion; and the company has 170 million shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future capital budgeting projects. Using the free cash flow valuation model, what should be the company's stock price today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations

I. MULTIPLE CHOICE / SHORT ANSWER QUESTIONS

1. You work for a bank that is considering a direct investment into Thailand to serve the Thai market. Your firm is listed on a US exchange, with an estimated stock beta of 0.75. ABC is a Thai bank with a similar capital structure to your firm’s, and is also listed on a US exchange, with an estimated stock beta of 2.0. The US risk-free rate is 2%, and the expected market return is 6%.

Using the CAPM model, calculate the most appropriate cost of equity capital for your firm to use in analyzing its direct investment opportunity.

2. You are analyzing Thailand, and you observe the following bond yields: (i) 5% yield on an 10-yearinternational bond issue denominated in USD; (ii) 2.5% yield on a US Treasury bond; and (iii) 8% yield on a domestic 10-year Thai government bond denominated in Thai baht.

a. The sovereign spread is 550 basis points (bp), and the country risk premium is also 550bp.

b. The sovereign spread is 250 basis points (bp), and the country risk premium is also 550bp.

c. The sovereign spread is 250 basis points (bp), and the country risk premium cannot be calculated from the information given.

d. The sovereign spread is 550 basis points (bp), and the country risk premium cannot be calculated fromthe information given.

e. None of the above.

3. Please briefly define the term “political risk”, and give one example of political risk.

4. Please briefly define the term “country risk”, and briefly describe two methods of incorporating country risk into an international capital budgeting analysis.

II. LONGER PROBLEMS

Note. Please show your work and clearly label your answers.

Question 8 will require you to use Excel. It might be easiest to provide brief answers in the space provided below, and attach a copy of the Excel spreadsheet with the more detailed calculations.

Problem 5. Over the next year, the expected inflation rate in Australia is 2%, and the real interest rate inAustralia is also 2%. You expect the Australian dollar to appreciate by 3% relative to the Japanese yen.

a. If relative purchasing power parity holds, what is the expected inflation rate in Japan?

b. If the domestic Fisher effect holds, what is the nominal interest rate in Australia? If the internationalFisher effect holds, what is the nominal interest rate in Japan?

c. You redo your forecasts. You still expect inflation in Australia to be 2% and the real interest rate to be 2%.However, you expect inflation in Japan to be 10%.

i. Assuming that the international Fisher effect holds, what is the nominal interest rate in Japan?

ii. Assuming that relative PPP holds, what is the expected percent appreciation or depreciation of the Australian dollar against the Japanese yen over the next year? Is this consistent with the prediction of uncovered interest rate parity?

Problem 6. Your firm is thinking of buying an office building in Bangkok, and selling it in one year.You plan to finance this using a two-year loan from a Chinese bank, in Chinese yuan. The interest rate on the loan is 7% per year. You believe that it is appropriate to use the interest rate on this loan as the discount rate for the project. There are no taxes involved in this transaction.

You assemble some cash flow and exchange rate projections as follows:

Year 0 Year 2
Purchase / sale of office building (THB) 30 million 40 million

Expected Thai baht exchange rate 30 THB per EUR 33 THB per EUR

Expected Chinese yuan exchange rate 4 CNY per EUR 3.8 CNY per EUR

Your boss asks you to calculate the net present value (NPV) of this transaction. In order to present the analysis to the head office in Paris, the NPV needs to be calculated in EUR terms.

a. Please calculate the net present value of the transaction above in EUR terms. Should you proceed with this project?

Problem 7. You get an internship at a French firm called Totally Inefficient Corporation, or TIC. TIC is trying to determine its optimal capital structure. It can issue debt or equity in Thailand, denominated in Thai baht(THB). It can also issue debt or equity in London, denominated in pounds (GBP).

TIC is considering two options: (1) 30% equity and 70% debt; and (2) 70% debt and 30% equity. You don't expect the choice of the higher debt share to affect the costs of debt and equity listed below.

The firm’s marginal tax rate is zero. You believe the International Fisher Effect is the best way to compare rates of return in different currencies.You observe the following variables:

London (GBP)

Risk-free rate 2%

Credit spread for TIC’s bond 4 percentage points

Expected stock market return 4%

TIC’s market beta 1.75

UK expected annual inflation rate 1%

Thailand (THB)

Risk-free rate 7%

Credit spread for TIC’s bond 5 percentage points

Expected stock market return 9%

TIC’s market beta 1.0

Thai expected annual inflation rate 5%

a. Please compare the financing options available to TIC. Where should TIC issue debt? Where should TICissue equity? Which capital structure should TIC choose?

b. Suppose that a severe recession hits Thailand, the central bank cuts interest rates, and the Thai risk-free rate falls to 3%. Nothing else changes. Now, where should TIC issue debt? Where should TIC issue equity?Which capital structure should TIC choose?

Problem 8. Your company is considering a direct investment project to produce computers in Thailand, for sale in the US market. This will be partially financed by US dollar debt, and partially financed by issuing stock in Thailand.

Your boss instructs you to conduct an NPV analysis by estimating cash flows in USD terms, and discounting at an appropriate rate. He states that the stock issuance in Thailand should be used to determine the marginal cost of equity for the firm.

After some thought, you come up with the following assumptions:

a. The project will cost USD200mn in Year 0, and have a terminal value of USD50mn in Year 10.

b. The project will begin production in Year 1. It will produce 30,000 computers yearly in Years 1-10, at an initial price of USD2,000 per computer in Year 1. The price will increase at the US inflation rate of2% per year.

c. Costs are expected to be 30,000 Thai baht (THB) per computer in Year 1, and will increase at the Thai inflation rate of 7% per year.

d. The spot exchange rate in Year 1 is expected to be 30 THB per USD. The exchange rate will be determined by relative purchasing power parity after that.

e. The firm’s benchmark USD bond was issued at a yield of 6%. It currently trades at a yield of 7%.

f. The firm’s capital structure is 40% equity, 60% debt.

g. You believe that the CAPM is the correct way to estimate the cost of equity capital, using a local market index as a benchmark. The Thai risk-free rate is 8%, the expected return on the Thai market is12%, and the beta you expect on your stock is 1.5.

h. You believe that the International Fisher Effect is a useful method for comparing the cost of capital across countries.

5.1. What is the cost of equity capital in THB terms? What is the cost of equity capital in USD terms? What is the weighted average cost of capital for the firm?

5.2 Given the assumptions above, should the firm proceed with this project? What is the project’s NPV?

5.3 Suppose the expected Thai inflation rate increased to 12% per year, but all of the other assumptions remained unchanged. What is the project’s NPV? Should the firm proceed with this project or not?

Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholders’ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholders’ equity.

(a) What does the term convertible (in reference to the company's Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.

(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?

Answer

thousand shares

(c) For "employee plan issuances," at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer

(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company's common stock has increased or decreased since issuance.

(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?

Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)