Log in
Finance
1
answer
0
watching
76
views

(1)Suppose your company is evaluating a project with the set of yearly cash flows: -10,000; 2,500; 3,500; 5,000; 4,000; 2,000. If the risk-appropriate discount rate is 12 percent, what is the project's NPV? (A)$2,258.15 (B)$3,560.00 (C)$915.67 (D)-$144.16

(2)What is the IRR for a project with yearly cash flows of -10,000, 2,500, 3,500, 5,000, 4,000, and 2,000 if the company faces a 10 percent cost of capital? (A)62.20 percent (B)10.00 percent (C)13.76 percent (D)20.62 percent

(3)Consider the following Khols Corporation bond: a 7.375%, Oct 15, last price 110.01, last yield 4.991. Assuming a $1,000 par value, what is the bond's semi-annual interest payment and current price? (A)$45, $1,376.25 (B)$36.88, $1,100.10 (C)$125, $5,339.00 (D)$73.75, $1,100.10

Watch
1
answer
0
watching
76
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Casey Durgan
Casey DurganLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

This is a comprehensive project evaluation problem bringing together much of what you have learned so far. Company ABC is a large publicly traded firm, a market leader in producing selfdriving agricultural machines. The company is looking at setting up a manufacturing plant overseas to produce a new line of self-driving tractors. This will be a four-year project. The plant and equipment will cost $100 million to build. The market data on ABC’s securities is following: Debt: 550,000 5.6 percent coupon bonds outstanding, 20 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 22,000,000 shares outstanding, selling for $56 per share; the beta is 1.1. Preferred stock: 1,200,000 shares of 5 percent preferred stock outstanding, selling for $85 per share. Market: 7 percent expected market risk premium; 3 percent risk-free rate. ABC faces 8 percent floatation costs of new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. ABC’s tax rate is 35 percent. The project requires $5,5 million in initial net working capital investment to get operational. a. Calculate the weighted average of floatation costs and use this to adjust your initial investment. b. The new project is somewhat riskier than a typical project for ABC, primarily because the plant is being located overseas. Management has decided to use adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating ABC’s project (start by calculating WACC). c. The manufacturing plant has a four-year tax life, and ABC uses straight-line depreciation. At the end of the project (that is, the end of Year 4), the plant and equipment can be scrapped for $20 million. What is the aftertax salvage value of this plant and equipment? d. The company will incur $16 million in annual fixed costs. The plan is to manufacture 2,000 tractors per year and sell them at $110,000 per machine; the variable production costs are $75,000 per tractor. Confirm that annual operating cash flows (OCF) from this project are $43.85 million. e. Confirm that the last year’s (year 4) total cash flow from assets is $62.35 million (don’t forget to add in the net working capital and after tax salvage value). f. Given the following total cash flows of years 0-4: -112,637,300; 43,850,000; 43,850,000; 43,850,000; and 62,350,000 what is the project’s internal rate of return (IRR) and net present value (NPV). Would you recommend to invest into this project?

Company ABC is a large publicly traded firm, a market leader in producing selfdriving agricultural machines. The company is looking at setting up a manufacturing plant overseas to produce a new line of self-driving tractors. This will be a four-year project. The plant and equipment will cost $100 million to build. The market data on ABC’s securities is following:

Debt: 550,000 5.6 percent coupon bonds outstanding, 20 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 22,000,000 shares outstanding, selling for $56 per share; the beta is 1.1.

Preferred stock: 1,200,000 shares of 5 percent preferred stock outstanding, selling for $85 per share.

Market: 7 percent expected market risk premium; 3 percent risk-free rate.

ABC faces 8 percent floatation costs of new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. ABC’s tax rate is 35 percent. The project requires $5,5 million in initial net working capital investment to get operational.

A. Calculate the weighted average of floatation costs and use this to adjust your initial investment.

B. The new project is somewhat riskier than a typical project for ABC, primarily because the plant is being located overseas. Management has decided to use adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating ABC’s project (start by calculating WACC).

C. The manufacturing plant has a four-year tax life, and ABC uses straight-line depreciation. At the end of the project (that is, the end of Year 4), the plant and equipment can be scrapped for $20 million. What is the aftertax salvage value of this plant and equipment?

D. The company will incur $16 million in annual fixed costs. The plan is to manufacture 2,000 tractors per year and sell them at $110,000 per machine; the variable production costs are $75,000 per tractor. Confirm that annual operating cash flows (OCF) from this project are $43.85 million.

E.. Confirm that the last year’s (year 4) total cash flow from assets is $62.35 million (don’t forget to add in the net working capital and after tax salvage value).

F. Given the following total cash flows of years 0-4: -112,637,300; 43,850,000; 43,850,000; 43,850,000; and 62,350,000 what is the project’s internal rate of return (IRR) and net present value (NPV). Would you recommend to invest into this project?

a. You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bond B matures in fifteen years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semi-annually. What is the value of your portfolio? What happens to the

value of your portfolio if each yield to maturity rises by one percentage point?

b. Rather than own a five-year bond and a fifteen-year bond, suppose you sell both of them and invest in two ten-year bonds. Each has a coupon rate of 8 percent (semi-annual coupons) and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

c. Based upon your answers to (a) and (b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

Task 2:

Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:

a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?

b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?

c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return?

d. Assume that Asset 1 of the diversified portfolio remains a total loss (�100% return) and asset two earns no return. Make a table showing how sensitive the portfolio returns are to a 1-percentage-point change in the return of each of the other three assets. That is, how is the diversified portfolio�s value affected if the return on asset three is 4 percent or 6 percent? If the return on asset four is 9 percent or 11 percent? If the return on asset five is 11 percent? 13 percent? How does the total portfolio value change if each of the three asset�s returns are one percentage point lower than in the table? If they are one percentage point higher?

e. Using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. What are the implications of this for choosing between a single asset portfolio and a diversified portfolio?

Task 3:

Annual savings from Project X include a reduction of ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operating expenses of $12,000 per year. The firms� tax rate is 34 percent.

a. Find Project X�s initial cash outlay.

b. Find the project�s operating cash flows over the five-year period.

Cash Flow:

Benefits:
Sale Increase: Reduced lost sales from stockouts
Cost reduction: Salary reduction delay
Reduced production delay
Reduction in utility cost

Change in eranings before depreciation:
 change in sales + cost reductions
Depreciation expense

benefits from the project:
change in sales + cost reductions
-depreciation

Cost increases:
Annual salary
operating expense
Increase in costs

Earnings before taxes:(benefits less cost increases)
Less: taxes
Earnings after taxes

Annual cash flows=net+depreciation=

C.If the project's required return is 12%, should it be implemented?

Year Cash flow PV at 12%
0
1
2
3
4
5

Please help me with this

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in