Assignment Task:
Problem 1: Cash Flow Analysis
The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The still has a useful life of 10 years but will be depreciated using straight-line depreciation over the next 5-years. It is expected to have a salvage value of $10,000 at the end of 10 years. The still would increase revenues by $120,000 per year and increase yearly operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net working capital. The firm's marginal tax rate is 30 percent, and the project's cost of capital is 10 percent. Should the new equipment be acquired according to NPV analysis?
Problem 2: Risk and Return
During the past 5 years, the stock of Euroflop has moved as follows:
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Price change, %
|
20
|
-10
|
-30
|
5
|
15
|
Calculate the variance and the standard deviation of the returns of Euro flop.
Problem 3: Time Value of Money
A newly divorced father of two, looking to improve his image wants to purchase a Mercedes-Benz in order to impress his young and foxy girlfriend. The car costs $17,999 and the car yard is willing to offer financing. The terms of the deal include a $2000 deposit (which the client has) with the remainder of the balance being repaid in equal monthly installments over the next three years. The car dealer charges 1.25 percent interest rate per month on the balance of the outstanding loan.
Required: Calculate the size of each monthly payment and then prepare a loan amortization schedule to show that as time passes the amount paid in interest by your client is reduced.
Problem 4: Time Value of Money
A small business entrepreneur is interested in leasing new office space that requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. Assume a discount rate of 14%.
Required: Calculate the present value of this stream of lease payments?
Problem 5: The Cost Of Capital
Floorstreet Stock Raiders Incorporated (FSR) has the following capital structure, which is considers to-be optimal:
|
Debt
|
25%
|
|
|
|
|
Preferred Stock Common Equity
|
15%
|
|
|
|
|
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60%
|
|
|
100%
|
FSR's expected net income this year is $34,285.72, its established dividend payout ratio is 30 percent, its corporate tax rate is 40 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. FSR paid a dividend of $3.60 per share on its 76,000 issued ordinary shares and is currently trading at a price of $54 per share. FSR can obtain new capital in the following ways:
- Preferred: Issue 10,800 new preference shares committing FSR's to a dividend of $11. The preference shares can be sold to the public at a price of $95 per share.
- Debt: Issue 1,800 ten year $1,000 par value bonds to the public. The bonds will pay 11.115% coupons (annually) and have a current yield to maturity of 12%.
(a) Confirm that the allocated weights above are correct.
(b) Determine the cost of each capital structure component
(c) Calculate the weighted average cost of capital.
(d) Given the following investment opportunities. Which projects should FSR accept? Why?
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PROJECT
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COST at t=0
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RATE OF
|
|
|
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RETURN
|
|
A B C D E
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$10,000 20,000
|
17.40%
|
|
|
|
|
10,000
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16.00%
|
|
|
|
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20,000
|
14.20%
|
|
|
|
|
10,000
|
13.70%
|
|
|
|
|
|
12.00%
|
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