FIN_3000 Set 1

ABC Industries is considering an investment that requires the company to issue new equity. The project will cost $100M but will add $120M to the company’s value after it is completed. The company’s true value absent the new project is $1B. Management knows this true value, but outside investors mistakenly value the company at $600M absent the project. Investors are aware of the project and correctly forecast that it will add $120M to the company’s value. The company has no cash, and if it wants to invest in the project, it must issue equity.   Now assume that the market will soon learn the true value of the company. However, the company cannot wait to invest in the project. If it does not invest now, then it will lose access to the project. What will the company’s stock price be once the market learns the company’s true value if the company issued equity and invested in the project? What will the company’s stock price be once the market learns the true value if the company passed up…

Ancer Food Enterprises, Inc. is considering launching a new corporate project.  The company will have to make Capital Investments, Invest in Net Working Capital, and generate Cash Flows from Operating the new project.   The Equipment required for the project will cost $8,700,000, will last for six years (the length of the project), and is estimated to be worthless at the end of its useful life.  The initial investment in Net Working Capital needs to be $400,000, while the year-end investment in NWC for years 1 - 5 will be 20% of the current year's sales; ending Net Working Capital at the end of year six will be zero.  Year One's sales will be $5,200,000 with annual growth at 5%; operating expenses will be 40% of sales.  The company uses Straight-Line depreciation and has a Tax Rate of 22%.  The appropriate discount rate for the risks involved is 12%. By how much does the Net Present Value of this project change if improved Working Capital Management cuts the required investment in Net…

Ancer Food Enterprises, Inc. is considering launching a new corporate project.  The company will have to make Capital Investments, Invest in Net Working Capital, and generate Cash Flows from Operating the new project.   The Equipment required for the project will cost $8,700,000, will last for six years (the length of the project), and is estimated to be worthless at the end of its useful life.  The initial investment in Net Working Capital needs to be $400,000, while the year-end investment in NWC for years 1 - 5 will be 20% of the current year's sales; ending Net Working Capital at the end of year six will be zero.  Year One's sales will be $5,200,000 with annual growth at 5%; operating expenses will be 40% of sales.  The company uses Straight-Line depreciation and has a Tax Rate of 22%.  The appropriate discount rate for the risks involved is 12%. By how much does the Net Present Value of this project change if improved Working Capital Management cuts the required investment in Net…

eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26%  income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…

Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $5,300 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects:    Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 5,300 $ 4,700 Good .50 6,400 7,000    a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the…

Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,200 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects:    Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,200 $ 3,400 Good .50 4,600 4,900    a. What is the expected value of the company if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations.) b. What is the expected value of the company’s equity if the low-volatility…

Mahomes Manufacturing needs to raise $80 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 15 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 5 percent, for new preferred stock, 3 percent, and for new debt, 2 percent. What is the true initial cost figure the company should use when evaluating its project?

A corporation is trying to decide whether to buy the patent for a productdesigned by another company. The decision to buy will require an investment of $8 million, and the demand for the product is not known. If demand is light, the company expects a return of $1.3 million each year for three years. If the demand is moderate, the return will be $2.5 million each year for four years, and high demand will mean a return of $4 million each year for four years. It is estimated that the probability of high demand is 0.4 and the probability of a light demand is 0.2. The firm's interest rate (risk-free) is 12%. Calculate the expected present worth of the investment. On this basis, should the company make the investment? (All figures represent after-tax values.)

J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $61 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $59 million today. If demand increases, the building would be worth $63.4 million a year from today. If demand decreases, the same office building would be worth only $57 million in a year. The company can borrow and lend at the risk-free annual effective rate of 2 percent. A local competitor in the real estate business has recently offered $760,000 for the right to build an office building on the land. What is the value of the office building today? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)…

Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $7 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The costs of capital for Orca and Shark are 12 percent and 10 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? 47.42 50.65 75.85 35.45

The Papillon Corporation is considering launching a new project, and it would like to do the math to figure out if it is worth it. The Papillon Corporation has no loans, and currently its cost of equity is 11.6 %. The project would require an immediate investment of $11.67 million to buy production equipment. The equipment will depreciate according to the straight-line method, and its economic life is 6 years. The Papillon Corporation expects that this 6-year- long project would bring "revenues minus costs of goods sold in the amount of $3.37 million each year. (Use the company's cost of equity to discount their after-tax values.) You also know that the T-Bill, or the risk-free, rate is 3.5 % per year. (Use this rate to discount the risk-free cash flows from this project, such as the annual "depreciation tax shields" (HINT: see Ch.6 PowerPoint!).) The Papillon Corporation faces a 24 % income tax rate. First, find the project's estimated unlevered cash flows, and then calculate the…

Cello Corporation is considering an investment in new equipment. An analysis by management indicates that the required initial investment is $235,000 and the project has a profitability index of 1.46. What is the net present value of this project? Round to the nearest whole dollar amount and do not enter a dollar sign or a decimal point (e.g., enter 89, not $89.00).

Phoney Communications Ltd pays income as franked dividends usable by Australian resident shareholders. The company is considering the purchase of a new telecommunications tower to replace an existing one. The new tower would be used to improve mobile phone coverage but with technological advances happening so quickly, Phoney expects that in four years’ time the tower will be redundant. Expected sale value on the tower is $200,000. The new machine costs $1,000,000. As the tower will be placed in a native bushland area, removal of the tower must be followed by re-establishment of foliage, which will cost approximately $2,000. Compute the terminal cash flow for this capital budgeting analysis. $202,000 $198,000 $802,000 $798,000

You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite like material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for four years. The equipment required for the project has no salvage value. The required return for projects of this type is 12 percent, and the company has a 34 percent tax rate.       Pessimistic   Expected   Optimistic     Market size   121,000       136,000       161,000       Market share   21 %     24 %     26 %     Selling price $ 144     $ 149     $ 155       Variable costs per unit $ 98     $ 93     $ 92       Fixed costs per year $ 959,000     $ 914,000     $ 884,000       Initial investment $ 1,248,000     $ 1,180,000     $ 1,112,000         Calculate the NPV for each case for this project

Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $7.4 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The costs of capital for Orca and Shark are 13 percent and 11 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per share

Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm’s only activity and that the firm will close one year from today. The firm is obligated to make a $5,400 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following information pertaining to the two projects:     Economy Probability Low-VolatilityProject Payoff High-VolatilityProject Payoff   Bad .50 $5,400         $4,800           Good .50 6,550           7,150               a. What is the expected value of the firm if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations and round your answers to the nearest whole dollar, e.g., 32.) b. What is the…