1) You are a big fan of investing in IPOs and three new IPOs are expected to hit the market this month.  Assume the IPO price is $40/share for all three IPOs. When the three IPOs hit the market, they have the following characteristics:   IPO Price 1st Day Market Price IPO A $40 $43 IPO B $40 $52 IPO C $40 $55 What was the average underpricing of the three IPOs? Compute the underpricing of each IPO, then take the average of the three. 2) You purchased a machine for $100,000 and you depreciate it using straight-line depreciation over its 10-year life. If you sell the machine at the end of year 6 for $22,000, what will be your after-tax salvage value? Your tax rate is 0.21? 3) You are beginning a new 5-year project that will require $90,969 in initial net working capital (t=0), which you will get back at the end of year 5. If your WACC for this project is 10%, what is the effect of the net working capital on the NPV of the project? 4)  If your WACC is 10%, calculate the NPV of a 5-year project with the following cash flows: Initial cost of $736,786 Initial net working capital of $63,925, which will be returned at the end of the project After-tax salvage value of $82,368 at the end of the project Net Operating Cash Flows (Net OCF) of $172,593 per year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 23P
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1) You are a big fan of investing in IPOs and three new IPOs are expected to hit the market this month.  Assume the IPO price is $40/share for all three IPOs. When the three IPOs hit the market, they have the following characteristics:

 

IPO Price

1st Day Market Price

IPO A

$40

$43

IPO B

$40

$52

IPO C

$40

$55

What was the average underpricing of the three IPOs? Compute the underpricing of each IPO, then take the average of the three.

2) You purchased a machine for $100,000 and you depreciate it using straight-line depreciation over its 10-year life. If you sell the machine at the end of year 6 for $22,000, what will be your after-tax salvage value? Your tax rate is 0.21?

3) You are beginning a new 5-year project that will require $90,969 in initial net working capital (t=0), which you will get back at the end of year 5. If your WACC for this project is 10%, what is the effect of the net working capital on the NPV of the project?

4) 

If your WACC is 10%, calculate the NPV of a 5-year project with the following cash flows:

Initial cost of $736,786

Initial net working capital of $63,925, which will be returned at the end of the project

After-tax salvage value of $82,368 at the end of the project

Net Operating Cash Flows (Net OCF) of $172,593 per year.

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