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a.
To calculate: The discount rate of Robinson Corporation.
Introduction:
Discount Rate:
A rate that is used for the calculation of the
a.
Answer to Problem 18P
The discount rate of Robinson Corporation is 7.53% and after rounding off to a whole number, the discount rate is 8%.
Explanation of Solution
Computation of the discount rate:
b.
To calculate: The PV of total outflows of Robinson Corporation.
Introduction:
Present value (PV):
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the
b.
Answer to Problem 18P
The PV of total outflows of Robinson Corporation is $3,171,831.
Explanation of Solution
Computation of PV of total outflows:
Working Notes:
Calculation of net cost of underwriting expense on new issue:
Calculation of after-tax cost:
The calculation of the tax savings per year is as follows:
The calculation of current price of bond, that is, PV of future tax savings is shown below.
The formula used for the calculation of current price of bond, that is, PV of future tax savings is shown below.
c.
To calculate: The PV of total inflows of Robinson Corporation.
Introduction:
Present value:
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.
c.
Answer to Problem 18P
The present value of total inflow of Robinson Corporation is $2,847,244.
Explanation of Solution
Calculation of the present value of total inflow:
Working Notes:
The calculation of the savings per year is as follows:
The calculation of PV of savings is shown below.
The formula used for the calculation of PV of savings is shown below.
Calculation of underwriting cost write off:
Calculation of PV of deferred future write off:
The calculation of current price of bond is shown below.
The formula used for the calculation of current price of bond is shown below.
d.
To calculate: The NPV of Robinson Corporation.
Introduction:
It is the difference between the PV (present value) of
d.
Answer to Problem 18P
The NPV of Robinson Corporation is ($324,478).
Explanation of Solution
Calculation of NPV:
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Chapter 16 Solutions
Foundations Of Financial Management
- Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now…arrow_forward
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT