Question 1
Hey guys! Here are my 3 questions, I hope you can help me... Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows ?$500 $150 $200 $300 a. 2.03 years b. 2.25 years c. 2.50 years d. 2.75 years e. 3.03 years Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. WACC: 12.00% Year 0 1 2 3 4 5 Cash flows ?$1,100 $400 $390 $380 $370 $360 a. $250.15 b. $277.94 c. $305.73 d. $336.31 e. $369.94 Kosovski Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. WACC: 7.75% Year 0 1 2 3 4 CFS ?$1,050 $675 $650 CFL ?$1,050 $360 $360 $360 $360 a. $11.45 b. $12.72 c. $14.63 d. $16.82 e. $19.35,ok, thank you :-),Thank you so very much!,Thank you so much for answering these questions however, I was wonder if you can send over the work you did to get the answers for questions 1 & 3 on the attached doc. Thank you in advance!! And I will definitely use you in the future :-),Thank you!,Hi! I'm not sure what happened but these were never answered... "Hey guys! Here are my 3 questions, I hope you can help me... Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows ?$500 $150 $200 $300 a. 2.03 years b. 2.25 years c. 2.50 years d. 2.75 years e. 3.03 years Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. WACC: 12.00% Year 0 1 2 3 4 5 Cash flows ?$1,100 $400 $390 $380 $370 $360 a. $250.15 b. $277.94 c. $305.73 d. $336.31 e. $369.94 Kosovski Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. WACC: 7.75% Year 0 1 2 3 4 CFS ?$1,050 $675 $650 CFL ?$1,050 $360 $360 $360 $360 a. $11.45 b. $12.72 c. $14.63 d. $16.82 e. $19.35 " - Sent to Finance Expert Tutor on 10/4/2011 at 3:00pm,Nevermind, they were... sorry...
Question 2
Complete Exercise 1-18 and 2-19. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome. 1-18 cost data for managerial purposes Beige Computers operates retail stores in both downtown (city) and suburban (mall) locations. The company has two responsibility centers: the city division, which contains stores in downtown locations, and the mall division, which contains stores in suburban locations. Beige?s CEO is concerned about the profitability of the city division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the city divisions operations. If the city division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the mall division. Beige Computers, City Division Divisional income Statement For the year ending January 31 Sales revenue 12,900,000 Costs Advertising ? city division 525,000 Cost of goods sold 6,450,000 Divisional administrative salaries 870,000 Selling cost (sales commission) 1,730,000 Rent 2,215,000 Share of corporate administration 1,425,000 Total cost $13,215,000 Net loss before income tax benefit $ (315,000) Tax benefit at 40% rate 126,000 Net loss $ (189,000) Required: what revenues and costs are probably differential for the decision to discontinue City Division?s operations? What will be the effect on Beige?s profits if the division is eliminated?,please let me know about 1-18 i received 2-19 and i thank you for that .
Question 3
A2, ACC00152 S1 2013 Page 1 of 3 ACC00152 Business Finance Session 1 2013 Assignment 2 The assignment has a 20% weighting in your overall mark for this unit. It will be marked out of 20 and consists of three main questions. Marks will be allocated as indicated for each question below. Your total assignment submission should not exceed five (5) A4 pages, excluding a reference list. Question 1: Bonds (5 marks total) Two outstanding government bond issues are identical except that one has 2 years to maturity and the other has 5 years to maturity. Each bond has a face value of $100, an AAA credit rating, fixed semi-annual coupons, a current price of $100 and a yield to maturity of 12% p.a. Based on this data, answer each of the following: (a) What is the annual coupon rate on each of these bonds? Explain. (0.5 marks) (b) The Reserve Bank of Australia announces a decrease in the cash rate and as a result interests rates fall market wide. If the required yield to maturity for the two government bonds falls to 10% p.a., what will be the price of each bond? (2 marks) (c) The Reserve Bank of Australia announces an increase in the cash rate and as a result interests rates rise market wide. If the required yield to maturity for the two government bonds rises to 14% p.a., what will be the price of each bond? (1 mark) (d) Explain, with reference to relevant bond valuation concepts, the relative changes in price of the two bonds in response to changing interest rates. (1.5 marks) Question 2: Woolworths Cost of Capital (8 marks) You are to estimate the cost of capital for Woolworths Ltd, an Australian listed company, at the end of its last financial year (24 June 2012). Before you can undertake this task, you will need to collect some actual finance data. The ?External Links? section of this unit?s MySCU web site contains links to Internet sources of information that you might find useful for this assignment. Amongst other sources, you should consider the Bulletin Statistical Tables F2 (daily) and F3 available through the RBA website. Note also that 24 June 2012 was a Sunday so some market data you will require is unavailable for that date. Use 22 June 2012 or June averages as appropriate. A2, ACC00152 S1 2013 Page 2 of 3 Woolworths Ltd uses a number of sources of debt and equity. You can make the following assumptions: ? Borrowings on the Woolworths Balance Sheet in their annual report reflect market value. ? All borrowings can be classified as debt. ? Woolworths aims to maintain its current A credit rating.1 An average yield on corporate bonds with an A rating can therefore be used in this analysis.2 ? The CAPM is used to estimate the cost of ordinary equity. ? The 10-year Australian Treasury bond rate is an appropriate proxy for the risk-free rate. ? The beta for Woolworths has not varied significantly in the past 5 years and is not expected to change in the near future. ? The market risk premium (also called equity risk premium) is 6%. ? Woolworths calculates its WACC assuming a classical tax system. ? The company?s tax rate is 30%. Ensure that you set out full workings in a clear and logical fashion. Label all input figures, state any assumptions necessary for their use and reference their source. Marks for this question will be awarded for: correct choice of input figures; correct choice and application of method; and referencing of data sources. Question 33: Capital Structure (7 marks total) Harry Real Estate Company was founded 25 years ago by the current CEO, Harry Lantern. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company?s management. Prior to founding Harry Real Estate, Harry was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, Harry Real Estate is entirely equity financed, with 15 million ordinary shares outstanding. The shares currently trade at $35.20 each. 1 Moody?s Investors Service 2012, Moody?s Disclosures on Credit Ratings of Woolworths Limited, press release, 15 June, http://www.moodys.com/research/Moodys-Disclosures-on-Credit-Ratings-of-Woolworths-Limited-- PR_248374, accessed 31 January 2012. 2 It is noted that specific types of debt securities issued by Woolworths may have different credit ratings and yields. However, we will assume that the average rate Woolworths would have to pay on new debt would be the same as A rated debt, since this is the long-term credit rating of the company. 3 Question adapted from Ross SA, Thompson SC, Christensen MJ, Westerfield RW & Jordan BD 2011, Fundamentals of Corporate Finance, 5th edn, McGraw-Hill, Sydney, pp. 698-699. A2, ACC00152 S1 2013 Page 3 of 3 Harry Real Estate is evaluating a plan to purchase a huge piece of land in Queensland for $110 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Harry Real Estate?s annual pre-tax earnings by $27 million in perpetuity. You, the company?s new CFO, have been put in charge of the project. You have determined that the company?s cost of capital is 12.5%. You feel that the company would be more valuable if it included debt in its capital structure, so you are evaluating whether the company should issue debt to finance the project in its entirety. Based on some conversations with investment banks, you think that the company can issue bonds at par value with an 8% coupon rate. From your analysis, you also think that a capital structure around 70% equity and 30% debt would be optimal. The company has a 40% corporate tax rate. Based on this data, answer each of the following questions, assuming that the only market imperfections are corporate taxes and financial distress costs: (a) Construct Harry Real Estate?s market value balance sheet before it announces the investment project. (0.5 marks) (b) Suppose the company decides to issue equity to finance the project. (2.5 marks) i) Construct Harry Real Estate?s market value balance sheet after it announces the project to the market and says it will finance the land purchase by a new share issue. [Hint: First calculate the NPV of the project.] ii) What would be the new price per share after the announcement in (i)? iii) How many shares will Harry Real Estate need to issue to finance the land purchase? iv) Construct Harry Real Estate?s market value balance sheet after the equity issue but before the land purchase has been made. How many shares does the company now have outstanding and what is the price per share? v) Construct Harry Real Estate?s market value balance sheet after the land purchase has been made. (c) Suppose the company decides to issue bonds to finance the project. (1.5 marks) i) What will the market value of Harry Real Estate be if the land purchase is financed with bonds? ii) Construct Harry Real Estate?s market value balance sheet after both the bond issue and the land purchase. What is the price per share? (d) If Harry Real Estate Company aims to maximise firm value and share price, which method of financing the new project (bonds or shares) should be used? Explain. (0.75 marks) (e) If your estimate of the optimal capital structure is correct, what else should the company consider doing? (0.5 marks) (f) With reference to appropriate theory and assuming your estimate of the optimal capital structure is correct, explain what is likely to happen if the company changes to a capital structure with a debt to equity ratio of 1? (1.25 marks)
Question 4
1. (a) Bridge to the Profession: Professional Research: FASB Codification, (b) On May 31, 2011, Armstrong Company (A US company) paid US$3,700,000 to acquire all of the common stock of Hall Corporation (a German company), which now became a division of Armstrong. Hall reported the following US$ balance sheet at the time of the acquisition: Current assets $ 900,000 Noncurrent assets 2,700,000 Total asset 3600000 current liabilities $ 600000 long-term liabilities 500000 stockholders equity 2500000 Total liabilities and stockholders equity 3600000 It was determined at the date of purchase that the fair value of the identifiable net assets of Hall was US$2,800,000. At December 31, 2011, Hall reports the following US$ balance sheet information: Current assets $ 800,000 Noncurrent assets (including goodwill recognized in purchase) 2,400,000 Current liabilities (700,000) Long-term liabilities (500,000) Net assets $2,000,000 It is determined that the future significant net cash flows of the Hall division will be US$300,000 per year for the next 20 years, occurring at year-end (Hint: the present value of future cash flows can be used as a proxy for the fair value). The recorded amount for Hall?s net assets (excluding goodwill) is the same as fair value, except for property which has a fair value of US$200,000 above the carrying value. The appropriate discount rate for Armstrong is 15%, while that for the Hall division is 10%. Required: i. Compute the amount of goodwill recognized, if any, on May 31, 2011. (5 points) ii. Determine the impairment loss, if any, to be recorded on December 31, 2011. (6 points) iii. On the assumption that the appropriate discount rate for Hall is the same as that for Armstrong, determine the impairment loss, if any, to be recorded on December 31, 2011. (17 points) iv. Prepare the journal entry to record the impairment loss, if any, on December 31, 2011. (2 points) (Points : 50)
Question 5
Exercise 1: This exercise is intended to make sure that we are all familiar with terms used debt financing. (10 points) Fill the blanks by choosing the appropriate term from the following list: lease, funded, floating-rate, Eurobond, convertible, subordinated, call, sinking fund, prime rate, private placement, global bond, public issue, senior, unfunded, Eurodollar rate, warrant, debentures, term loan. a. Debt maturing in more than 1 year is often called _________________ debt. b. An issue of bonds that is sold simultaneously in several countries is traditionally called a(n) ___________________. c. If a lender ranks behind the firm?s general creditors in the event of default, the loan is said to be ______________________. d. In many cases, a firm is obliged to make regular contributions to a(n) _____________, which is then used to repurchase bonds. e. Most bonds give the firm the right to repurchase or ________________ the bonds at specified prices. f. The benchmark interest rate that banks charge to their customers with good credit is generally termed the _____________________. g. The interest rate on bank loans is often tied to short-term interest rates. These loans are usually called _________________ loans. h. Where there is a(n) ____________________, securities are sold directly to a small group of institutional investors. These securities cannot be resold to individual investors. In the case of a(n) __________________, debt can be freely bought and sold by individual investors. i. A long-term rental agreement is called a(n) ______________. j. A(n)__________________ bond can be exchanged for shares of the issuing corporation. k. A(n) _________________ gives its owner the right to buy shares in the issuing company at a predetermined. Exercise 2: (18 points) Empirical evidence shows that stock market in the United States is efficient. a. Explain the three forms of market efficiency (see chapter 5, pages 178 ? 183). b. How do you explain the fact that some people make very high returns on stock markets? c. How does competition among investors lead to efficient markets? Exercise 3: (18 points) In 1987 RJR Nabisco, the food and tobacco giant, had $5 billion of A-rated debt outstanding. In that year the company was taken over, and $19 billion of debt was issued and used to buy back equity. The debt ratio skyrocketed, and the debt was downgraded to a BB rating. The holders of the previously issued debt were furious, and one filed a lawsuit claiming that RJR had violated an implicit obligation not to undertake major financing changes at the expense of existing bondholders. Why did these bondholders believe they had been harmed by the massive issue of new debt? What type of explicit restriction would you have wanted if you had been one of the original bondholders? Exercise 4:(18 points) Explain how a company can incur costs of financial distress without ever going bankrupt. What is the nature of these costs? Exercise 5: (18 points) An all equity business has 100 million shares outstanding selling for $20 per share. Management believes that interest rates are unreasonably low and decides to execute a dividend recapitalization (a recap). It will raise $1 billion in debt and repurchase 50 million shares. A) what is the market value of the firm prior to the recap? What is the market value of equity? B) Assuming the Irrelevance Proposition holds, what is the market value of the firm after the recap? What is the market value of the equity? C) Do equity shareholders appear to have gained or lost as a result of the recap? Please explain D) Assume now that the recap increases total firm cash flows, which adds $100 million to the value of the firm. Now what is the market value of the firm? What is the market value of equity? E) Do equity shareholders appear to have gained or lost as a result of the recap in this revised scenario? Exercise 6: (18 points) Equity, Inc. is currently an all-equity financed firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of $30,000 and pays no taxes. The firm contemplates a restructuring that would issue $50,000 in 8% debt which will be used to repurchase stock. Show the value of the firm, EPS, and rate of return on the stock before and after the proposed restructuring. What changed?
