Question 1:

Parker products manufactures a variety of household products.  The company is considering introducing a new detergent.  The company’s CFO has collected the following information about the proposed product.

  • The product has a proposed life of 4 years.
  • You will have to purchase a new machine to produce the detergent. The machine will have an upfront cost of $2 million.
  • The machine would be depreciated on a straight line basis.
  • The company anticipates that the machine will last 4 years and after the 4th year, its salvage value will be equal to $0.
  • The detergent is expected to generate sales revenue of $1 million in the 1st year, $2 million in the 2nd year, $2 million in the 3rd year and $1 million in the 4th
  • Each year the operating cost amounts to $400,000.
  • Tax rate is 40%.
  • The project’s WACC is estimated to be 12%. Calculate if the new detergent should be introduced.

 

                                                      0                           1                                 2                           3                           4
           
 Sales          
           
 fixed costs          
           
 EBITDA          
 Depreciation          
           
 EBIT          
 TAX          
 NOPAT          
 Add depreciation          
 salvage value          
 less tax on excess market price          
           
 Equipment          
           
 Incremental cash flow          

 

Question 2:

You have been given the following information concerning Ben and Jerry’s capital structure.

  • 1 million common shares outstanding, 200,000 preferred shares and it issued 40,000 debentures (Bonds).
  • Ben and Jerry distributed a $0.54 dividend last year and dividend is expected to grow at a steady rate of 5%. Closing Value of share on the London stock exchange is $25.
  • Preferred dividend stream is $1.2 and market value is $36.
  • The interest rate on debentures is 5%
  • Tax rate is 20%

Calculate the following:

  1. Cost of preferred share,
  2. Cost of common equity,
  3. Weight of debt, common shares and preferred shares,
  4. Weighted average cost of capital WACC of Ben and Jerry.

 

Question 3:

News Corp is expected to pay a dividend of $0.8 in one year.  The dividend is expected to grow at 12% in the following 3 years and then at a constant rate of 4% per annum indefinitely.  If the required rate of return is 12%, what is the price of the company’s share today?

 

Question 4

Calculate the price of a 10 year, $1000 par value bond that makes semiannual payments, has a coupon rate of 12% and offers a yield to maturity of 10%

Recalculate the price using a yield to maturity of 13%.

What can you conclude?

 

Question 5:

Project A
Year Cash flow
0 -6000
1 2000
2 2000
3 2000
4 2000
5 2000

 

  1. Calculate NPV, payback and discounted payback for project A using a discount rate of 10%
  2. If you had the choice between project A and B and that NPV for project B is $1000, which one would you choose?

 

Question 6

The table below shows two bonds making annual payments:

  Coupon YTM Maturity
A 8% 4.71% 2
B 6% 5.52% 2

 

Assuming a par value of $100, state which bond has a higher value at present time?

 

Question 7

Apple Inc. and HP Inc. are direct competitors, if Apple Inc. has a beta of 1.2. What is the cost of equity for HP Inc.?

Assuming:

Rf = 2%

Rm = 9%

(Hint: Can utilize beta of a peer)

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