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 4^{th} year, its salvage value will be equal to $0.
- The detergent is expected to generate sales revenue of $1 million in the 1^{st} year, $2 million in the 2^{nd} year, $2 million in the 3^{rd} year and $1 million in the 4^{th}
- 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:
- Cost of preferred share,
- Cost of common equity,
- Weight of debt, common shares and preferred shares,
- 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 |
- Calculate NPV, payback and discounted payback for project A using a discount rate of 10%
- 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)
Click on Buy Solution and make payment. All prices shown above are in USD. Payment supported in all currencies. Price shown above includes the solution of all questions mentioned on this page. Please note that our prices are fixed (do not bargain).
After making payment, solution is available instantly.Solution is available either in Word or Excel format unless otherwise specified.
If your question is slightly different from the above question, please contact us at info@myassignmentguru.com with your version of question.