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.
|less tax on excess market price|
|Incremental cash flow|
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.
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?
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?
- 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?
The table below shows two bonds making annual payments:
Assuming a par value of $100, state which bond has a higher value at present time?
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.?
Rf = 2%
Rm = 9%
(Hint: Can utilize beta of a peer)
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