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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