Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Basic Finance Expert

problem  prepare a short essay of 350-400 words for each of the following problems. Where possible, illustrate with an appropriate ex in your answer. You must support your discussion with appropriate references.

  •    'Risk aversion implies only risk-free investments will be undertaken by corporate managers'. Critically evaluate             this statement (indicate whether you agree or disagree in your answer).
  •    What is the distinction between nominal and real interest rates? Why is this distinction important?
  •     describe why evaluating mutually exclusive projects with IRR and NPV methods can be problematic.

problem                                                                   

  •  John has invented a new household device that would earn him $10,000 per annum for the next 10 years. Given a rate of interest of 8% per year, would John be willing to sell his invention today for $100,000?
  •  An investment will pay $200 at the end of each of the next 3 years, $300 at the end of year 4, $500 at the end of year 5 and $500 at the end of year 6. Given that other investments of equal risk earn 10% per annum, find out the present value and future value of this investment.
  •   You intend to invest into a fund for a period of 10 years. Find the interest rate at which regular deposits of $1,000 will accumulate to $25,000 at the end of the investment period. The deposits are made at the end of every year. Estimate the interest rate using the interpolation method.

problem                                                                                          

 

The Crystal Glass Company is proposing the construction of a new plant in east Brisbane. The plant has an annual capacity of 100,000 tonnes and will cost $100 million to build. Profits on the plant will be taxed at a rate of 30 per cent. The company expects its new plant to produce 90,000 tonnes of plate-glass per year. The annual revenues of $59.4 million based on an anticipated selling price of $660 per tonne will allow the company to gain 12 per cent market share in the first year of operation. Fixed costs are expected to average $12 million annually while variable costs are estimated to be around $140 per tonne. The plant will be fully depreciated on a straight-line basis over ten years, with an estimated salvage value of $2 million at the end of the project. The required rate of return on the project is taken as 12 % per year due to the high degree of systematic risk associated with a cyclical product like plate-glass.

find out the NPV of the project and describe if the company should go ahead with the proposed project.

problem                                                                                       

Western Communications Ltd's bonds will mature in five years with a total face value of $50 million, paying a half yearly coupon rate of 10% per annum. The yield on the bonds is 15% per annum. The market value for the company's preference share is $5.0 per unit while the ordinary share is currently worth $3.0 per unit. The preference share pays a dividend of $0.5 per share. The beta coefficient for the ordinary share is 1.2 and retained earnings are expected to be more than sufficient to fund the ordinary equity component of any new investment. The market risk premium is estimated to be 13% per annum and the risk-free rate is 4% per annum. The company is subject to a 30% corporate tax rate. The balance sheet values for bond and equity are shown below:

 

$ (Million)

Bonds

$50

Equity:

 

preference shares (200,000 units)

$3

Ordinary shares (10 million units)

$15

a.   describe the three steps involved in the calculation of cost of capital for Western Communications.

b.   find out Western Communications' after-tax weighted average cost of capital.

c.    Western Communications is considering raising more capital for a new project. Should the company use more equity or debt? In your answer, discuss the effect of using more equity or

debt on the company's cost of capital.                                                      

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M946

Have any Question? 


Related Questions in Basic Finance

1 i a stock will pay constant dividends of 9 every year its

1) i) A stock will pay constant dividends of $9 every year. Its required rate of return (a.k.a., cost of capital, discount rate) is 17%. What is the value of the stock? Round to the penny. ii) A stock just paid a dividen ...

Kings department store is contemplating the purchase of a

King's Department Store is contemplating the purchase of a new machine at a cost of $36,686. The machine will provide $4,900 per year in cash flow for fourteen years. King's has a cost of capital of 12 percent. calculate ...

Tom decides to open a small italian wine store in an

Tom decides to open a small Italian wine store in an affluent South Florida neighborhood. He will be an absentee owner and has hired Vinnie as the store manager. He has agreed to pay Vinnie a fixed salary of $75,000 per ...

Is an institutional client different from an institutional

Is an institutional client different from an institutional investor? If so could you please please give an example of each just so I understand?

The difference between the terminal value of the two kinds

The difference between the terminal value of the two kinds of annuity payments can be substantial as the number of years increases or the interest rate rises. Consider an individual retirement account (IRA) in which you ...

A client plans to send a child to college for 4 years

A client plans to send a child to college for 4 years starting 18 years from now. Having set aside money for the tuition, she decides to plan for room and board also. She estimates these costs at $20,000 per year, payabl ...

One of your clients wants a trust over which he can

One of your clients wants a trust over which he can exercise exclusive control over disposition of his assets to his children from a former marriage. Which of the following trusts apply? (1) bypass trust (2) power of app ...

Five years from today you plan to invest 4900 for 8

Five years from today, you plan to invest $4,900 for 8 additional years at 7.8 percent compounded annually. How much will you have in your account 13 years from today? $13,008.88 $8,936.06 $7,133.29 $9,439.74 $9,322.51

What would be the netnbspannualnbspcost of the following

What would be the net  annual  cost of the following checking account? Interest earnings of 3 percent with a $550 minimum balance; average monthly balance, $800; monthly service charge of $15 for falling below the minimu ...

Your cousin is currentlynbsp10nbspyears old she will be

Your cousin is currently 10 years old. She will be going to college in 8 years. Your aunt and uncle would like to have $90,000 in a savings account to fund her education at that time. If the account promises to pay a fix ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As