Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Management Expert

problem 1: You are considering investing in Facial Laboratories. Suppose Facial is currently undergoing expansion and is not expected to change its cash dividend while expanding for the next 4 years. This means that its current annual $3.00 dividend will remain for the next 4 years. After the expansion is completed, higher earnings are expected to result causing a 30% increase in dividends each year for 3 years. After these three years of 30% growth, the dividend growth rate is expected to be 2% per year forever. If the required return for Facial’s common stock is 11%, what is a share worth today? 

problem 2: You are considering three stocks for investment purposes. The required return (rj) on the market portfolio is 14%, and the riskless return is 9%. On the basis of the information that follows, in which (if any) of the below stocks should you invest?
 
Stock     Beta    Current Price  Last Dividend  Growth Rate
A           1.3      $15.00          $1.20            5.00%
B           0.9      $28.00          $1.30            10.00%
C           1.1      $31.00          $2.40            8.00%

problem 3: Joe Brown and Fred Anthony are planning to invest in a Go Green project. The marginal tax rate is 26% and the company tax rate is 30%. Due to their lack of finance expertise, they have asked your assistance in determining whether they should invest in Go Green or not. They have provided you with the following information:

A) The project has a life of 6 years.

B) The equipment costs $280000 with an additional installation cost of $25000.

C) The equipment will be sold at the end of project life for $55,000.

D) Straight line method is employed in calculating the depreciation.

E) The Fiji Tax Authority has given this type of equipment an effective life of 5 years.

F) Sales for the first year will be $85000 and sales are expected to grow at 7% pa for each year of the project.

G) The Cost of goods sold is 18 percent of sales every year.

H) Working capital will be 7% of sales revenues for each year. The working capital investment has to be made at the start of each period. All working capital will be recovered.

I) Marketing costs will be 2% of sales per annum.

J) The hurdle rate is 10%.

Required:

i) Compute NPV for Go Green project.

ii) Compute IRR for Go Green project using interpolation method (trial and error method).

iii) Advice Joe Brown and Fred Anthony on the acceptability of Go Green project.

iv) Is IRR or NPV more reliable when choosing a project? Why?
 
problem 4: The cost of capital for a firm can differ from the cost of capital for each of its businesses. When a firm has multiple businesses, it is important to use the cost of capital appropriate to the particular project under consideration, rather than the firm's overall cost of capital, when evaluating a proposed project. Renowned Cola, Inc.'s 2005 annual report describes that Renowned Cola's investments are expected to generate cash returns that exceed its "long-term cost of capital," which Renowned Cola estimated to be approximately 10% at year-end 2005. Renowned Cola has three main lines of business, soft drinks, notably Dr. Cola; snack foods, such as Fritos; and restaurants. Restaurant investments include NPC, which has a beta of 0.80 and a debt-to-firm value ratio is 0.31. Renowned Cola did not report costs of capital separately for these three businesses. Below, we have available year-end data for 2005 provided by Renowned Cola.
 
Renowned Cola’s Items                            Values (M = millions)

Cash and marketable securities                 $1,498M (market value assumed)
Short-term debt                                     $706M
Long-term debt                                      $8,509M ($8,747M market value)
Common shares outstanding                     788M
Year-end share price                               $55.875
Income tax rate                                      34%
Renowned Cola's beta                              1.0
Long-term borrowing rate                         6.75%
Short-term riskless rate                           5.13%
Intermediate-term riskless rate                  5.50%
Long-term riskless rate                             6.00%
Short-term market risk premium                 8.40%
Intermediate-term market risk premium        7.40%
Long-term market risk premium                   7.00%
 
Given the above information, answer the below problems.
 
(i) Compute the market value of Renowned Cola's debt at year-end 2005. What is the book value of debt? Why do usually use market or book values for debt? describe.
 
(ii) To the nearest million, find out the market value of Renowned Cola's stockholders' equity at year-end 2005.
 
(iii) Renowned Cola subtracts the value of its short-term debt from its total debt when calculating its "net debt ratio." Renowned Cola believes that the market values for its traded debt are not accurate because the bonds trade infrequently. Given this belief and their treatment of short-term debt, compute Renowned Cola's net debt ratio using book values for debt and market value for equity.
 
(iv) find out Leverage keeping the short-term debt as part of total debt. Using the CAPM find out re for short-term, medium-term, and long-term investments. Compute WACC for short-term, medium-term, and long-term investments. Suppose you were considering a long-term capital investment project, which WACC would you use and why? You can assume that the asset's risk profile for the project mirrors Renowned Cola's overall risk profile.
 
(v) Should Renowned Cola use its overall cost of capital to evaluate its restaurant capital investments? Under what circumstances would it be correct to do so?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M9564

Have any Question? 


Related Questions in Financial Management

List the three forms of the efficient market hypothesis and

List the three forms of the Efficient Market Hypothesis and briefly describe each form. Assume you are using the dividend discount model to value a share of stock. Holding dividends constant, what other variables can cha ...

Investors believe that a certain stock will pay a 4

Investors believe that a certain stock will pay a $4 dividend next year. The market price of the stock is $66.67, and investors expect a 12 percent return on the stock. What long-run growth rate in dividends is consisten ...

Delray foods must purchase a new gumdrop machine two

DelRay Foods must purchase a new gumdrop machine. Two machines are available. Machine 7745 has a first cost of $8,200, an estimated life of 10 years, a salvage value of $1,000, and annual operating costs estimated at $0. ...

The past five monthly returns for kohlrsquos are 356

The past five monthly returns for Kohl’s are 3.56 percent, 3.67 percent, −1.70 percent, 9.26 percent, and −2.58 percent. Compute the standard deviation of Kohls’ monthly returns. (Do not round intermediate calculations a ...

Using examples of or referencing pfeffer and salanciks

Using examples of, or referencing Pfeffer and Salancik's resource dependence theory "RDT" choose an organisation and say how they manage their interdependencies with their external environment to build competitive advant ...

How do changes in exchange rates affect the consolidation

How do changes in exchange rates affect the consolidation of financial statements of a multinational corporation? BP PLC (ticker: BP) has operations all over the world. Look at BP's sales and operating income from U.S. o ...

The operating and maintenance expenses on a machine are

The operating and maintenance expenses on a machine are expected to increase 0.5% per month. This month’s expenses are $2,000. Find the equal monthly series that is equivalent to the monthly expenses over 5 years for an ...

Office automation inc must choose between two copiers the

Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $900 and will last for three years. The copier will require a real aftertax cost of $120 per year after all relevant expenses ...

Sustainable competitive advantage is influenced by check

Sustainable competitive advantage is influenced by: (Check all that apply) a lower price for the customer based on the value created for them (due to your operations or other cost control strategies) a rareness factor, m ...

Robbie barrow just purchased a risk-free us treasury note

Robbie Barrow just purchased a risk-free US Treasury note having 3 years to maturity and an annual coupon rate of 7.0 percent. Unlike standard US Treasury notes, the coupon/interest payments for this Treasury note are ma ...

  • 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

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro