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

Parker amp stone inc is looking at setting up a new

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $4.5 million in anticipation of using it as a warehouse and d ...

1 a condominium is purchased for 80000 with a down payment

1. A condominium is purchased for $80,000 with a down payment of $12,000 at an annual interest rate of 9% for 15 years. Calculate the unpaid balance after 10 years of making payments. 2. What would be the market value of ...

A firm had net income of 1000000 and a payout ratio of 30

A firm had Net Income of $1,000,000 and a payout ratio of 30%. If they are 60% equity financed, how much can they spend on capital expenditures before needing external equity?

1 according to the mampm propositions in a perfect market

1. According to the M&M propositions, in a perfect market which of the following statements is true? a. value of the firm will be equal to the net present value of its underlying projects b. net present value of a firm's ...

You own 19175 of human genome stock that has an assumed

You own $19,175 of Human Genome stock that has an assumed beta of 3.91. You also own $11,700 of Frozen Food Express (assumed beta = 1.83) and $1,625 of Molecular Devices (assumed beta = 0.82). What is the beta of your po ...

A shopping center is considering paying 15000 for a snow

A shopping center is considering paying $15,000 for a snow plow and blower, which will have a 5 year life, a negligible salvage value, and daily O&M expenses of $150. The firm can alternatively contract to have the snow ...

Hindelang inc is considering a project that has the

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it wil ...

Bobs stuff inc has preferred stock with a stated dividend

Bobs stuff, INC has preferred stock with a stated dividend of $3.57, which is currently trading at 25.6 per share. Bob bleives he can sell shares at that cost, but with flotation costs at 7% of the selling price. What is ...

Source one associates inc is based in poughquag new york

Source One Associates, Inc., is based in Poughquag, New York. Peter Easton, Source One’s president, is responsible for its daily operations. Between 1995 and 1997, Source One received requests from persons in Massachuset ...

Market research has identified three different types of

Market research has identified three different types of consumers based on survey data. The following schedule gives the reservation prices of these customers for the two most popular products you sell. Assume that there ...

  • 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

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

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen