FIN 571 Week 4 Individual Homework

FIN 571 Week 4 Individual Homework  

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Week 4 Individual Homework Submit Through Gradebook In Excel

1- New Project Analysis El Gato’s Motors is considering the purchase of a new production machine for $1,000,000.  Although the purchase of this machine will not produce any increase in sales revenues it will result in a before tax reduction of labor costs of $400,000 per year.  To operate this machine properly, workers would have to go through a brief training session that would cost $100,000.  In addition it would cost $50,000 to install this machine properly.  Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $150,000.  This machine has an expected life of 10 years after which it will have no salvage value.  Assume simplified straight line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate and a required rate of return of 12 percent.  Determine NPV, CPI, IRR, MIRR and Discounted Payback.

2- Determine the cost of common stock for the following:

Net Income       $2,000,000

Equity               $8,000,000

Dividends         $200,000

Mkt Price          $20 per share

Number of Shares Outstanding is 1,000,000

3- Determine the cost of preferred given the following

Preferred Stock Price Per Share is $50

Preferred Dividend is $5.50

4- Find the cost of debt for the following bond instrument:

Interest Rate is 12%

Tax Rate is 40%

5- Find the cost of Common Stock given the following:

Net income $5,000,000

Owners Equity $25,000,000

Dividends $500,000

Shares Outstanding 1,000,000

Market Price Per Share is $8.

6- Assuming the above information found in problems 3-5 above, and the corporate capital structure given below, what is the weighted cost of capital?

Financing Method

Debt                                         $1,000,000

Preferred                                  $2,000,000

Common                                   $7,000,000

Total Financing                          $10,000,000

7- Determine the intrinsic value of the following bond:

Face Value is $1,000

Coupon is $120

Term is 4 Years

Prevailing Interest Rates 8%.

8- Lease VS Purchase

You have decided to purchase a new vehicle.  The purchase price of the vehicle is $25,000.  You plan to keep the vehicle for 4 years at which time you will sell it for $8,000.  The annual lease payments are $5,345.  As you know, lease payments are made at the beginning of the lease.  Your cost of borrowing is 5 percent.  Determine if you will choose to purchase or lease the vehicle.

9- Bond Yields.  An AT&T bond has 10 years until maturity, a coupon rate of 8 percent and sells for $1,050.

1. What is the current yield on the bond?
2. What is the yield to maturity?

10-  The Eagle Company is expected to pay out a $5.00 dividend at the end of next year.  They anticipate their dividend to grow at a rate of 5% a year over the next six years.  Assuming a required rate of return of 12 percent, what is the present value of the dividends during this six year period?

Answers To Week 4 Problems

1. ElGato Answer:

Cash Flows:   Yr       0          1         through                  9                     10

$1,266,000    $299,700                            $299,700            $449,700

NPV $475,668

IRR 20.33%

CPI 1.38

2. Kc = .25/20 + .225 = .2373
3. Kp = 11%
4. Kd = 7.2%
5. Kc = .25
6. WACC = 20.7%
7. Intrinsic Value = $1,132.49

PV Purchase	-$25,000	$6,582	-$18,418
PV Lease	-$5,345	-$14,556	-$19,901
Purch. Save			$1,482

9. a. Current yield = coupon/price = $80/1050 =.0762 =7.62%.

7. YTM = 7.28%. On the calculator, enter PV = (-)1050,

         FV = 1000, n = 10, PMT = 80, compute i.

10. $22.93