corporate finance

(an Excel file)Part I: Sensitivity of Bond Price With Respect to YTM, Coupon Rate, and Maturityyou have a bond with these features: Coupon rate: 10% annualCoupon payment frequency: semiannualTime to maturity: 20 yearsFace value: $1,000Yield to maturity (YTM, I, or r): 12%Tabulate and graph the price of this bond by changing (one at a time): Coupon rate from 1% to 30% (jumps of 1%)Coupon payment frequency (# of compoundings) from once a year (annual bond) to 365 times a yearTime to maturity from 1 year to 50 years (in jumps of 1 year) Yield to maturity from 0% to 50%Explain in words the relationship between price and each of the above parameters. Explain like a graduate student, not as a child. Part 2: Stock ValuationUse the CAPM formula to find the cost of common stock for the firm that you choose for Week 1 Discussion. Get the beta for your firm from Yahoo Finance. Use a market risk premium of 6. 5%Get the risk free rate from Yahoo Finance (under Bonds, look for the longest-maturity Treasury Bond yield). Calculate last year’s actual return for this firm using historical prices from Yahoo Finance. Choose your price from the Adj. Return column which adjusts the price for stock splits, dividends, and a whole bunch of things that otherwise cause you a lot of problems. Consider the year to be End of August 2013 to End of August 2014Annual historical return = (year-end price 2014 – price one year ago)/ price one year agoIn other words, calculate the percentage change in price during the last one year. Imagine for the sake of this assignment that the required rate of return a year ago was the same as the one you calculated today using CAPM. Compare your calculated historical return with the required rate of return you calculated using CAPM. Explain the difference. What would this difference indicate to the investors? What would they be tempted to do? Can this difference stay this way in the long-run?. chegg. com/#”>

Corporate Finance

Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term Borrowing Arrangement. Morton Mercado, the CFO of Kanton Company, carefully developed the estimates of the firm’s total funds requirements for the coming year. These are shown in the following table: MonthTotal FundsMonthTotal FundsJanuary$1,000,000July$6,000,000February$1,000,000August$5,000,000March$2,000,000September$5,000,000April$3,000,000October$4,000,000May$5,000,000November$2,000,000June$7,000,000December$1,000,000In addition, Morton expects short-term financing costs of about 10% and long-term financing costs of about 14% during that period. He developed the three possible financing strategies that follow: Strategy 1 – Aggressive: Finance seasonal needs with short-term finds and permanent needs with long-term funds. Strategy 2 – Conservative: Finance an amount equal to the peak need with long-term funds and use short-term funds only in an emergency. Strategy 3 – Tradeoff: Finance $3,000,000 with long-term funds and finance the remaining funds requirements with short-term funds. Using data on the firm’s total funds requirements, Morton estimated the average annual short-term and long-term financing requirements for each strategy in the coming year, as shown in the following table. AVERAGEANNUALFINANCINGType of FinancingStrategy 1 AggressiveStrategy 2 ConservativeStrategy 3 TradeoffShort-term$2,500,000$0$1,666,667Long-term$1,000,000$7,000,000$3,000,000To ensure that, along with spontaneous financing from accounts payable and accruals, adequate short-term financing will be available, Morton plans to establish an unsecured short-term borrowing arrangement with its local bank, Third National. The bank has offered either a line-of-credit agreement or a revolving credit agreement. Third National’s terms for a line of credit are an interest rate of 2. 50% above the prime rate, and the borrowing must be reduced to zero for a 30-day period during the year. On an equivalent revolving credit agreement, the interest rate would be 3% above prime with a commitment fee of 0. 50% on the average unused balance. Under both loans, a compensating balance equal to 20% of the amount borrowed would be required. The prime rate is currently 7%. Both the line-of-credit agreement and the revolving credit agreement would have borrowing limits of $1,000,000. For purposes of his analysis, Morton estimates that Kanton will borrow $600,000 on the average during the year, regardless of which financing strategy and loan arrangement it chooses. (Note: assume a 365-day year. )TO DO: a. Determine the total annual cost of each of the three possible financing strategies. b. Assuming that the firm expects its current assets to total $4 million throughout the year, determine the average amount of net working capital under each financing strategy. (Hint: Current liabilities equal average short-term financing. )c. Using the net working capital found in part b as a measure of risk, discuss the profitability-risk trade-off associated with each financing strategy. Which strategy would you recommend to Morton Mercado for Kanton Company? Why?d. Find the effective annual rate under: 1) the line-of-credit agreement and 2) the revolving credit agreement. (Hint: Find the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively have use of. )e. If the firm expects to borrow an average of $600,000, which borrowing arrangement would you recommend to Kanton? Why?

Corporate Finance

Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term Borrowing Arrangement. Morton Mercado, the CFO of Kanton Company, carefully developed the estimates of the firm’s total funds requirements for the coming year. These are shown in the following table: MonthTotal FundsMonthTotal FundsJanuary$1,000,000July$6,000,000February$1,000,000August$5,000,000March$2,000,000September$5,000,000April$3,000,000October$4,000,000May$5,000,000November$2,000,000June$7,000,000December$1,000,000In addition, Morton expects short-term financing costs of about 10% and long-term financing costs of about 14% during that period. He developed the three possible financing strategies that follow: Strategy 1 – Aggressive: Finance seasonal needs with short-term finds and permanent needs with long-term funds. Strategy 2 – Conservative: Finance an amount equal to the peak need with long-term funds and use short-term funds only in an emergency. Strategy 3 – Tradeoff: Finance $3,000,000 with long-term funds and finance the remaining funds requirements with short-term funds. Using data on the firm’s total funds requirements, Morton estimated the average annual short-term and long-term financing requirements for each strategy in the coming year, as shown in the following table. AVERAGEANNUALFINANCINGType of FinancingStrategy 1 AggressiveStrategy 2 ConservativeStrategy 3 TradeoffShort-term$2,500,000$0$1,666,667Long-term$1,000,000$7,000,000$3,000,000To ensure that, along with spontaneous financing from accounts payable and accruals, adequate short-term financing will be available, Morton plans to establish an unsecured short-term borrowing arrangement with its local bank, Third National. The bank has offered either a line-of-credit agreement or a revolving credit agreement. Third National’s terms for a line of credit are an interest rate of 2. 50% above the prime rate, and the borrowing must be reduced to zero for a 30-day period during the year. On an equivalent revolving credit agreement, the interest rate would be 3% above prime with a commitment fee of 0. 50% on the average unused balance. Under both loans, a compensating balance equal to 20% of the amount borrowed would be required. The prime rate is currently 7%. Both the line-of-credit agreement and the revolving credit agreement would have borrowing limits of $1,000,000. For purposes of his analysis, Morton estimates that Kanton will borrow $600,000 on the average during the year, regardless of which financing strategy and loan arrangement it chooses. (Note: assume a 365-day year. )TO DO: a. Determine the total annual cost of each of the three possible financing strategies. b. Assuming that the firm expects its current assets to total $4 million throughout the year, determine the average amount of net working capital under each financing strategy. (Hint: Current liabilities equal average short-term financing. )c. Using the net working capital found in part b as a measure of risk, discuss the profitability-risk trade-off associated with each financing strategy. Which strategy would you recommend to Morton Mercado for Kanton Company? Why?d. Find the effective annual rate under: 1) the line-of-credit agreement and 2) the revolving credit agreement. (Hint: Find the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively have use of. )e. If the firm expects to borrow an average of $600,000, which borrowing arrangement would you recommend to Kanton? Why?

Corporate Finance

FIN200 Assignment, T220141. List and briefly describe the three general areas of responsibility for a chief financial officer (CFO) of a selected non-financial company which is listed on Australian Stock Exchange (ASX). How those responsibilities can affect ultimate objective of the company. The name of company you chose should start with the first letter of your name, surname or middle name. (Maximum of 1000 words)2. Chill Mount Creamery manufactures a variety of Ice creams. The company is considering introducing a new product (Yugo cream). The company’s manager has been provided with the following information by their business analyst. ?The project has an anticipated economic life of 5 years. ?The Company plans to spend $1,300,000 on advertising campaign to boost sales. ?The Company’s interest expense each year will be $500,000. ? The Company is required to purchase a new machine to produce the new product. The machine’s initial cost is $5,500,000. The machine will be depreciated on a straight – line basis over 5 years. The Company anticipates that the machine will last for 10 years, the salvage value after 5 years is $500,000. ? Six months ago the Company also paid $300,000 to a firm to do research regarding new product. ?If the Company goes ahead with the new product, it will have an effect on the Company’s net operating capital. The forecasted net working capital will be $200,000 (at time zero)?The new product is expected to generate sales revenue of $1,500,000, 2,500,000, 3,500,000, 4500,000 and 5,500,000 in year 1, 2, 3, 4 and 5 respectively. Each year the operating cost (not including depreciation) expected to equal 30 percent of sales revenue. ? In addition the Company expects with introduction of new product, sale of other ice cream increase by $500,000 after taxes each year. ? The Company’s overall WACC is 7. 5 percent. However, the proposed project is riskier than the average project, the new project’s WACC is estimated to be 10 percent. ? The Company’s tax rate is 30 percent. ? What is the net present value, internal rate of return, payback period, discounted payback period, and profitability index of the proposed project. Based on your analysis should the project be accepted? Discuss.

Corporate Finance

Katbuddys Confectionaries produces large range of chocolates and the company is now considering diversifying its activities by investing in theme park business through the construction of a theme park. The theme park would have a mixture of family activities and thrills. ?Katbuddys has just spent £400,000 on market research into the theme park, and is encouraged by the findings. ?The theme park is expected to attract an average of 20,000 visitors per day for at least five years. ?The price of admission to the theme park is expected to be £25 per adult and £15 per child. 70% of visitors are forecast to be children. In addition to admission revenues, it is expected that the average visitor will spend £10 on food and drinks, (of which 40% is contribution, and £7 on gifts and souvenirs, (of which 45% is contribution). ?All costs and receipts (excluding maintenance and construction costs and the realisable value) are shown at current prices, the company expects all costs and receipts to rise by 5% per year from current on a compound bases. ?The theme park would cost a total of £500 million and could be constructed and working after 1 year of investment (I. e. revenue will start in year 2). Half of the £500 million would be payable immediately, and half in one year’s time. In addition workingcapital of £60 million will be required from the beginning of the project. ?The non-current asset has an after tax realisable value between £100 million and £200 million after five years of the project. ?Operation costs (excluding labour (please see below) are expected to be £17 million in the first year of operation, increasing by £5 million per year. ?Insurance costs per annum are £3 million, of which £2 million per year is due directly to the theme park project. ?Insurance and labour cost will be increased in line with the Consumer price i. e. 5% per annum compounded annually. ?The project would require 1000 employees with a cost of £35 million per annum (at current prices). The dual use of existing advertising campaigns chocolate theme park will save a £3 million per year in advertising expenses. ?Katbuddys has no previous experience of theme park management. However as part of the finance team, you have investigated the current risk and financial structure of its closest theme park competitor, Alton Limited. Details are summarised below. ALTON LIMITED, SUMMARISED BALANCE SHEET£m Non-current assets (net) 1,710 Current assets 630Less current liabilities (570) 1,770Financed by: £1 ordinary shares 500 Reserves 7001200 Medium and long term debt 570 1,770After carrying out preliminary search for financing and investigating the industry further, your team has been able to gather the following information: a) Katbuddys can procure a loan of £400 million loan at 8% fixed rate to provide the necessary finance for the theme park. b) £300 million of the investment will attract 25% per year capital allowances on a reducing balance basis while the remainder will not, and tax is paid in the year it is incurred. c) Corporate tax is at a rate of 35%. d) The expected market return on equity is 12% and the risk free rate3. 5%. e) Katbuddys current weighted average cost of capital is 9%. f) Katbuddys market weighted gearing if the theme park project isundertaken is estimated to be 65% equity and 35% debt. g) Katbuddys equity beta is 0. 80. h) The current share price of Katbuddys is 200 pence, and of Allton 400pence. i) Alton’smedium and long term debt comprises long term bonds witha par value of £100 and current market price of £93. j) Alton’sequity beta is 1. 50. You are required to prepare a report analysing whether or not Katbuddys should undertake the investment in the theme park. Your report should cover the following areas which have been indicated in your firm’sinvestment manual: Net present value and any relevant advice to management on salient issues to be considered. A suggestion of financial and non-financial issues that the management of Katbuddys need to be aware of and suggestions onhow to manage these issues. 3. You have decided to take an initiative and include in your report a brief outline of the use of real options in project appraisal for management and as such will prepare an outline on the following options and how they may be applicable to the Katbuddys theme park project under appraisal• Abandonment • Expansion• Flexibility• Selling• And any other relevant option

Corporate Finance

Felicia & Freds executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided. Requirements:1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structureA 35% tax rateThe cost of debt is now 10% due to an additional default risk premiumThe beta of the company is 1.3The risk free rate is 2%The return on the market is 12%Use the CAPM for calculation of the cost of equity.2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystalsProject and equipment life is 5 yearsRevenues are expected to increase $25 million annuallyGross margin percentage is 40% (not including depreciation)Depreciation is computed at the straight-line rate for tax purposesSelling, general, and administrative expenses are 5% of salesTax rate is 35%Compute net present value and internal rate of return of the project.3. Although crystal jewelry is extremely popular at the moment, Felicia & Fred are concerned about the product life cycle and would like to explore an abandonment option. Management asks for an additional scenario to be developed, reflecting a three- rather than a five-year life cycle for this project, including cash flows and asset life. Compute the net present value and internal rate of return given this change in parameter.You may use Excel to complete this project. The text has a number of resources that provide examples of spreadsheet solutions for this purpose. Model your responses according to these examples. Additionally, provide a 250?500 word executive summary on the results of the decision rule given these two scenarios with a five- and three-year project life, and revised WACC. Advise Felicia & Fred specifically regarding the abandonment option versus the initial five year project.Please include references

Corporate Finance

FIN200 Assignment, T220141.List and briefly describe the three general areas of responsibility for a chief financial officer (CFO) of a selected non-financial company which is listed on Australian Stock Exchange (ASX). How those responsibilities can affect ultimate objective of the company.The name of company you chose should start with the first letter of your name, surname or middle name.(Maximum of 1000 words)2.Chill Mount Creamery manufactures a variety of Ice creams. The company is considering introducing a new product (Yugo cream). The companys manager has been provided with the following information by their business analyst.?The project has an anticipated economic life of 5 years.?The Company plans to spend $1,300,000 on advertising campaign to boost sales.?The Companys interest expense each year will be $500,000.? The Company is required to purchase a new machine to produce the new product. The machines initial cost is $5,500,000. The machine will be depreciated on a straight ? line basis over 5 years. The Company anticipates that the machine will last for 10 years; the salvage value after 5 years is $500,000.? Six months ago the Company also paid $300,000 to a firm to do research regarding new product.?If the Company goes ahead with the new product, it will have an effect on the Companys net operating capital. The forecasted net working capital will be $200,000 (at time zero)?The new product is expected to generate sales revenue of $1,500,000, 2,500,000, 3,500,000, 4500,000 and 5,500,000 in year 1, 2, 3, 4 and 5 respectively. Each year the operating cost (not including depreciation) expected to equal 30 percent of sales revenue.? In addition the Company expects with introduction of new product, sale of other ice cream increase by $500,000 after taxes each year.? The Companys overall WACC is 7.5 percent. However, the proposed project is riskier than the average project; the new projects WACC is estimated to be 10 percent.? The Companys tax rate is 30 percent.? What is the net present value, internal rate of return, payback period, discounted payback period, and profitability index of the proposed project. Based on your analysis should the project be accepted? Discuss.

Corporate Finance

Felicia & Fred’s executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided. Requirements:1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structureA 35% tax rateThe cost of debt is now 10% due to an additional default risk premiumThe beta of the company is 1.3The risk free rate is 2%The return on the market is 12%Use the CAPM for calculation of the cost of equity.2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystalsProject and equipment life is 5 yearsRevenues are expected to increase $25 million annuallyGross margin percentage is 40% (not including depreciation)Depreciation is computed at the straight-line rate for tax purposesSelling, general, and administrative expenses are 5% of salesTax rate is 35%Compute net present value and internal rate of return of the project.3. Although crystal jewelry is extremely popular at the moment, Felicia & Fred are concerned about the product life cycle and would like to explore an abandonment option. Management asks for an additional scenario to be developed, reflecting a three- rather than a five-year life cycle for this project, including cash flows and asset life. Compute the net present value and internal rate of return given this change in parameter.You may use Excel to complete this project. The text has a number of resources that provide examples of spreadsheet solutions for this purpose. Model your responses according to these examples. Additionally, provide a 250–500 word executive summary on the results of the decision rule given these two scenarios with a five- and three-year project life, and revised WACC. Advise Felicia & Fred specifically regarding the abandonment option versus the initial five year project.Please include references

Corporate finance

FIN200 Assignment, T220141.List and briefly describe the three general areas of responsibility for a chief financial officer (CFO) of a selected non-financial company which is listed on Australian Stock Exchange (ASX). How those responsibilities can affect ultimate objective of the company.The name of company you chose should start with the first letter of your name, surname or middle name.(Maximum of 1000 words)2.Chill Mount Creamery manufactures a variety of Ice creams. The company is considering introducing a new product (Yugo cream). The company’s manager has been provided with the following information by their business analyst.?The project has an anticipated economic life of 5 years.?The Company plans to spend $1,300,000 on advertising campaign to boost sales.?The Company’s interest expense each year will be $500,000.? The Company is required to purchase a new machine to produce the new product. The machine’s initial cost is $5,500,000. The machine will be depreciated on a straight – line basis over 5 years. The Company anticipates that the machine will last for 10 years; the salvage value after 5 years is $500,000.? Six months ago the Company also paid $300,000 to a firm to do research regarding new product.?If the Company goes ahead with the new product, it will have an effect on the Company’s net operating capital. The forecasted net working capital will be $200,000 (at time zero)?The new product is expected to generate sales revenue of $1,500,000, 2,500,000, 3,500,000, 4500,000 and 5,500,000 in year 1, 2, 3, 4 and 5 respectively. Each year the operating cost (not including depreciation) expected to equal 30 percent of sales revenue.? In addition the Company expects with introduction of new product, sale of other ice cream increase by $500,000 after taxes each year.? The Company’s overall WACC is 7.5 percent. However, the proposed project is riskier than the average project; the new project’s WACC is estimated to be 10 percent.? The Company’s tax rate is 30 percent.? What is the net present value, internal rate of return, payback period, discounted payback period, and profitability index of the proposed project. Based on your analysis should the project be accepted? Discuss.

CORPORATE FINANCE

I need this back in 3 hours, please do not shake hands if you cannot deliver. Please read the questions carefully and be sure you can solve them before you offer to help. Please let your calculations be clear and neat.

PART1

1.State the most appropriate objective of the firm and justify your answer.

2.Precisely define the intrinsic value of a security according to the lecture materials, and

compare the intrinsic value analysis to the NPV rule in investment decision making.

3.Discuss precisely the key difference between systematic risk and unsystematic risk. RecentlyPfizer terminated its merger proposal with Allergan. State the nature of the risk associated with Pfizer’s decision and explain precisely why risk averse investors would or would not be fully compensated for taking this type of risk given its nature.

PART2

1. Lee Inc. purchases a $300,000 digital color printer, which will be fully depreciated according tothe straight-line method over its 5-year economic life, for a 4-year publishing project. The printer will be sold for $75,000 at the termination of the project. The variable costs are $30 per copy of the book, and annual fixed production costs are $80,000. An annual sales volume of 100,000 copies of the book is expected over the life of the project. The marginal tax rate is 35%, the inflation rate is 2%, and the real discount rate is 12%. This project requires an initial net working capital requirement of $50,000 of which 85% will be recovered at the termination of the project. Compute, in nominal term, (a) the annual break-even operating cash flow, and (b) use your answer for (a) to compute the financial break-even price of the book.

Corporate Finance

(a) Market reacts positively to dividend increases and negatively dividend decreases. Three

explanations are provided for this notion.

  1. Information content (signalling) hypothesis,
  2. Free cash flow hypothesis

iii. Clientele effect

Discuss these hypotheses related to dividend policy.

(30 marks)

(b) Briefly discuss five reasons for companies to choose repurchases rather dividends under a

classical tax system.

(30 marks)

(c) Identify (interim or final) dividend change using “dividend history from the DatAnalysis

Premium Database” for the company allocated to you for the assignment 2.

A dividend change is defined as the relative difference from the previous year’s level.

  • Interim dividend change = interim dividend per share in year t minus interim dividend per share in

year t-1.

  • Final dividend change = Final dividend per share in year t minus Final dividend per share in year

t-1.

Step 2

Announcement date for the dividend change can be identified from “ASX announcements from the

DatAnalysis Premium Database”.

  • Announcement date for interim dividend change: use the announcement date of half yearly

report

  • Announcement date for final dividend change: use the announcement date of preliminary final

report

  • Select “ASX announcements”
  • select “Search option – Click here to refine your search by ASX Announcement Type

and/or text search”

  • for Announcement Type: select periodic reports
  • for Sub-Announcement Type: select preliminary – final statement for final dividend; half

yearly report interim dividend change

  • specify the date rage

Step 3

(i)  Calculate three day return earned by your firm for the period from the day before the

announcement continuing through the day after the announcement date; and two day return earned

by your firm for the period from the day of the announcement to the day after the announcement

date

(ii)  Calculate the market return for the corresponding periods in (i).

(iii) Calculate the excess: (i) – (ii)

Step 4

Check the results for any other two students in your tutorial class and report that result in your

assignment 2

Step 5

Discuss the relevant theory with the findings in Step 3 and Step 4.

(40 marks)

(30 + 30 + 40 = 100 marks)