# 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

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

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

• 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”

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)