# Finance Problems

1. Determine the size of the M1 money supply using the followinginformation. Currency plus traveler s checks \$25 millionNegotiable CDs \$10 millionDemand deposits \$13 millionOther checkable deposits \$12 million2. Following are components of the M1 money supply at the end oflast year. What will be the size of the M1 money supply at the end ofnext year if currency grows by 10 percent, demand deposits grow by5 percent, other checkable deposits grow by 8 percent, and theamount of traveler s checks stays the same?Currency \$700 billionDemand deposits \$300 billionOther checkable deposits \$300 billionTraveler s checks \$10 billion3. Assume that a country estimates its M1 money supply at \$20million. A broader measure of the money supply, M2, is \$50 million. The country s gross domestic product is \$100 million. Production orreal output for the country is 500,000 units or products. a. Determine the velocity of money based on the M1 moneysupply. b. Determine the velocity of money based on the M2 moneysupply. c. Determine the average price for the real output. 4. The One Product economy, which produces and sells onlypersonal computers (PCs), expects that it can sell 500 more, or 12,500PCs, next year. Nominal GDP was \$20 million this year, and themoney supply was \$7 million. The central bank for the One Producteconomy plans to increase the money supply by 10 percent next year. a. What was the average selling price for the personal computersthis year?b. What is the expected average selling price next year forpersonal computers if the velocity of money remains at thisyear s turnover rate? What percentage change in price level isexpected to occur?c. If the objective is to keep the price level the same next year(i. e. , no inflation), what percentage increase in the moneysupply should the central bank plan for?d. How would your answer in (c) change if the velocity of moneyis expected to be three times next year? What is it now?5. 1. The following three one-year discount loans are available toyou:Loan A: \$120,000 at a 7 percent discount rateLoan B: \$110,000 at a 6 percent discount rateLoan C: \$130,000 at a 6. 5 percent discount ratea. Determine the dollar amount of interest you would pay oneach loan and indicate the amount of net proceeds each loanwould provide. Which loan would provide you with the mostupfront money when the loan takes place?b. Calculate the percent interest rate or effective cost of eachloan. Which one has the lowest cost?Following are selected balance sheet accounts for Third State Bank:vault cash \$2 million; U. S. government securities \$5 million;demand deposits \$13 million; nontransactional accounts \$20million; cash items in process of collection \$4 million; loans to individuals\$7 million; loans secured by real estate \$9 million; federalfunds purchased \$4 million; and bank premises \$11 million. a. From these accounts, select only the asset accounts andcalculate the bank s total assets. b. Calculate the total liabilities for Third State Bank. c. Based on the totals for assets and liabilities, determine theamount in the owners capital account. 10. Let s assume that you have been asked to calculate risk-basedcapital ratios for a bank with the following accounts:Cash \$5 millionGovernment securities \$7 millionMortgage loans \$30 millionOther loans \$50 millionFixed assets \$10 millionIntangible assets \$4 millionLoan-loss reserves \$5 millionOwners equity \$5 millionTrust-preferred securities \$3 millionCash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms ofriskiness. a. Calculate the equity capital ratio. b. Calculate the Tier 1 Ratio using risk-adjusted assets. c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio usingrisk-adjusted assets11. Challenge Problem This problem focuses on bank capitalmanagement and various capital ratio measures. Following arerecent balance sheet accounts for Prime First National Bank. Cash assets \$ 17 million Demand deposits \$50 millionLoans secured by Time & savingsreal estate 40 deposits 66Commercial loans 45 Federal fundspurchased 15Government Trust-preferredsecurities owned 16 securities 2Goodwill 5Bank fixed assets 15 Owners capital 5Total assets \$138 million Total liabilities \$138 millionand owners capitalAll amounts are in millions of dollars. Note: The bank has loan-loss reserves of \$10 million. The real estateand commercial loans shown on the balance sheet are net of theloan-loss reserves. a. Calculate the equity capital ratio. How could the bank increaseits equity capital ratio?b. Risk-adjusted assets are estimated using the following weightingsprocess: cash and government securities . 00; real estateloans . 50; commercial and other loans 1. 00. Calculate the risk-adjusted assets amount for the bank. c. Calculate the Tier 1 Ratio based on the information providedand the risk-adjusted assets estimate from Part b. d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based onthe information provided and the risk-adjusted assets estimatefrom Part b. e. What actions could the bank management team take toimprove the bank s Tier 1 and Total Capital ratios?

# Finance Problems

Chapter: 9 Problem: 18 INPUTS USED IN THE MODEL P0 \$50.00 Net Ppf \$30.00 Dpf \$3.50 D0 \$2.35 g 7% B-T rd 10% Skye’s beta 0.95 Market risk premium, RPM 6.5% Risk free rate, rRF 6.0% Target capital structurefrom debt 40% Target capital structure from preferred stock 5% Target capital structure from common stock 55% Tax rate 35% Flotation cost for common 10% a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferredstock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the CAPM method to find the cost of equity. Cost of debt: B-T rd × (1 – T) = A-T rd Cost of preferred stock (including flotation costs): Dpf /Net Ppf = rpf Cost of common equity, DCF (ignoring flotation costs): D1 / P0 + g = rs Cost of common equity, CAPM: rRF + b × RPM = rs = IMPORTANT NOTE: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME COST OF EQUITY. THAT OCCURRED BECAUSE WEUSED A BETA IN THE PROBLEM THAT FORCED THE SAME RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS. b. Calculate the cost of new stock using the DCF model. D0 × (1 + g) / P0 × (1 – F) + g = re c. What is the cost of new common stockbased on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method and add that differential to the CAPM value for rs.) rs + Differential = re + = Again, we would not normally find that the CAPM and DCF methods yield identicalresults. d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company’s WACC? wd 40.0% wpf 5.0% ws 55.0% 100.0% wd × A-T rd + wpf × rpf + ws × rs = WACC = e. Suppose Gao is evaluating three projectswith the following characteristics: (1) Each project has a cost of \$1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the betaestimated for the project. All equity will come from reinvested earnings. (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%. (3) Equity invested in Project B would have a beta of 1.0. The project has an expectedreturn of 10.0%. (4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%. Analyze the company’s situation and explain why each project should be accepted or rejected. Beta rs rps rd(1 – T) WACC Expected returnon project Accept? Project A 0.5 Project B 1.0 Project C 2.0

# Finance Problems

Financial Pre-Test ProblemsI am looking for the way to solve these by hand and in Excel, and also the proper answer: 1. Suppose that the following cash flows are received: 0 = -\$500, 1 = \$200, 2 = \$200, 3 = \$200The Internal Rate of Return on the cash flows (rounded to the nearest percent) is8%, 9%, 10%, 11%, or 12%2. A 10-year bond paying 8% annual coupons pays \$1000 at maturity. If the required rate of return on the bond is 7%, then today the bond will sell (rounded to the nearest cent) for\$1000. 00\$1210. 45\$987. 48\$1070. 243. The annual revenue-growth rates for a new tech star tup during its first 4 years of operations were as follows: 1 = 50, 2 = 50, 3 = -50, 4 = -50Rounded to the nearest tenth of one percent, the start up’s 4-year Compound Annual Growth Rate was-13. 4% or -10. 5%4. Last year, a barber shop generated \$100,000 in profit. Assume that the shop’s profits grow at 5% per year and that cash flows are discounted at 10% per year. If profits are received at the end of each year, what is the present value of all the shop’s future profits?\$2,100,000\$3,000,000

# Finance Problems

Division Asset Beta Next Period’s Expected Free Cash Flow (\$mm)Expected Growth Rate Oil Exploration 1.44504.0%Oil Refining 1.15252.5%Gas and Convenience Stores 0.86003.0%The risk-free rate of interest is 3% and the market risk premium is 5%.Which is the cost of capital for the oil refining division closest to?A) 6.5%B) 7.0%C) 8.5%D) 10.0%with the calculation p.Number 2 question You expect CCM Corporation to generate the following free cash flows over the next 5 yearsYear12345FCF (\$ millions)2528323740 If CCM has \$150 million of debt and 12 million shares of stock outstanding, then which is the share price for CCM closest to?A) \$49.50B) \$11.25C) \$20.50D) \$22.75 Number 3 question Which is the variance of the returns on the Index from 2000 to 2009 closest to?Year EndIndexRealized Return(R – R)(R – R)2200023.6.78%0.0218448200124.7.88%0.0252174200230.5%21.68%0.047002220039.0%0.18%3.24E-062004-2.0%-10.82%0.01170722005-17.3%-26.12%0.06822542006-24.3%-33.12%0.1096934200732.2%23.38%0.054662420084.4%-4.42%0.001953620097.4%-1.42%0.0002016A) 0.0450B) 0.3400C) 0.1935D) 0.0375(TCO A) Which of the following statements is false? (Points : 5)The WACC can be used throughout the firm as the company-wide cost of capital for new investments that are of comparable risk to the rest of the firm and that will not alter the firms debt-equity ratio.A disadvantage of the WACC method is that you need to know how the firm’s leverage policy is implemented to make the capital budgeting decision.The intuition for the WACC method is that the firm’s weighted average cost of capital represents the average return the firm must pay to its investors (both debt and equity holders) on an after-tax basis.To be profitable, a project should generate an expected return of at least the firm’s weighted average cost of capital.number 2…. (TCO F) Which of the following statements is correct? (Points : 5)One advantage of the NPV over the IRR is that NPV takes account of cash flows over a projects full life, whereas IRR does not.One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a projects full life, whereas MIRR does not.One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas the MIRR is based on undiscounted cash flows.Because cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.

# Finance Problems

Problem 2:Quantco, a domestic corporation, is an engineering consulting firm that has its main offices in San Diego, California. Because Quantco does a considerable amount of business in China, it has a branch office in Beijing. During the current year, Quantco generates a total pre-tax profit of \$100 million (all from active business operations), including \$80 million of profits from its U.S. operations and \$20 million of profits from its Chinese operations. Assume the U.S. tax rate is 35% and the Chinese rate is 40%.Compute Quantco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits (if any).Now assume that Quantco has a second foreign branch office in Singapore which generates \$10 million of profits (all from active business operations), on which Quantco pays Singapore taxes. Assume the Singapore tax rate is 25%. Recompute Quantco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits. What is the name of the phenomenon by which the Singapore profits resulted in the elimination of the excess credits on the Chinese profits?Problem 3:Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market.In addition, Trike1 owns 100% of Trike2, a U.K. corporation that market’s Trike1’s products in the United Kingdom. At the end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows:Trike 1 Trike2Post – 1986 undistributed earnings: \$90 million \$54 millionPost-1986 foreign income taxes: \$36 million \$27 millionDuring the current year, Trike2 distributed a \$10 million dividend to Trike1, and Trike1 distributed a \$10 million divident to Trikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Trike1 was exempt from Italian taxation.Compute Trikeco’s deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the U.S. tax rate is 35%.Problem 4:Shedco, a domestic corporation, operates in Asia through Shed1, a wholly owned Hong Kong subsidary. At the end of the current year, Shed1’s pools of post-1986 undistributed earnings and post-1986 foreign income taxes are as follows:Post-1986 undistributed earnings Post-1986 income taxesGeneral limitation income \$24 million \$18 millionPassive income \$12 million \$3 millionTotals \$36 million \$21 millionDuring the current year, Shed1 distributed a \$6 million dividend to Shedco. Compute Shedcos deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Shedco received from Shed1. Assume the U.S. tax rate is 35%.PROBLEM 5Tenco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Tenco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had \$15 million of foreign base company sales income, paid \$3 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profi ts, paid no foreign income taxes, and distributed a \$12 million dividend.Assuming the U.S. corporate tax rate is 35%, what are the U.S. tax consequences of Tenys Year 1 and Year 2 activities?

# Finance Problems

Exercise 20-6Schumann Shoe Manufacturer is considering whether or not to refund a \$70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing \$4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase. A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to \$5 million. Schumann’s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.a. Perform a complete bond refunding analysis. What is the bond refunding’s NPV? b. At what interest rate on the new debt is the NPV of the refunding no longer positive?Exercise 18-6 As part of its overall plant modernization and cost reduction program, Western Fabrics’ management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%.The loom has an invoice price of \$250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of \$20,000 per year paid at the end of each year. The loom falls in the MACRS 5-year class, and Western’s marginal federal-plus-state tax rate is 40%. Aubey Automation Inc., maker of the loom, has offered to lease the loom to Westen for \$70,000 upon delivery and installation (at t=0) plus 4 additional annual lease payments of \$70,000 to be made at the ends of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of eight years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of \$42,500. Tanner-Woods plans to build and entirely new plant in 4 years, so it has no interest in either leasing or owning the proposed loom for more than that period. a. Should the loom be leased or purchased? b. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pre-tax discount rate is 15 percent. What would be the effect of a salvage value risk adjustment on the decision? c. Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying? Exercise 15-12Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure?

# Finance Problems

Question 11. You are given the following information about ABC Company:Interest expenses = \$17,758Times Interest Earned Ratio = 1. 6 timesTax Rate = 22. 8%What is the net income?Question 21. Suppose an investment offers to double your money in 16 years. What annual rate of return are you being offered if interest is compounded semi-annually?Question 31. ABC’s current assets comprise of cash, accounts receivables, and inventory. ABC has \$10,342 in cash, \$8,947 in accounts receivables, and \$5,725 in inventory. If the current ratio is 1. 7 times, compute the quick ratio. Question 41. ABC Company earned \$438,069 in taxable income for the year. How much tax does the company owe on this income?Question 51. ABC Company has \$556,473 of operating income after all costs but before \$42,383 of interest income, \$52,182 of dividend income, and taxes. What is the tax expense?Question 61. ABC Company has total assets of \$789,024. There are 52,104 shares outstanding with a market value of \$27 per share. If the net profit margin is 9. 4% and the total asset turnover is 2. 5, what is the price/earnings (P/E) ratio?Question 71. What is the future value of \$75,425 invested for 9 years at 14% compounded semi-annually?Question 81. ABC Company has a debt ratio of 0. 2. What is the debt-equity (D/E) ratio?Question 91. Suppose you invest \$25,195. If the interest rate is 4% compounded quarterly for the first 10 years and 13% compounded monthly for the next 5 years, what is the future value after 15 years?Question 101. ABC Company has net working capital of \$1,956, current assets of \$4,354, long-term debt of \$2,963, and equity of \$4,898. What is the amount of net fixed assets?Question 111. A project has the following cash flows. What is the internal rate of return?Year 0 1 2 3Cash flow -\$121,000 68,150 \$42,200 \$39,10014. 82%12. 71%14. 39%13. 85%13. 47%1 pointsQuestion 121. How many years will it take to triple your money at 6% compounded monthly?

# Finance Problems

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you. 1. The company purchased equipment on January 2, 2009, for \$165,000. At that time, the equipment had an estimated useful life of 7 years with a \$25,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a \$15,000 salvage value. 2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost \$625,000. It had a useful life of 10 years and a salvage value of \$50,000. The following computations present depreciation on both bases for 2010 and 2011. 2011 2010 Straight-line \$ 57,500 \$ 57,500Declining-balance \$ 92,000 \$ 115,0003. The company purchased a machine on July 1, 2010, at a cost of \$450,000. The machine has a salvage value of \$25,000 and a useful life of 10 years. The company’s bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. Ignore Tax effect. 4. The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2011 \$ 5,400December 31, 2012 \$ 4,6005. In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount. December 31, 2010 Understated \$ 32,000December 31, 2011 Understated \$ 51,000December 31, 2012 Overstated \$ 9,5006. At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of \$250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was \$62500. The company has already recorded 2012 depreciation expense of \$46875 using the double-declining-balance method. 7. Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been recorded using the new method. Prior year tax effects must be considered. The following information is available. Pretax Income Percentage-of-Completion Completed-ContractPrior to 2012 \$320,000 \$180,0002012 \$140,000 \$120,000Required: Prepare the journal entries necessary at December 31, 2012, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored.

# Finance Problems

P7-1. A very small country s gross domestic product is \$12 million. a. If government expenditures amount to \$7. 5 million andgross private domestic investment is \$5. 5 million, whatwould be the amount of net exports of goods and services?P7-2. How would your answer change in Problem 1 if the gross domesticproduct had been \$14 million?P8-1. Assume investors expect a 2. 0 percent real rate of return over thenext year. If inflation is expected to be 0. 5 percent, what is theexpected nominal interest rate for a one-year U. S. Treasury security?P8-4. A thirty-year U. S. Treasury bond has a 4. 0 percent interest rate. Incontrast, a ten-year Treasury bond has an interest rate of 3. 7 percent. If inflation is expected to average 1. 5 percentage points over both thenext ten years and thirty years, determine the maturity risk premiumfor the thirty-year bond over the ten-year bond. P8-6. You are considering an investment in a one-year government debtsecurity with a yield of 5 percent or a highly liquid corporate debtsecurity with a yield of 6. 5 percent. The expected inflation rate forthe next year is expected to be 2. 5 percent. a. What would be your real rate earned on either of the twoinvestments?b. What would be the default risk premium on the corporatedebt security?P8-12. A Treasury note with a maturity of four years carries a nominalrate of interest of 10 percent. In contrast, an eight-year Treasurybond has a yield of 8 percent. a. If inflation is expected to average 7 percent over the first fouryears, what is the expected real rate of interest?b. If the inflation rate is expected to be 5 percent for the firstyear, calculate the average annual rate of inflation for years2 through 4. c. If the maturity risk premium is expected to be zero betweenthe two Treasury securities, what will be the average annualinflation rate expected over years 5 through 8?

# Finance Problems

5-2Wilson Wonder s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 per value, and the coupon interest rate is 10%. The bonds sell at a price of \$850. What is their yield to maturity?6-7Suppose rRF = 5%, rM = 10%, and rA = 12%a. Calculate Stock A s beta. b. If Stock A s beta were 2. 0, then what would be A s new required rate of return?6-11You have a \$2 million portfolio consisting of a \$100,000 investment in each of 20 different stocks. The portfolio has a beta1. 1. You are considering selling \$100,000 worth of one stock with beta of 0. 9 and using the proceeds to purchase another stock with a beta of 1. 4. What will the portfolio s new beta be after these transactions?

# Finance Problems

Resolved Question:1. the target capital structure for QM industries is 45% common stock, 12% preferred stock, and 43% debt. If the cost of common equity for the firm is 18. 1%, the cost of preferred stock is 9. 8%, the before-tax cost of debt is 7. 9% and the firms tax rate is 35%, what is QM’S weighted average cost of capital?QM’S WACC IS _________%2. Crypton electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of \$1000 par value, 6. 5% bonds that mature in 15 years and pay annual interest will sell for \$972. Common stock of the firm is currently selling for \$29. 05 per share and the firm expects to pay a \$2. 34 dividend next year. dividends have grown at the rate of 4. 6% per year and are expected to continue to do so for the foreseeable future. What is cryptons cost of capital where the firms tax rate is 30%Cryptons cost of capital is ___%3. the target capital structure for jowers manufacturing is 55% common stock 16% preferred stock, and 29% debt. if the cost of common equity for the firm is 19. 2% the cost of preferred stock is 12. 3% and the beforetax cost of debt is 9. 5% what is jowers cost of capital? the firms tax rate is 34%Jowers wacc is ______%4. . As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm s capital structure as follows:Bonds \$3,500,000Preferred stock \$2,200,000Common stock \$6,500,000To finance the purchase, ranch manufacturing will sell 10-year bonds paying 7. 2% per year at the market price of \$1,028. Preferred stock paying a \$2. 02 dividend can be sold for \$25. 45. Common stock for ranch manufacturing is currently selling for \$55. 35 per share and the firm paid \$2. 91 dividend last year. Dividends are expected to continue growing at a rate of 45. 4% per year into the indefinite future. if the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchase?Ranch manufacturing s WACC is ___%5. Abe forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located In dallas, Houston, and san Antonio. To finance the new venture two plans have been proposed:-plan a is an all common equity structure in which \$2. 4 million dollars would be raised by selling 80,000 shares of common stock- plan b would involve insuring \$1. 1 million dollars in long term bonds with an effective interest rate of 11. 7% plus \$1. 3 million would be raised by selling 40,000 shares of common stock. The debt funds raised under plan b have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firms capital structure. Abe and his partners plan to use a 40% tax rate in their analysis and they have hired you on a consulting basis to do the following:a. find the EBIT indifference level associated with the two financing plans. b. prepare a pro forma income statement for the EBIT level solved for in part a. that shows the EPS will be the same regardless whether plan a or b is chosen. 6. . three recent graduates of the computer science program at the university of Tennessee are forming a company that will write and distribute new application software for the Iphone. Initially, the corportation will operate in the southern region of Tennessee, Georgia, north Carolina, and south Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:- the first (plan a) is an all common equity capital structure. \$2. 2 million dollars would be raised by selling common stock at \$20 per common share- plan b would involve the use of financial leverage. \$1. 4 million dollars would be raised by selling bonds with an effective interest rate of 10. 7% (per annum), and the remaining \$0. 8 million would be raised by selling common stock at the \$20 per share. The use of financial leverage is considered to be a permanent part of the firm s capitalization, so no fixed maturity date is needed for the analysis. A 34% tax rate is deemed appropriate for the analysis. a. find the EBIT indifference level associated with two financing plans. b. a detailed financial analysis of the firms prospects suggests that the long term EBIT will be above \$302,000 annually. Taking this into consideration, which plan will generate the higher eps?

# Finance problems

FIN/370 week 2

Cash Flow Problem Sets

Complete the following problem sets from Chapter 5 in Microsoft® Excel®:

5-1
5-3
5-5
5-7
5-12
5-15
5-39 (Calculate monthly payment only)

· 5-1 FutureValue Compute the future value in year 9 of a \$2,000 deposit in year 1 and another \$1,500 deposit at the end of year 3 using a 10 percent interest rate.

· 5-3 Future Value of an Annuity What is the future value of a \$900 annuity payment over five years if interest rates are 8 percent?

· 5-5 Present Value Compute the present value of a \$2,000 deposit in year 1 and another \$1,500 deposit at the end of year 3 if interest rates are 10 percent.

· 5-7 Present Value of an Annuity What’s the present value of a \$900 annuity payment over five

· 5-12 Present Value of an Annuity Due If the present value of an ordinary, 6-year annuity is \$8,500 and interest rates are 9.5 percent, what’s the present value of the same annuity due?

· 5-15 Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What’s the loan’s effective annual rate (EAR)?

· Loan Payments You wish to buy a \$25,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a deci

# finance problems

Question

Problem1. Using present value techniques to evaluate alternative investment opportunities.
Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Fast recently acquired approximately \$6 million of cash capital from its owners, and its president. Don Keenon, is trying to identify the most profitable way to invest these funds.
Clarence Roy, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of \$720,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by \$280,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of \$100,000. Operating the vans will require additional working capital of \$40,000, which will be recovered at the end of the fourth year.
In contrast, Patricia Lipa, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings with reductions in cash outflows as the following.
Year 1 Year 2 Year 3 Year 4
\$160,000 \$320,000 \$400,000 \$440,000
The large trucks are expected to cost \$800,000 and to have a four-year useful life and a \$80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to \$16,000. Fast Delivery’s management has established a 16 percent desired rate of return.
Required
a. Determine the net present value of the two investment alternatives.
b. Calculate the present value index for each alternative.
c. Indicate which investment alternative you would recommend. Explain your choice.