Financial Analysis: Exploring Investment Strategies and Capital Structure

Question 1

 

MoviePlex is planning to raise a total of $5,000,000 with a bond issue.  Each of the bonds has a face (par) value of $1,000 and coupon rate of 4%.  The company's applicable tax rate is 21%.  

a) What is the annual coupon payment, per bond, that investors expect to receive? 

b) What is the total after-tax annual interest expense to MoviePlex? 

 

Question 2

 

An investor is buying a bond that pays semi-annual interest.  The par value is $900 and the coupon rate is 6%.  The investor plans to hold the bond to its maturity, which is 5 years from now.  If her typical required rate of return is 7%, what is the most the investor should pay for the bond?  Use a Time Value of Money function for full credit. (round to nearest cent) 

 

Question 3

 

A preferred stock has a par value of $105 and pays an annual dividend of 3% of par.  If similar investments have an annual rate of return of 5%, what is the current value of this preferred stock. (round to nearest cent) 

 

Question 4

 

Last year A1 Bank paid an annual dividend of $7 per share. The bank expects the growth of its dividends to be stable at 2% per year going forward. 

a) If investors require an 8% return, what is the current value of A1 Bank's stock? (round to nearest cent) 

b) If the stock currently trades at $124.55 per share, what is the dividend growth rate investors expect? (round to nearest percent)  Hint: When the constant-growth formula is solved for the growth variable, it becomes:  g = -D/P + r 

 

Question 5

 

A team of analysts is using a two-stage variable growth model to estimate the value of ABCM's common stock. The most recent annual dividend paid by ABCM was $4 per share. The analysts expect dividends to increase 7% per year for the next 3 years and then drop to 3% starting in year 4 and remain at that rate for the foreseable future. The required rate of return used for the analysis is 8% 

a) What are the expected dividends for the next 4 years? 

b) What is the value of the stock attributable to the first 3 years of dividends? (use NPV function) 

c) What is the value of the stock at the end of year 3? (use constant-growth model) 

Question 2

d) What is the value of the stock attributable to years 4 and beyond? (use pv function, where answer to part C is the fv) 

e) What is the total value of ABCM stock? 

 

Question 6

 

A food processing company is considering replacing essential machinery.  Cost and relevant cash flow details are provided in the table at the right.  The company requires an 11% return on its capital. 

a) What is the present value of the yearly cash flows?  Use a Time Value of Money function for full credit. (round to nearest dollar) 

b) What is the net present value of the project? (round to nearest dollar) 

c) What is the internal rate of return of the project?  Use a Time Value of Money function for full credit. (round to two decimal places) 

 

Question 7

 

Similar projects, Eta and Zeta, are being considered using the payback method. Each has an initial cost of $100,000.  Annual cash flows for each project are provided in the table at the right. 

a) What is the pay back period in years for Eta? (round to two decimal places) 

b) What is the pay back period in years for Zeta?  Determine the cumulative cash flows for each year in the column next to the table (round to two decimal places) 

 

Question 8

 

Thomas manufacturing is capitalized with long-term debt, preferred stock and common stock.  The amount and cost of each capital source is in the table at the right.  The cost of debt is the after-tax cost.  What is the firm's weighted average cost of capital? Show the 'weight' calculation for each capital source in the final formula or via separate formulas next to the data table. (round to two decimal places) 

 

Question 9

 

A small manufacturer is considering an equipment replacement project.  The new equipment would have an installed cost of $125,000 and would replace existing equipment that was purchased 3 years ago at an installed cost of $80,000. If the company moves forward with the replacement, it could sell the old equipment for $25,000. Purchasing the new equipment would result in the company's current assets increasing by $12,000 and current liabilities increasing by $9,000. The company uses the 5-year MACRS table for depreciation (use the rates from our text and homework problems) and is taxed at 21%. 

a) What is the accumulated depreciation of the old equipment? 

b) What is the current book value of the old equipment? 

c) What is the amount of depreciation recapture/recovery? 

d) What is the tax on the sale of the old equipment? 

e) What are the after-tax proceeds from the sale of the old equipment? 

f) What is the change in Net Working Capital? 

g) What is the initial investment for the project?