finance
billba
tvm_-_case_1_2.docxTime Value of Money – Case #1
Show your work including any intermediate steps. Some partial credit awarded but must complete the problem.
Problem #1
A father is now planning a savings program to put his daughter through college. She is 13 and plans to enroll in college in 5 years, and she should graduate 4 years later. Currently, the annual cost for college is $15,000 and is expected to increase 4% each year. The college requires that the costs be paid at the start (hint: beginning) of each year. The child now has $7,500 saved for college in an account and is expected to have a return of 6% annually. The father will make six equal payments starting today and the sixth on the day she starts college and make no more additional payments. How much must each of the payments be to fully fund the college cost?
Problem #2
Brian is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power throughout his retirement as $40,000 today. His retirement income will begin the day he retires, 10 years from today, at which time he will receive his first payment and then 24 additional payments at the beginning of the next 24 years. Annual inflation is expected to be 1%. He currently has $100,000 saved, and he expects to earn 8% annually on his savings both before and after he retires. How much must he save each of the next 10 years (assuming end of the year payments) to meet his retirement goal?
Problem #3
A homeowner just bought a house and entered into a 30 year mortgage of $250,000. Set up an amortization schedule for loan to be repaid in equal installments at the end of each month over 30 years (360 payments). The interest rate is 5%.
a. For the 30th payment how much of the payment is payment of principle vs interest.
b. The homeowner was expecting to use an annual bonus to be made as an additional payment of $5,000 every 12th payment in addition to the normal loan payment. The homeowner’s goal was to reduce the overall amount of interest paid on the loan.
a. For the 30th payment how much is now the payment of principle vs. interest.
b. How many months will it now take to pay off the loan?
|
Section |
Value Each |
Available Points |
|
WACC
|
Capital Structure |
10 |
|
|
Tax Rate |
5 |
|
|
Cost of Debt |
10 |
|
|
Cost of Equity |
10 |
|
|
WACC |
15 |
|
Capital Budgeting |
NPV |
8 |
|
|
IRR |
8 |
|
|
MIRR |
8 |
|
|
Payback |
8 |
|
|
Discounted Payback |
8 |
|
|
Recommendation |
10 |
|
Total Points |
|
100 |
c.
d.
e. Instructions
f. Submit all of your work in EXCEL (no template provided). Show all work.
g. WACC SECTION Determine the Market Based Capital Structure and an estimate of WACC for ‘ABC Company’ given the following select information. Information is not in any specific order.
h.
i. Please Complete the following GRID – Show all work for any partial credit.
j.
k.
l.
m.
|
Item |
Source |
Value |
|
Equity Shares Outstanding |
Current Market Data |
25,000,000 |
|
10 Year Treasury Bond Rate (Assume this to be the Risk Free Rate and Maturity Risk Premium) |
Current Market Data |
2.75% |
|
Current Credit Risk Rating |
Current Credit Rating for ABC Company |
AA |
|
“Default Risk Premium” for AA Debt |
Current Market Data |
3.25% |
|
Debt Liquidity Risk Premium for Company |
Assumption |
0% |
|
Current Stock Price |
Current Market Data |
$55.00 |
|
Income Statement Information |
Most Recent Income Statement |
|
|
Balance Sheet Information
|
(Assume Book Value of Debt is Market Value of Debt) |
|
|
Equity Beta |
Market Consensus
|
1.2
|
|
Equity Market Risk Premium |
Market Consensus |
5.0%
|
n.
o.
p.
q.
r.
s.
t.
u. CAPITAL BUDGETING SECTION
v.
Calculation of WACC
Capital Structure
% Debt
% Equity
Tax Rate
Cost of Debt
Cost of Equity
WACC
Earnings Before Interest and Taxes (EBIT)1,200,000,000
Interest Expense250,000,000
Earnings Before Taxes950,000,000
Taxes380,000,000
Earnings After Taxes570,000,000
Liabilities
Current Liabilities
Accounts Payable18,000,000
Accrued Liabilities12,000,000
Current Portion of Long Term Debt25,000,000
Total Current Liabilities55,000,000
Non-Current Liabilities
Long Term Debt400,000,000
Total Liabilities455,000,000
Exam # 3 2015 (Jan)Name:_____________________________________________
Company is choosing between two new Injection Molding machines for it's manufacturing plant.
The equipment will not be replacing any existing equipment but is expected to reduce labor.
The combined impact of depreciation, operational cost improvements, and labor have all been considered on an after tax basis.
All numbers below are the expected FCF which the project will render, including the impact of selling the equipment after it's useful life
1. Evaluate the two options using the 5 tools of capital budgeting. SHOW ALL WORK
2. Identify which model maximizes the value to the company.
Model: 2500Model: 4000
Net Present value (NPV)
Internal Rate of Return (IRR)
Modified IRR (MIRR)
Payback (PB)
Discounted PB
Recommendation
Initial Investment (100,000) Initial Investment(140,000)
YearSavingsYearSavings
124,000 138,000
224,000 238,000
324,000 335,000
423,000 435,000
523,000 532,000
650,000 675,000
Cost of capital6.0%Cost of capital6.0%
Model 2500
Annual Operational SavingsAnnual Operational Savings
Model 4000
