Finance homework
fat619619
homework_4.docxPlease answer the following questions. Please write all your work. You will be graded on your process, NOT on achieving the correct answer. Please staple all pages together. Include your name on every page. This is due at the beginning of class on Monday, March 21st. Late homeworks will not be accepted.
1. Compute the Present Value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is 35%.
a. A $1,000, one-year loan at 8% interest
b. A 5-year loan of $1,000 at 8% interest. Assume no principal is repaid until maturity.
c. A $1,000 perpetuity at 7% interest
2. Trombley’s Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12% and the rate of interest on the bonds is 6%. Assuming that the bonds are default-risk free, draw a graph that shows the expected return of Trombley’s common stock (re) and the expected return on the package of common stock and bonds (ra) for different debt-equity ratios.
3. ABC Corp has the opportunity to invest $1 million now (t=0) and expects after-tax returns of $600,000 in t=1 and $700,000 in t=2. The project will last for two years. The appropriate cost of capital is 12% with all-equity financing, the borrowing rate is 8%, and ABC Corp will borrow $300,000 against the project. This debt must be repaid in two equal installments. Assume debt tax shields have a net value of $0.30 per dollar of interest paid. Calculate the project’s APV.
4. Tiara Wings Ltd is a firm that makes Tiaras and chicken wings. The firm has projected its future growth in the table below. Assuming this table is correct, compute the value per share. The firm has WACC of 12%, the long-run growth rate after year 5 is 4%. The firm has $5 million in debt and 865,000 shares outstanding. The accounting statement is in thousands of $.
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Latest |
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Year |
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Forecast |
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-1 |
0 |
1 |
2 |
3 |
4 |
5 |
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1. |
Sales |
39,357.0 |
40,123.0 |
36,351.0 |
30,155.0 |
28,345.0 |
29,982.0 |
30,450.0 |
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2. |
Cost of Goods Sold |
18,564.0 |
22,879.0 |
21,678.0 |
17,560.0 |
16,459.0 |
15,631.0 |
14,987.0 |
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3. |
Other Costs |
7,645.0 |
8,025.0 |
6,797.0 |
5,078.0 |
4,678.0 |
4,987.0 |
5,134.0 |
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4. |
EBITDA (1 – 2 – 3) |
13,148.0 |
9,219.0 |
7,876.0 |
7,517.0 |
7,208.0 |
9,364.0 |
10,329.0 |
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5. |
Depreciation and Amortization |
5,745.0 |
5,678.0 |
5,890.0 |
5,670.0 |
5,908.0 |
6,107.0 |
5,908.0 |
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6. |
EBIT (pretax profit) (4 – 5) |
7,403.0 |
3,541.0 |
1,986.0 |
1,847.0 |
1,300.0 |
3,257.0 |
4,421.0 |
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7. |
Tax at 35% |
2,591.1 |
1,239.4 |
695.1 |
646.5 |
455.0 |
1,140.0 |
1,547.4 |
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8. |
Profit after Tax (6 – 7) |
4,811.0 |
2,301.7 |
1,290.9 |
1,200.6 |
845.0 |
2,117.1 |
2,873.7 |
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9. |
Change in Working Capital |
566.0 |
784.0 |
-54.0 |
-342.0 |
-245.0 |
127.0 |
235.0 |
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10. |
Investment (change in gross PP&E) |
6,467.0 |
6,547.0 |
7,345.0 |
5,398.0 |
5,470.0 |
6,420.0 |
6,598.0 |
5) Your run a toy company that is considering updating your electric tricycle line. The upgrades will cost $30 million and will add a fixed cost of $1 million per year, but will decrease your variable costs by $40 per unit. This project will be good for 5 years. Assume 5-year straight-line depreciation, a 40% tax rate, and a 10% cost of capital. (Hint: see chapter 10)
a. What is the NPV of this project if you sell 300,000 units per year?
b. What is the break-even number of units you must sell in order to make this project profitable?
