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Stock market and growth rates




Questions provided on attached document. Please provide response on the Excel document provided. Be sure to show how all quantitative answers are derived. Thanks;Attachment Preview;F2-MT 5880-stu 14e.xlsx Download Attachment;A;1;C;D;E;F;G;H;Name;Mid-term Examination;FINC 5880;Session 5;2;3;4;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;B;Question 1. (10 points) The exercise price on one of ORNE Corporation's call options is $25 and the price of;the underlying stock is $29. The option will expire in 35 days and is currently selling at $5.50.;a. Calculate the option's exercise value? What is the significance of this value?;b. Why is an investor willing to pay more than the exercise value for the option?;c. If the price of the underlying stock changes to $33 per share, will the market value of the option increase;decrease, or remain the same? Why;d. If Orne Corporation had issued a put option (instead of the call), would its value increase, decrease, or;remain the same if the price of the underlying stock increased? Why?;Brigham 14e;Page 1 of 7;11/23/2014;A;1;B;C;D;E;F;G;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;56;57;58;59;60;61;Question 2. (15 points) Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $90,000. In addition the;equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. The equipment falls into the MACRS 3-year;class, and will be sold after 3 years for $35,000. The equipment would require increased inventory of 6,000. The equipment is expected to;save the company $35,000 per year in before-tax operating costs. The company's marginal tax rate is 30 percent and its cost of capital is 11;percent.;a. What is the cash outflow at Time 0?;Cost of milling machine;Modifications to machine;Shipping costs;MACRS 3 year class;Salvage after 3 years;Increased inventory;Savings per year;Tax rate;$90,000;$10,000;$2,000;0.3333;$35,000;$6,000;$35,000;30%;0.4445;0.1481;0.0741;b. Calculate the net operating cash flows in years 1, 2, and 3?;c. Calculate the non-operating terminal year cash flow.;d. Calculate net present value. Should the machine be purchased?;Brigham 14e;Page 2 of 7;11/23/2014;A;1;B;C;D;E;F;G;H;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;Question 3. (15 points) Andrews Corporation plans a $10 million expansion. The firm wants to maintain a 45 percent debt-to-total-assets ratio in its;capital structure. It also wants to maintain its past dividend policy of distributing 30 percent of last year's net income. Last year, net income was $4;million.;a. Calculate the amount of external equity needed.;b. If the company changed to a residual dividend policy, how much external equity will it need?;c. Is the company likely to change to a residual policy? Why or why not?;Brigham 14e;Page 3 of 7;11/23/2014;A;1;B;C;D;E;F;G;H;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;56;57;58;59;60;Question 4. (15 points) A U.S. company orders merchandise from a Japanese company at a cost of 100 million;yen. The merchandise must be paid for in yen;Spot;30-day forward;90-day forward;180-day forward;Yen per $1 $ per 1 yen;97.57;0.01025;97.45;0.01026;96.31;0.01038;92.45;0.01082;a. How many U.S. dollars must be raised if payment is due today?;b. Is the dollar appreciating or depreciating against the yen? Explain.;c. How many U.S. dollars must be raised if payment is due in 90 days?;d. Who bears exchange rate risk, the U.S. company or the Japanese company or both? Explain.;e. Describe 3 ways in which the company can reduce exchange rate risk.;Brigham 14e;Page 4 of 7;11/23/2014;A;1;B;C;D;E;F;G;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;Question 5. (15 points) Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the;company's stock with Kern netting $225 million from the offering. The expected price to the public was $25 per share.;The out-of-pocket expenses incurred by the investment banker were $5 million.;a. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $25 per share?;b. What profit or loss would the investment banker realize if the issue were sold to the public at an average;price of $20 per share?;c. Is the agreement between the company and its investment banker an example of a negotiated or a bestefforts deal? Why? Which is riskier to the company? Why?;Brigham 14e;Page 5 of 7;11/23/2014;A;1;B;C;D;E;F;G;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;56;Question 6. (15 points) Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30;percent and the equipment's depreciation would be $600,000 per year for 5 years. If the company leased the asset on a 5-year;lease, the payment would be $700,000 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge;11 percent interest on the loan.;a. Calculate the cost of purchasing the equipment with debt.;Cost of equipment;Depreciation per year;5-year lease;Lease payment -BGN year;Loan;Tax rate;After-tax rate;Purchase Option;CF0;CF1;CF2;CF3;CF4;CF5;CF1;CF2;CF3;CF4;CF5;Cost of equipment;Depreciation tax saving;Total cash flow;NPV;b. Calculate the cost of leasing the equipment.;Lease Option;CF0;Lease Payments;Tax saving;After-tax payments;c. Calculate NAL? Should the company buy or lease the equipment? Why?;Brigham 14e;Page 6 of 7;11/23/2014;A;1;B;C;D;E;F;G;H;Name;3;Mid-term Examination;FINC 5880;4;Session 5;2;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;31;32;33;34;35;36;37;38;39;40;41;42;43;44;45;46;47;48;49;50;51;52;53;54;55;56;57;58;59;Question 7. (15 points) Marcal Corporation is considering foreign direct investment in Asia. The company estimates that the;project would require an initial investment of $18 million. and generate positive cash flows of $3 million a year at the end of;each of the next 20 years. The project's cost of capital is 13%.;a. Calculate the project's NPV.;b. The company thinks there is a 50-50 chance that the Asian country will impose restrictions on the company in one year.;If the restrictions are imposed, cash flows will be $2,000,000 per year for 20 years. If restrictions are not imposed, cash;flows will be $4,000,000 per year for 20 years. Cost of capital remains the same. In either case, the cost will remain at;$18,000,000 and cost of capital at 13%. Calculate the value of the real option by waiting one year to decide.;c. Apart from real options, discuss 3 qualitative factors that the company should consider when making its decision on accepting;the new project.;Brigham 14e;Page 7 of 7;11/23/2014


Paper#18286 | Written in 18-Jul-2015

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