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ABCStockiscurrentlypricedat$75.

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1. ABCStockiscurrentlypricedat$75.Thestockisexpectedtobeworth$85inoneyearand;youexpecttoreceiveadividendof$2.00ashare.ThebetaofABCis1.75.Theriskfreerate;is3%andtheexpectedreturnofthestockmarketis10%.ShouldyouinvestinABCstock?;WhatisthefairvalueestimateforABCstocktoday?;2. ABCStockcurrentlypaysadividendof$4.00ashare.Thatdividendisexpectedtogrowat;15%forthenext3years,then3%thereafter.Therequiredrateofreturnis7%.Whatisthe;intrinsicvalueofABCsstock?;3. Applecurrentlyproducesannualfreecashflowof40billionayear.Thecompanyhaslong;termdebtof$18billionandCashandMarketableSecuritiesof$150billion.Giventhatthe;stockcurrentlytradesinthemarketplaceat$100andthatthereare6billionsharesoutstanding;atwhatrateisthemarketfactoringinforFCFgrowthassumingthatthestockiscorrectly;valuedandthattheFCFwillgrowconstantlynextyearandbeyond.UseaWACCof8%for;yourcalculation.Secondly,assumethatFCFisgoingtogrowat7%forthenext3yearsas;theyintroducenewproductsandthatinyear4andbeyondtheFCFwillgrowat1%.Whatis;theintrinsicvalueofthestockgiventhisnewinformation?Commentonyourfindings.;4. CalculatetheWACCforPGgiventhefollowing;a) Thecompanyhasoutstandingdebtthatmaturesin20yearsthathasacouponof9%.It;b);c);d);e);paysinterestsemiannuallyandthebondsarecallablein3yearsata3%premiumtopar.;Thecurrentpriceofthebondsis1214.59.Forareference20yearTreasuriesareyielding;3.5%.(PGbondsareratedAA);PGhasoutstandingpreferredthathavean8%coupon,$100parvalueandiscurrently;pricedat$120.Ifnewpreferredwasissuedthecompanywouldincurflotationcostsof5%.;Thecompanysstockiscurrentlypricedat$100andthecurrentdividendis$3.00.That;dividendisexpectedtogrowat3%forever.ThebetaofPGis0.6andtheRFRandMRP;are3%and7%respectively.Ignoreflotationcostsforyourcostofequity.;Thetargetstructureis60%equity,30%debtand10%preferred.Thetaxrateis40%.;Ifthecompanyhadnoresidualcashandnewissuedequitywouldincuraflotationcostof;10%.CalculateanewtheWACCusingonlytheDCFmethodforequityandkeepingall;otherfactorsthesame.Commentonyourfindings;5. GiventhefollowingprojectscalculatetheprojectsNPV,IRR,MIRR,Payback,Discounted;Payback,ProfitabilityIndexandNPVprofile.Summarizewhichprojectyouwouldinvestin;andwhyuseaninitialWACCOF10%.;a) ProjectAInitialInvestment$10,000;SubsequentCashFlowsYear1andbeyond$2000,3000,3000,5000,7000;ProjectBInitialInvestment$10,000;SubsequentCashFlowsYear1andbeyond$5000,4000,3000,3000,2000;6. EasternClothingCompanyisconsideringmanufacturinganewstyleofshirt,whosedataare;shownbelow.Theequipmenttobeusedwouldbedepreciatedbythestraightlinemethodover;its3yearlifeandwouldhaveazerosalvagevalue,andnonewworkingcapitalwouldbe;required.Revenuesandotheroperatingcostsareexpectedtobeconstantovertheproject's3;yearlife.However,thisprojectwouldcompetewithotherEastern'sproductsandwouldreduce;theirpretaxannualcashflows.Whatistheproject'sNPV?;WACC;Pretaxcashflowreductionforotherproducts(cannibalization);Investmentcost(depreciablebasis);Straightlinedeprec.rate;Salesrevenues,eachyearfor3years;Annualoperatingcosts(excl.deprec.);Taxrate;10.0%;$5,000;$80,000;33.333%;$67,500;$25,000;35.0%;7. SpotlessCarWashisconsideringanewprojectwhosedataareshownbelow.Theequipmentto;beusedhasa3yeartaxlife,wouldbedepreciatedonastraightlinebasisovertheproject's3;yearlife,andwouldhaveazerosalvagevalueafterYear3.Nonewworkingcapitalwouldbe;required.Revenuesandotheroperatingcostswillbeconstantovertheproject'slife,andthisis;justoneofthefirm'smanyprojects,soanylossesonitcanbeusedtooffsetprofitsinother;units.Ifthenumberofcarswasheddeclinesby40%fromtheexpectedlevel,byhowmuch;wouldtheproject'sNPVdecline?Constructaonewaydatatablethatshowstheprojects;declineinNPVfromthebasecasebyvaryingthe#ofcarswashed.;WACC;Netinvestmentcost(depreciablebasis);Numberofcarswashed;Averagepricepercar;Fixedop.cost(excl.deprec.);Variableop.cost/unit(i.e.,VCpercarwashed);Annualdepreciation;Taxrate;10.0%;$60,000;2,800;$25.00;$10,000;$5.375;$20,000;35.0%

 

Paper#23947 | Written in 18-Jul-2015

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