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##### Use the Rule of 72 to answer Questions 1-4. Rememb...

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Use the Rule of 72 to answer Questions 1-4. Remember to show all steps in your work, not just the answer. 1. You invest $5,000 for 12 years and earn 6% per year. What is your approximate future value ? Solve, using the Rule of 72. 2. After earning 9% on your investment for the past 32 years, your account value is now $320,000. How much did you invest 32 years ago in order to have achieved this $320,000 account value ? Solve for present value, using the Rule of 72. 3. Your $5,000 investment into World Growth Fund has grown to $40,000. The Fund has returned, on average, 8% per year. For how many years have you been in the Fund? Solve for time, using the Rule of 72. 4. A Ford Mustang which sold for $4,000 in 1969 costs $32,000 today. By what average rate has the Mustang's cost been inflating? Solve for rate, using the Rule of 72. For the following case problems, show all your work: factors, formulas, diagrams, etc. No credit will be given for answers without your showing all the steps you've taken to arrive at your solutions. To compute your work, you may use tvm tables, excel, or financial calculators- your choice. Case Problem 1: Create and submit an income statement and a balance sheet for Hitchcock Productions. Then, answer the questions that follow. Assume a 30% tax rate for Hitchcock. Cash...512 Depreciation...85 Cost of Goods Sold...128 Accounts Receivable...700 Sales...689 Interest Paid on Bonds...86 Long-term Debt...847 Net Plant & Equipment...1776 Inventory...301 Accounts Payable...540 Dividends Paid...57 Notes Payable...144 What is Hitchcock's net income ? What is Hitchcock's Owners' Equity ? What is Hitchcock's Operating Cash Flow ? What is the quick ratio for Hitchcock ? What is Hitchcock's profit margin ? Case Problem II. Heinz Corporation bonds carry a coupon of 8% and will mature in 5 years at $1,000. Newly issued 5-year bonds with similar characteristics are yielding 4%. Calculate today's market price of the Heinz bond. Compute your answer, submit all your work, then answer the following questions. What is the discount rate you used in your work ? What is the annual interest in dollars paid by the Heinz bond ? What is the pv of the yearly bond interest that the Heinz bond pays ? Could this yearly bond interest be computed as an annuity ? Why,or why not ? What is the present value of the principal of the Heinz bond ? What is the total present value of the Heinz bond- interest plus principal ? Case Problem III. Wall Street is forecasting yearly dividends for FNC as follows: $1.00 (Year 1); $1.50 (year 2); $2.00 (Year 3); $3.00 (Year 4). The consensus estimate is that FNC shares will trade at $80 in four years. If the required return on the stock is 9%, calculate the value of FNC stock today. Show and submit all your work, then answer the following questions. What is the discount rate you used in your work ? Could the yearly FNC dividends be computed as an annuity ? Why, or why not ? What is the total pv of the four yearly dividends ? What is the pv of the forecasted share price ? What is the total value of FNC today (pv of four dividends plus pv of forecasted share price) ? Madison Bakery is considering the installation of a new oven. Made in Milan, the oven would enable Madison to produce Old World breads which could be sold at premium prices. Costs are estimated as follows: Milano Oven...$1,150,000 Building Improvements...$650,000 Additions to Working Capital...$100,000 Madison Bakery's WACC is 7% and its tax rate is 30%. Assume straight-line depreciation, and a five-year life for the oven with no salvage value. EBIT estimates are as follows: $150,000 (Year 1); $175,000 (Year 2); $200,000 (Year 3); $225,000 (Year 4); $250,000 (Year 5). Draw and submit a time line, including EBIT, taxes, depreciation, operating cash flow, tvm factors, and discounted cash flow. Is the "addition to working capital" a depreciable item ? Why, or why not ? What is the project's present value ? What is the project's NPV ? What is the Payback Period, in years, using non-discounted operating cash flows ? Based on your work, should Madison Bakery proceed with this proposed oven ? Briefly cite why, or why not. Case Problem V. Chatham Craft's capital structure consists of $30 million of debt and $90 million of equity. The Company's CFO has provided the following data: interest rate on debt is 8%; the Company's tax bracket is 30%; the current stock dividend is $2.00; the expected dividend growth rate is 8%; the current stock price is $40. After submitting all your work, including formulas and calculations, answer the following questions. What is Chatham's after-tax cost of debt ? What is Chatham's cost of equity ? What are the weightings of debt and equity ? What is the WACC ? If the proportion (weighting) of equity in Chatham's cap structure were to increase and the proportion of debt were to decrease, what would happen to the Company's WACC? Briefly explain why.

Paper#3880 | Written in 18-Jul-2015

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