Financial Analysis: Marketing Coursework

Final Exam Part 2
Student's Name
Institution
Professor
Unit Name & Number
Date of Submission
Problems (10 points each) – Show your Work unless otherwise indicated
Problem 1:
* Ronald Smith Co. raised $275 million in new debt and used this to buy back stock. After the recap, Smith’s stock price is $9.50. If the company had 80 million shares of stock outstanding before the recap, how many shares does it have outstanding after the recap?
$275 millions
Share price per share $9.50
=$275m/$9.50 = 28.9 million shares
After recap (28.9 + 80) = 118.9 million shares
* East Winds, Inc. has a beta = 1.30 and its tax rate is 21%. If the company is financed with 30% debt, what is its unlevered beta?
= (1.3/ (1+(1-0.21) *(0.3/0.7))
=0.971
Problem 2:
* MPDI, Inc. has currently outstanding bonds with a 7% coupon and 5% yield to maturity. MPDI could issue new bonds at par that would provide the same YTM. If company’s marginal tax rate is 21%, what is the company’s after-tax cost of debt?
After tax cost of debt
YTM * (1 – tax rate)
7% * (1-21%)
5.53%
* MPDI has just issued preferred stock for the first time. If the price is $100 per share with an annual dividend of $8.75 per share, what is the company’s cost of preferred stock?
Dividend per share / Share price per share * 100
8.75 / 100 * 100 = 8.75%
* You have been asked to estimate the required return on common stock for MPDI. If beta = 0.9, the yield on a 10-year T-bond is 4% and the market risk premium is 7.5%, what is the estimated cost of common equity?
Cost of common equity = Risk free + Risk premium * Equity beta
= 4% + 7.5 % * 0.9
= 10.75% or 11%
* If MPDI’s capital structure is 60% common equity, 10% preferred equity and 30% debt, what is the company’s WACC?
WACC
WACC = (Cost of equity * Equity + Cost of preferred stock * preferred stock + cost of debt * debts)/ 100
= (11 % * 60% + 8.75% * 10% + 5.53% * 30%) / 100 = 0.091%
Problem 3 (Note: if you use a financial calculator for Problem 3, you do not need to show your work.)
* Frontier Resources, Inc. is planning a project with an initial cost of $90,000, expected net cash flow of $27,000 per year for 5 years, and a cost of capital of 8%. What is the project’s NPV?
Cash flow for next 5 year $27,000,
Cost of capital 8%
Total cash flows for 5 years = ($27,000*5) = $135,000
Annuity factor will apply due to even cash flows
Annuity factor 5 years 8% = 3.993
Present value = Cash flow * annuity factor
= 27,000 * 3.993 = $ 107,811
NPV = Present value of cash flows – Initial investment
= $ 107,811 - $90,000
NPV = $ 17,811
* What is the same project’s IRR?
Year

Cash flows

Annuity factor 8%

Present value

Annuity factor 10%

Present value

0

-90,000

1

-90,000

1

-90,000


135,000

3.933

539,055

3.790

511,650




449,055


421,650

IRR = a + A/ A-B * (b-a)
Whereas,
A= higher present value
B = lower present value
a = higher present value discount rate
b = lower present value discount rate
IRR = 8% + 449,055/ 449,055- 421,650 *(10%-8%) = 40.77%
* What is the same project’s Payback Period?
year

Cash flow

Initial investment

1

27,000

(90,000-27,000) =63,000

2

27,000

(63,000 – 27,000) = 36,000

3

27,000

(36,000 – 27,000) = 9,000

4

27,000

(9,000-9,000) =0

5

27,000


Payback period = 3 years +( (9,000/27,000) * 12 months)
3 years and 4 months.
Problem 4:
* Adams & Smart, Inc. has stock that is selling for $40/share. The stock’s last dividend was D0 = $1.25. The dividend is expected to grow at 4% per year indefinitely.
i.What is the expected stock price one year from now?
=$40 * (1+ 4%) = $ 41.6
ii.What is the estimated required rate of return on the stock?
By using the Dividend valuation model = (Do (1+ growth)/ Po) + growth
= ($1.25 (1 + 4%) / $40) + 4%
= 7.25%
* TMU, Inc. has preferred stock with an annual dividend of $12 per share. The preferred shares sell for $135. What is the stock’s required rate of return?
Preferred stock required rate of return = Dividend / share price
= $12/ $135 *100
= 8.9%
c.Wilbur Industries has never paid a dividend. Its current free cash flow of $875,000 is expected to grow at a constant rate of 7%. The weighted average cost of capital is WACC=11%. Calculate Wilbur’s estimated value of operations.
Free Cash flow = $875,000 * (1+7%) = $ 936,250
Required return = 11%
Growth = 7%
Value of operation = $ 936,250 / 11% - 7% = $ 23,406,250
Problem 5:
Thomas-Jenkins, Inc. (TJ) is considering two new pieces of equipment for this year’s capital budget. The first is a computer-controlled milling machine and the second is a hydraulic lift. The projects are independent. The cash outlay for the milling machine is $70,000 and $88,000 for the lift. The firm’s cost of capital is 17%. After-tax cash flows, including depreciation, are as follows:
Year

Milling Machine

Lift

1

$26,000

$24,000

2

26,000

24,000

3