Project #5596 - after tax cost, 10% coupon rate StoreABC

2.)    Recycle Paper Company utilizes the payback method to evaluate investment proposals.  It is presently considering two investment opportunities:

 

 

Investment A

Net Investment = $1000,000

 

Investment B

Net Investment = $500,000

 

 

 

 

 

 

Year

Expected

Cash inflows

 

 

Year

Expected

Cash inflows

1

$25,000

 

1

$125,000

2

25,000

 

2

250,000

3

25,000

 

3

300,000

4

25,000

 

4

225,000

5

25,000

 

5

100,000

6

10,000

 

6

25,000

7

5,000

 

7

0

 

(a)    Compute the payback period for each of the investments.

 

(b)   If the firm utilized a payback cutoff standard of three years which, if either, of the investments would be acceptable?

 

As a recent employee of Recycle Paper Company (above), you recognize the deficiencies of the payback method.  After deriving the firm’s required rate of return (cost of capital), you desire to illustrate alternative approaches to your boss.

 

(c)    Assuming a cost of capital of 14%, calculate the NPV of investment proposals A and B.

 

(d)               Should Recycle accept either of the investment proposals?

 

 

3.)     

The after tax cost of Par Value Corporation’s outstanding bond is 6.6%.  If the firm is in the 34% tax bracket, what is the before tax cost (yield) of that debt?

 

 

4.)    A corporate bond bearing a 10% coupon rate will mature in 10 years. ($1000. FACE)

 

(a)    If the current market rate is 8%, what is the current value of the bond (assume annual interest payments)?

 

(b)   If interest payments are made semiannually, what is the value of the bond?

 

(c)    Under the conditions in (b), what would the price of the bond be if market interest rates rose to 12%

 

 

5.)     

6.)    Plummer Chemicals employs the internal rate of return method to evaluate capital expenditure proposals.  Plummer adjusts its acceptable rate of return to accommodate varying degrees of risk.  The cash flow characteristics of a capital proposal and required rate of return are presented below:

 

Coefficient of Variation of Cash Flow

Required Rate of Return

.10 to .15

.12

.16 to .35

.14

.36 to .50

.18

> .50

.24

 

 

Expected Cash Flows Each Year  from Proposal for 10 Years

 

Probability

 

 

 

 

$400,000

.20

 

$600,000

.40

 

$800,000

.30

 

$900,000

.10

 

       

 

The capital expenditures proposal will require a cash investment of $3,000,000.  Utilizing the internal rate of return method and information above, should Plummer accept the proposal?

 

 

7.)    The Cajun Soup Company is seeking to diversify its operations and is considering acquisition of three firms in unrelated fields.  Cajun’s cost of capital is approximately 10% and the coefficient of variation associated with its usual investments averages .3.  Using the information below, determine which, if any, of the three proposed acquisitions are acceptable investments.

 

Firm

(a)

Blue Boy

Supermarkets

(b)

Acey-Ducey

Electronics

(c)

Wild Cat

Drilling

 

 

 

 

Required investment

$25,000,000

$40,000,000

$22,000,000

Expected life

12 years

8 years

6 years

Expected annual after tax returns

3,000,000

8,000,000

5,000,000

Estimated standard deviation of returns

300,000

3,000,000

3,000,000

 

 

Required rates of return on company investments:

 

Coefficient of variation

less than .2

.2 to .40

.4 to .55

above .55

Required rate of return

8%

10%

15%

20%

Please show all work for these problems if using excel take grid out and send all work back than you please Asap! Thanks again

Subject Business
Due By (Pacific Time) 05/05/2013 12:00 am
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