Project #88450 - Finance Assignment

1.Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

 

2.Prepare a cash flow summary for the following investment proposal

Service life                                                                         8 years

 

Recovery period                                                                  5 years

 

Depreciation method                                                        Accelerated

 

Purchase price                                                                      $9700

 

Installation and shipping cost                                         $ 300

 

Change in net working capital                                        $ 500

 

Annual revenue                                                                   $8000

 

Annual expense: years 1 through 5                             $3000

 

Annual expense: years 6 through 8                             $5000

 

Estimated salvage value                                                   $2000

 

Tax rate                                                                                   40%

 

3.Suppose a firm has the following balance sheet

 

Assets

 

 

Claims

Current assets

$400,000,000

Current liabilities

$200,000,000

Fixed assets

$600,000,000

Bonds ($1000 par)

$400,000,000

 

 

Preferred stock (($25 par)

$200,000,000

 

 

Retained earnings

$100,000,000

 

 

Common stock ($10 par)

$100,000,000

 

Total assets

 

 

$1,000,000,000

 

Total claims

 

$1,000,000,000

 

The bonds sell currently for $980, pay an annual 8% coupon, net $0.98 for each dollar sold, and mature in 20 years. The preferred stock sells currently for $30, pays an annual $3 dividend, and has 4% flotation costs. The common stock sells currently for $12; next year's dividend is expected to be $0.75 with an anticipated annual growth rate of 6% and the flotation costs are 6%. The firm's tax rate is 40%.

 

(a)          Find the component costs

 

(b)          Find the component weights

 

(c)           Find the weighted average cost of capital using retained earnings

 

(d)          Find the weighted average cost of capital using new common stock

 

 

4.Suppose an investor took long positions in both a stock and the put option on that stock. The stock and the put were trading for 16-1/8 and 7/8 respectively at the time of the opening trade. The exercise price on the put is 16 and it expires in 6 months.

 

Note the stock and option prices are quoted in fractional terms so 16-1/8 is $16.125 and 7/8 is $0.875.

 

(a)  Find the holding period payoffs, both dollar and percent, for both positions if the stock price

      is 12-3/4 when the closing trade is made and the closing trade occurs at expiration.

 

(b)  Find the holding period payoffs, both dollar and percent, for both positions if the stock price

      is 17-3/8 when the closing trade is made and the closing trade occurs at expiration.

 

(c)  Find the annualized holding period payoffs for both positions if the stock price is 14-3/4 at

      the close and the holding period is 90 days. The closing trade occurs at expiration.

Suppose an investor is considering three investments with expected returns and probabilities as indicated below

 

 

 5.

 

Asset A

 

 

Asset B

 

Asset C

 

ri

 

 

prob

 

ri

 

 

prob

 

ri

 

 

prob

- 20%

0.20

-  40%

0.60

-  40%

0.40

0%

0.20

  40%

0.40

  10%

0.20

10%

0.30

 

 

  50%

0.40

20%

0.10

 

 

 

 

40%

0.20

 

 

 

 

        

(a)          Find the expected return E(r) for each investment

 

(b)          Find the standard deviation of return σ for each investment

 

(c)           Comment on the nature of the risk-return tradeoff given your answers to parts a and b above

 

 

6.A firm is considering three investment projects. Estimates of the post-investment values of selected financial data are shown below.

 

Project 1

 

Net income = 20,000,000

Revenues = 100,000,000

P/E ratio = 25

Expenses = 80,000,000

Outstanding shares = 15,000,000

 

Project 2

 

Net income = 28,000,000 
Revenues = 250,000,000 
P/E ratio = 15 
Expenses = 222,000,000 
Outstanding shares = 12,000,000

 

Project 3

 

Net income = 80,000,000 
Revenues = 680,000,000 
P/E ratio = 21 
Expenses = 600,000,000 
Outstanding shares = 50,000,000

 

 

 

Which project or projects should the firm select? Why

Subject Business
Due By (Pacific Time) 10/21/2015 08:50 pm
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