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Managerial Finance Assignment Questions
Complete all question. There are five (5), four (4)-partquestions for 20 points each; plus one (1), two (2)-part question for 10 points, totaling 30 points.
Show your work. Present your work in a clean crisp format, as you would submit a report to your boss.
1) Consider your opportunities to refinance your home vs. buying another more expensive one. Your original loan was $120,000 at 6.0% for 30 years and the loan is exactly 5 years old. Your Bank has offered to refinance your existing loan for the remaining balance 4.0% for 25 years, with no closing costs, or provide a loan for the original amount at 4.25% plus fees of 2% of the loan amount to be added into the new loan. Calculate (use monthly payment settings!):
a) The original payment;
b) Remaining balance (PV) after exactly 5 years;
c) New monthly payment on refinance for a new term of 25 years
d) New monthly payment on new loan at original amount plus fees
2) A firm, NGU, Inc. issued a 15 year debenture (unsecured bond) face amount $10 million at an initial coupon rate of 6.0%, payable semiannually, exactly 6 years ago. The bond is currently selling for 115.
a) What is the current yield?
b) The YTM?
c) If the market rate of return (YTM) for bonds with comparable risk moves to 5.0%, what is the new price of this security?
d) What will the bond pay at maturity per $1,000 face amount?
3) Your firm is looking at 4 projects, each costing $450,000: Project A is estimated to generate net benefits of $125,000 per year for 5 years; Project B is estimated to generate operating income of $100,000 for 6 years plus save an additional $10,000 per year; Project C is estimated to save $75,000 per year for 10 years but requires additional corporate overhead of $10,000 per year. Project D will increase revenue by $60,000 for 10 years, plus save $25,000 per year of operating expenses for the 1st 5 years ONLY.
a) Compute the net cash flows for the 4 projects and choose all that will meet your decision rule at a corporate cost of capital of 8.0 %. Ignore corporate tax.
b) What changes if the cost of capital falls to 10.0%? Ignore income taxes.
c) If we deduct income taxes of 30% of the net cash flow, does this change your results?
d) Why would we choose any project with an NPV of 0 if our required rate of return is 10%?
4) The Isgett Corporation plans to initiate annual dividends of $2.40 per share of Common stock, beginning this month and then maintain a constant dividend growth rate of 4% per annum. Assume a 12% required rate of return:
a) What is the current share price?
b) If the payout ratio is 40%, are the per-share earnings be after tax?
c) If the current dividend was $2.40 and the expected growth rate was a constant 6%, what is the current stock price?
d) Recalculate b. for a required rate of return of 10%
6.a.) You win the Lottery of $60 million payable in 30 annual installmentsbeginning this month; what is your net cash receipt if the SC tax is 7% and the US tax is 58% overall. The estimated discount rate of 3% is based on a basket of US Treasuries maturing from 1 to 30 years.
6.b.) If the Company in Question 5 can raise new equity by selling Preferred stockat a required rate of return that is 200 basis points below the r for common stock, what is the annual dividend per $100 of proposed new Preferred?
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