## Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server.

**Details:**

Complete problems 1, 2, 6, 9, 12, and 28 in chapter 4 of the textbook.

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week 2

Complete problems 1, 2, 3, and 5 in chapter 2 of the textbook.

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**D****etails:**

Complete problems 7, 8, 9, and 10 in chapter 3 of the textbook.

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**week 3**

**Details:**

Use the template provided and complete problem 11-18.

Please show all work.

You are not required to submit this assignment to Turnitin.Chapter: 11

Problem: 18

Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 10% of the year’s projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company’s nonvariable costs would be $1 million at Year 1 and would increase with inflation.

The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project’s returns are expected to be highly correlated with returns on the firm’s other assets. The firm believes it could sell 1,000 units per year.

The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project’s 4-year life is $500,000. Webmasters’ federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%.

- Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback.

Input Data (in thousands of dollars)

Equipment cost $10,000 Key Results:

Net operating working capital/Sales 10% NPV =

First year sales (in units) 1,000 IRR =

Sales price per unit $24.00 Payback =

Variable cost per unit (excl. depr.) $17.50

Nonvariable costs (excl. depr.) $1,000

Market value of equipment at Year 4 $500

Tax rate 40%

WACC 10%

Inflation in prices and costs 3.0%

Estimated salvage value at year 4 $500

Intermediate Calculations 0 1 2 3 4

Units sold

Sales price per unit (excl. depr.)

Variable costs per unit (excl. depr.)

Nonvariable costs (excl. depr.)

Sales revenue

Required level of net operating working capital

Basis for depreciation $10,000

Annual equipment depr. rate 20.00% 32.00% 19.20% 11.52%

Annual depreciation expense

Ending Bk Val: Cost – Accum Dep’rn $10,000

Salvage value $500

Profit (or loss) on salvage

Tax on profit (or loss)

Net cash flow due to salvage

Years

Cash Flow Forecast 0 1 2 3 4

Sales revenue

Variable costs

Nonvariable operating costs

Depreciation (equipment)

Oper. income before taxes (EBIT)

Taxes on operating income (40%)

Net operating profit after taxes

Add back depreciation

Equipment purchases

Cash flow due to change in NOWC

Net cash flow due to salvage

Net Cash Flow (Time line of cash flows)

Key Results: Appraisal of the Proposed Project

Net Present Value (at 10%) =

IRR =

MIRR =

Payback =

Data for Payback Years Years

0 1 2 3 4

Net cash flow

Cumulative CF

Part of year required for payback

- Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables’ values at 10% and 20% above and below their base-case values. Include a graph in your analysis.

% Deviation SALES PRICE Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case Sales Price in Cell B86 should be the number $24.00 you should NOT have the formula =D28 in that cell. This is because you’ll use D28 as the column input cell in the data table and if Excel tries to iteratively replace Cell D28 with the formula =D28 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won’t tell you that there is a problem, so you’ll just get the wrong values for the data table!

from Base NPV

Base Case $24.00

-20%

-10%

0%

10%

20%

% Deviation VARIABLE COST % Deviation 1st YEAR UNIT SALES

from Base NPV from Base NPV

Base Case $17.50 Base Case 1,000

-20% -20%

-10% -10%

0% 0%

10% 10%

20% 20%

**Due Date:** May 27, 2015 23:59:59 **Max Points:**30

**Details:**

Use the template provided and complete problem 10-23.

Please show all work.

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<pclass=”msonormal”>07-12-2012

Chapter: 10

Problem: 23

**Gardial Fisheries is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:**

Expected Net Cash Flows

Time Project A Project B

0 ($375) ($575)

1 ($300) $190

2 ($200) $190

3 ($100) $190

4 $600 $190

5 $600 $190

6 $926 $190

7 ($200) $0

- If each project’s cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?

@ 12% cost of capital @ 18% cost of capital

Use Excel’s NPV function as explained in this chapter’s Tool Kit. Note that the range does not include the costs, which are added separately.

WACC = 12% WACC = 18%

NPV A = NPV A =

NPV B = NPV B =

At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.

- Construct NPV profiles for Projects A and B.

Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital.

Project A Project B

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

- What is each project’s IRR?

We find the internal rate of return with Excel’s IRR function:

IRR A = Note in the graph above that the X-axis intercepts are equal to the two projects’ IRRs.

IRR B =

- What is the crossover rate, and what is its significance?

Cash flow

Time differential

0

1

2 Crossover rate =

3

4 “The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is:

have the same net present value. In this scenario, that common net present”

5

6

7

- What is each project’s MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project.

@ 12% cost of capital @ 18% cost of capital

MIRR A = MIRR A =

MIRR B = MIRR B =

- What is the regular payback period for these two projects?

Project A

Time period 0 1 2 3 4 5 6 7

Cash flow -375 -300 -200 -100 600 $600 $926 ($200)

Cumulative cash flow

Payback

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow -575 190 190 190 190 $190 $190 $0

Cumulative cash flow

Payback

- At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC = 12%

Project A

Time period 0 1 2 3 4 5 6 7

Cash flow -375 -300 -200 -100 600 $600 $926 ($200)

Disc. cash flow

Disc. cum. cash flow

Discounted Payback

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow -575 190 190 190 190 $190 $190 $0

Disc. cash flow

Disc. cum. cash flow

Discounted Payback

- What is the profitability index for each project if the cost of capital is 12%?

PV of future cash flows for A:

PI of A:

PV of future cash flows for B:

PI of B:

week 4

**Due Date:** Jun 03, 2015 23:59:59**Max Points:**30

**Details:**

Complete problems 1, 2, 3, 4, 5, and 6 in chapter 12 of the textbook.

Please show all work for each problem.

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week 5

**Details:**

Complete problems 1, 2, 3, 4, and 5 in chapter 14 of the textbook.

Please show all work for each problem.

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<pclass=”msonormal”>

Chapter: 7

Problem: 22

Hamilton Landscaping’s dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%.

- What is Hamilton’s estimated stock price today?

D0 $2.50

rs 11.0%

g0,1 30% Short-run g; for Year 1 only.

g1,2 15% Short-run g; for Year 2 only.

gL 5% Long-run g; for Year 3 and all following years.

g 30% 15% 5% 5%

Year 0 1 2 3

Dividend

PV of dividends and PV of horizon value

= D2 (1+g) = D3

= Horizon value = P2 =

= rs – gL

$0.0000 = P0

- What is Hamilton’s estimated stock price for Year 1?

P1 = P2 + D2

(1 + rs)

P1 = +

P1 =

- If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?
- Find the expected dividend yield.

Dividend yield = D1 / P0

Dividend yield = /

Dividend yield =

- Find the expected capital gains yield.

Use the estimated price for Year 1, P1, to find the expected gain.

Cap. Gain yield= (P1 – P0) / P0

Cap. Gain yield= /

Cap. Gain yield=

Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.

Cap. Gain yield= Expected return – Dividend yield

Cap. Gain yield= –

Cap. Gain yield=

- What your expected dividend yield and capital gains for the second year (from Year 1 to Year 2)? Why aren’t these the same as for the first year?
- Find the expected dividend yield.

Dividend yield = D2 / P1

Dividend yield = /

Dividend yield =

- Find the expected capital gains yield.

Use the estimated price for Year 2, P2, to find the expected gain.

Cap. Gain yield= (P2 – P1) / P1

Cap. Gain yield= /

Cap. Gain yield=

Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.

Cap. Gain yield= Expected return – Dividend yield

Cap. Gain yield= –

Cap. Gain yield=

Chapter: 7

Problem: 23

Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

INPUTS (In millions) Year

Current Projected

0 1 2 3 4

Free cash flow -$20.0 $20.0 $80.0 $84.0

Marketable Securities $40

Notes payable $100

Long-term bonds $300

Preferred stock $50

WACC 9.00%

Number of shares of stock 40

- Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow).

Current Projected

0 1 2 3 4

Free cash flow -$20.0 $20.0 $80.0 $84.0

Long-term constant growth in FCF

Horizon value

- Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations.

PV of horizon value

PV of FCF

Value of operations (PV of FCF + HV)

- Calculate the estimated Year-0 price per share of common equity.

Value of operations

Plus value of narketable securities

Total value of company

Less value of debt

Less value of preferred stock

Estimated value of common equity

Divided by number of shares

Price per share

week 6

**Details:**

Complete problems 2, 4, 5, 6, 7, and 12 in chapter 9 of the textbook.

Please show all work for each problem.

You are not required to submit this assignment to Turnitin.

**Details:**

Use the template provided and complete problem 15-12.

Please show all work.

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<pclass=”msonormal”>Chapter: 15

Problem: 12

**Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure?**

Percent Financed with Debt (wd) Before-tax Cost Debt (rd) Input Data

Risk-free rate 4.5%

Market risk premium 5.5%

Unlevered beta 0.8

0% 6.0% Tax rate 40.0%

10% 6.1%

20% 7.0%

30% 8.0%

40% 10.0%

50% 12.5%

60% 15.5%

70% 18.0%

Fill in formulas in the yellow cells to find the optimum capital structure.

Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Cost of

Ratio (wd) Ratio (ws) Ratio (wd/ws) Debt (rd) Beta Equity WACC

0% 1.0 0.00

10% 0.9 0.11

20% 0.8 0.25

30% 0.7 0.43

40% 0.6 0.67

50% 0.5 1.00

60% 0.4 1.50

70% 0.3 2.33

WACC at optimum debt ratio =

Optimum debt ratio =

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<pclass=”msonormal”>week 7<pclass=”msonormal”>

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<pclass=”msonormal”>**Details:**

Use the template provided and complete problem 18-8.

Please show all work.

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<pclass=”msonormal”>Chapter: 18

Problem: 8

**Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase.**

A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann’s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.

Current bond issue data

Par value $700,00,000

Coupon rate 10%

Original maturity 30

Remaining maturity 22

Original flotation costs $45,00,000

Call premium 10%

Tax rate 40%

Refunding data

Coupon rate 8.0000%

Maturity 22

Flotation costs $50,00,000

Time between issuing new bonds and calling old bonds (months) 1

Rate earned on proceeds of new bonds before calling old bonds (annual) 5%

- Perform a complete bond refunding analysis. What is the bond refunding’s NPV?

Initial investment outlay to refund old issue:

Call premium on old issue =

After-tax call premium =

New flotation cost =

Old flotation costs already expensed =

Remaining flotation costs to expense =

Tax savings from old flotation costs = You get to expense the remaining flotation costs

Additional interest on old issue after tax = This is interest paid on the old bond issue between when the new bonds are issued and the old bonds are retired

Interest earned on investment in T-bonds after tax = This is interest earned on the proceeds from the new bonds before they are used to pay off the old bonds.

Total investment outlay =

Annual Flotation Cost Tax Effects:

Annual tax savings on new flotation =

Tax savings lost on old flotation =

Total amortization tax effects =

Annual interest savings due to refunding:

Annual after tax interest on old bond =

Annual after tax interest on new bond =

Net after tax interest savings =

Annual cash flows =

After-tax cost of new debt =

NPV of refunding decision =

- At what interest rate on the new debt is the NPV of the refunding no longer positive?

Use Goal Seek to set cell D60 to zero by changing cell C27.

“Break-even” interest rate =

Chapter: 19

**Problem: 6**

**As part of its overall plant modernization and cost reduction program, Western Fabrics’ management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%.**

**The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at the end of each year. The loom falls in the MACRS 5-year class, and Western’s marginal federal-plus-state tax rate is 40%.**

Gardial Automation Inc., maker of the loom, has offered to lease the loom to Westen for $70,000 upon delivery and installation (at t=0) plus 4 additional annual lease payments of $70,000 to be made at the ends of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of eight years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $42,500. Tanner-Woods plans to build and entirely new plant in 4 years, so it has no interest in either leasing or owning the proposed loom for more than that period.

- Should the loom be leased or purchased?

First, we want to lay out all of the input data in the problem.

INPUT DATA

Invoice Price $2,50,000

Length of loan 4

Loan Interest rate 10%

Maintenance fee $20,000

Tax Rate 40%

Lease fee $70,000

Equipment expected life 8

Expected salvage value $0

Market value after 4 years $42,500

Book value after 4 years $42,500

First, we can determine the annual loan payment that must be made on the new equipment. We will do so using the

function wizard for PMT.

Annual loan payment =

Year 1 2 3 4

Beginning loan balance

Interest payment

Principal payment

Ending loan balance

Now, we see that the decision being made is whether to purchase the equipment at a net cost of $250,000 (with annual payments of $78,868) or lease the equipment and make annual payments of $70,000. To make this decision, we must analyze the incremental cash flows.

Before proceeding with our NPV analysis we must determine the schedule of depreciation charges for this new equipment.

MACRS 5-year Depreciation Schedule

Year 1 2 3 4 5 6

Depr. Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

Depr. Exp.

We can now construct our table of incremental cash flows from these two alternatives. Remember, that the appropriate discount rate in this scenario is the after tax cost of borrowing, or: 10%*(1-40%) = 6%.

NPV LEASE ANALYSIS OF INCREMENTAL CASH FLOWS

Year = 0 1 2 3 4

Cost of ownership

Purchase cost

Loan proceeds

After-tax interest payment

Principal payment

Maintenance cost

Tax savings from maintenance cost

Tax savings from depreciation

Salvage value

Net cash flow from ownership

PV cost of ownership

Cost of leasing

Lease payment

Tax savings from lease payment

Net cash flow from leasing

PV cost of leasing

Cost Comparison

PV ownership cost @ 6%

PV of leasing @ 6%

Net Advantage to Leasing

Our NPV Analysis has told us that there is a negative advantage to leasing. We interpret that as an indication that the firm should forego the opportunity to lease and buy the new equipment.

- The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pre-tax discount rate is 15 percent. What would be the effect of a salvage value risk adjustment on the decision?

All cash flows would remain unchanged except that of the salvage value. Our new array of cash flows would resemble the

following:

Standard discount rate 10%

Salvage value rate 15%

Year = 0 1 2 3 4 4

Net cash flow

PV of net cash flows

NPV of ownership

New Cost Comparison

PV ownership cost @ 6%

PV of leasing @ 6%

Net Advantage to Leasing

Under this new assumption of using a greater discount factor for the salvage value, we find that the firm should lease, and not buy, the equipment.

- Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying?

We will use the Goal Seek function to determine the lease payment that makes the Net Advantage to Leasing zero.

Crossover = $69,175

**week 8**

e the template provided and complete problem 24-5.

Please show all work.

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<pclass=”msonormal”>08-12-2012

Chapter: 24

Problem: 5

**Duchon Industries had the following balance sheet at the time it defaulted on its interest payments and filed for liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $900 million, while the current assets were sold for another $400 million. Thus, the total proceeds from the liquidation sales were $1,300 million. Trustee’s costs amounted to $1 million; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities. Determine the amount available for distribution to all claimants.**

Balance Sheets (Millions of Dollars)

Assets

Current assets $700

Net fixed assets 1,300

Total assets $2,000

Liabilities and equity

Accounts payable $80

Accrued taxes 80

Accrued wages 70

Notes payable 400

Total current liabilities $630

First-mortgage bondsa 700

Second-mortgage bondsa 300

Debentures 500

Subordinated debenturesb 200

Common stock 100

Retained Earnings -430

Total claims $2,000

a All fixed assets are pledged as collateral to the mortgage bonds.

b Subordinated to notes payable only.

Other inputs (in thousands of dollars):

Proceeds from sale of fixed assets = $900

Proceeds from sale of current assets = $401

Trustee’s costs = $1

Total claims (including trustee expenses)

Total cash from liquidation

Amount available for distribution to shareholders

Initital Distribution to Priority Claimants

Priority claims:

Trustee’s expenses

Worker’s wages due

Government taxes due

Distribution to first mortgage (paid from sale of fixed assets)

Remaining proceeds from sale of fixed assets after satisfying first mortgage holders

Distribution to second mortgage (paid from sale of fixed assets after satisfying first mortgage holders)

Remaining proceeds from sale of fixed assets after satisfying first and second mortgage holders

Total preliminary distributions to priority claimaints

Total of satisfied priority claims

Total unsastified claims from all claimants

Funds available for distribution to general creditors:

Pro rata distribution percentage

Distributions due to general claims: Distribution after Subordination Adjustment

Remaining Unsatisfied Claim

Amount of Claim Pro Rata Distribution Subordination Adjustment

Unsatisfied first mortgage

Unsatisfied second mortgage

Accounts payable

Notes payable

Debentures

Subordinated debentures

Total

Total distributions (including prior distributions to mortgage holders and subordination adjustment):

Percent of Claim Satisfied

Total Distribution Original Claim

First mortgage $700

Second mortgage $300

Accounts payable $80

Notes payable $400

Debentures $500

Subordinated debentures $200

**Details:**

Complete problems 1, 2, and 5 in chapter 22 of the textbook.

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