Finance Assignment Help

(Question number 1-9)

Ans: 1 Yield to Maturity on the Mortgage Bond.
Face Value = $1000
Coupon Rate = 8%
Therefore, semi-annual rate = 4%
Coupon payment = 0.04 * 1000 = $ 40
Let half a year be1 time period.

End of PeriodCash Flow ($)
140
240
340
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----
1940
201000 + 40 = 1040

Let the annual Yield to Maturity be R. => Semi-annual yield = R/2 = r
Present Value of Bond = CF1/(1+r) + CF2/(1+r)^2 + …… CF20/(1+r)^20
ð 875 = 40/(1+r) + 40/(1+r)^2 + ….. 40/(1+r)^19 + 1040/(1+r)^20
ð Solve this equation for r using a financial calculator or Microsoft Excel.
r = 5%
R = 2r = 10%

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Ans 2: Let k be the cost of equity.

Using the dividend discount model.
P = D1/(k-g)
=> 27 = D0 * (1+g) / (k-g)
=> 27 = 1.215*1.08/(k- 0.08)
=> k = 0.1286 = 12.86%
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Ans 3: Total Debt (long-term) = 5,143,000
Total Equity = 500,000 + 2,000,000 + 8,640,210 = 11,140,210
ð D/(D+E) = 0.3158
ð E/(D+E) = 0.6842
ð Overall cost of capital = D/(D+E) * YTM + E/(D+E) * k
ð = 0.3158 * 0.1 + 0.6842* 0.1286
ð = 0.03158 + 0.08799
ð = 0.1196 = 11.96%

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Ans 4: Cash Flows for automated mixer

Cost of Mixer = $240,000
MACRS Depreciation schedule:

End of year Cost of Asset MACRS Depreciation Accumulated Book Value
factor for the year Depreciation at end of year.
1 240000 0.3333 79992 79992 160008
2 240000 0.4445 106680 186672 53328
3 240000 0.1481 35544 222216 17784
4 240000 0.0741 17784 240000 0

ð The Revenues and Expenses both increase by 5%.We assume that the Marginal Revenues brought in by the mixer and the savings in expenses obtained also increase at 5% per annum..
ð The change in Working Capital is assumed to increase by 20% of the given estimates due to the mixer. Only changes due to the mixer i.e. 20% of the given estimates have been used for calculating the mixer's cash flows.
ð The Cash flow calculations have been shown below.

Year 1 Year 2 Year 3 Year 4 Year 5
Revenues 62500 65625 68906.25 72351.5625 75969.14
Expenses -22500 -23625 -24806.25 -26046.5625 -27348.9
Gross Profit 85000 89250 93712.5 98398.125 103318
Depreciation 79992 106680 160008 53328 0
Profit Before Tax 5008 -17430 -66296 45070 103318
Tax 35% 35% 35% 35% 35%
Profit after Tax 3255 -11330 -43092 29296 67157
PAT + Depreciation 83247 95351 116916 82624 67157
Change in Working Capital
Inventory 3200 3200 3200 3200 3200
Acc. Receivable 800 800 800 800 800
Acc. Payable 1200 1200 1200 1200 1200
Total change 2800 2800 2800 2800 2800
Capital Expenditure 0 0 0 0 0
Cash Flow 80447 92551 114116 79824 64357

Ans 5: NPV = -240,000 + 80447/1.1196 + 92551/(1.1196^2) + 114116/(1.1196^3) +

79824/(1.1196^4) + 64357/(1.1196^5)

= $66438.97


Ans 6: IRR is the rate used for discounting such that the NPV becomes 0.
Let the IRR be r.
-240,000 + 80447/(1+r) + 92551/(1+r)^2 + 114116/(1+r)^3 +

79824/(1+r)^4 + 64357/(1+r)^5 = 0
ð IRR = 24.13%


Ans 7: The depreciation schedule for the continuous oven is as follows.

End of year Cost of Asset MACRS Depreciation Accumulated Book Value
factor for the year Depreciation at end of year.
1 685000 0.1429 97886.5 97886.5 587113.5
2 685000 0.2449 167756.5 265643 419357
3 685000 0.1749 119806.5 385449.5 299550.5
4 685000 0.1249 85556.5 471006 213994
5 685000 0.0893 61170.5 532176.5 152823.5
6 685000 0.0892 61102 593278.5 91721.5
7 685000 0.0893 61170.5 654449 30551
8 685000 0.0446 30551 685000 0

ð The Oven does not bring in Marginal Revenues but saves operating costs. These Savings have been assumed to grow to 5% more than today over the next 10 years. Assuming a constant increase at 1.1746%.
ð The estimated change in working capital is $14000 per annum. We assume 5% of this (=$700) to be because of the oven.
ð The Cash flow calculations are shown below.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Revenues 0 0 0 0 0 0 0 0 0 0
Expenses -105000 -106833.3 -108699 -110596 -112528 -114492 -116491 -118525 -120595 -122700
Gross Profit 105000 106833.3 108699 110596.5 112528 114492 116491 118525 120595 122700
Depreciation 97886.5 167756.5 119807 85556.5 61170.5 61102 61171 30551 0 0
Profit Before Tax 7113.5 -60923.2 -11108 25039.99 51357 53390.2 55321 87974.2 120595 122700
Tax 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%
PAT 4623.775 -39600.08 -7220.1 16275.99 33382.1 34703.7 35958 57183.2 78386.5 79755
PAT + Depreciation 102510.28 128156.42 112586 101832.5 94552.6 95805.7 97129 87734.2 78386.5 79755
Change in Working Capital
Inventory 800 800 800 800 800 800 800 800 800 800
Acc Receivable 200 200 200 200 200 200 200 200 200 200
Acc Payable 300 300 300 300 300 300 300 300 300 300
Total Change 700 700 700 700 700 700 700 700 700 700
Cap Ex. 0 0 0 0 0 0 0 0 0 -30000
Cash Flows 101810.28 127456.42 111886 101132.5 93852.6 95105.7 96429 87034.2 77686.5 109055

NPV = -685000 + CF1/(1.1196) + CF2/(1.1196^2) +…… CF10/(1.1196^10)
= - $93,193.24
Even without the Working Capital assumption the NPV = -$89,655.02


Ans 8: The depreciation schedule for the semi-automated packer is as follows.

End of year Cost of Asset MACRS Depreciation Accumulated Book Value
factor for the year Depreciation at end of year.
1 390000 0.1429 55731 55731 334269
2 390000 0.2449 95511 151242 238758
3 390000 0.1749 68211 219453 170547
4 390000 0.1249 48711 268164 121836
5 390000 0.0893 34827 302991 87009
6 390000 0.0892 34788 337779 52221
7 390000 0.0893 34827 372606 17394
8 390000 0.0446 17394 390000 0

ð The Oven does not bring in Marginal Revenues but saves operating costs. These Savings have been assumed to grow to 5% more than today over the next 10 years. Assuming a constant increase at 1.1746%.
ð The estimated change in working capital is $14000 per annum. We assume 5% of this (=$700) to be because of the oven.
ð The Cash flow calculations are shown below.
ð We assume that the previous packer was sold at its market value when the semi-automated packer was installed.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Revenues 0 0 0 0 0 0 0 0 0 0
Expenses -90000 -91571.4 -93170.2 -94797 -96452 -98136 -99850 -101593 -103367 -105172
Gross Profit 90000 91571.4 93170.24 94796.99 96452.1 98136.2 99849.7 101593 103367 105172
Depreciation 97886.5 167756.5 119806.5 85556.5 61170.5 61102 61170.5 30551 0 0
Profit Before Tax -7886.5 -76185.1 -26636.3 9240.489 35281.6 37034.2 38679.2 71042 103367 105172
Tax 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35
PAT -5126.225 -49520.3 -17313.6 6006.318 22933.1 24072.2 25141.5 46177.3 67188.5 68361.6
PAT + Depreciation 92760.275 118236.2 102492.9 91562.82 84103.6 85174.2 86312 76728.3 67188.5 68361.6
Change in Working Capital
Inventory 800 800 800 800 800 800 800 800 800 800
Acc Receivable 200 200 200 200 200 200 200 200 200 200
Acc Payable 300 300 300 300 300 300 300 300 300 300
Total Change 700 700 700 700 700 700 700 700 700 700
Cap Ex. -20000 0 0 0 0 0 0 0 0 0
Cash Flows 112060.28 117536.2 101792.9 90862.82 83403.6 84474.2 85612 76028.3 66488.5 67661.6

NPV = -390000 + CF1/1.1196 + CF2/(1.1196^2) + …. CF10/ (1.1196^10)
= -$29367.55

However, without the Working Capital assumption the Cash flows are

Cash Flows 112760.28 118236.2 102492.9 91562.81783 84103.6 85174.22925 86312 76728.3 67188.5 68361.6

And the NPV = $128624.53


Ans 9: Mike should undertake the automated mixer as it has a NPV = $66438.97 and an IRR of 24% i.e. greater than the overall cost of capital. Therefore, Mike should invest the $240,000 in the automated mixer.

The Continuous Oven has a negative NPV ( = -$93,193) and therefore should not be undertaken.

The Semi-automated packer has an NPV of $128,624.53. (However, the effects on Working Capital should be studied carefully as they turn the NPV negative) . The investment worth $ 390,000 should be made.
Therefore, Total Capital Expenditure for Mike = $240,000 + $390,000 = $630,000 which is less than his budget of $1,000,000.

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