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 Period                           Cash Flow ($)
1                                                    40
2                                                    40
3                                                    40
…..
…..
19                                                  40
20                                                  1000 + 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:

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.

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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
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 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%

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

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.

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

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

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.

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

And the NPV = $128624.53
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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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