Seven Finance Problems Assignment

Seven Finance Problems Assignment in $28 Only

Question 1. (15 points) NORREL Corporation’s stock is selling for $35 per share. An investor is considering buying a call option with an exercise price of $40. The investor is willing to pay the premium of 50 cents per option.

a. Calculate the exercise value of the option?
b. Why is an investor willing to pay 50 cents an option when the stock is going for $35?
c. Calculate the exercise value if the price of the stock increases to $42 per share.
d. What is the difference between a put option and a call option?
e. If the exercise price for both the call option and the put option is $40, which will have a higher premium if the underlying stock price falls to $30 per share? Why?

Question 2. (15 points) Your company is evaluating new equipment that will cost $1,000,000. The equipment is in the MACRS 3-year class and will be sold after 3 years for $100,000. Use of the equipment will increase net working capital by 100,000. The equipment will save $450,000 per year in operating costs. The company’s tax rate is 30 percent and its cost of capital is 10%.Part a. Calculate the cash flow in Year 0.
Part b. Calculate the incremental operational cash flows .
Reference: MACRS Depreciation Percentages for three-year class life assets: 0.3333 0.4445 0.1481 0.0741
c. Calculate the non-operating terminal year cash flow.
Part d. Calculate the project’s payback period.
Part e. Calculate the project’s NPV.
Part f. Calculate the project’s IRR. Part g. Calculate the project’s MIRR.
Part h. Investment Decision: Should the project be accepted or rejected? Why or why not?

Question 3. (15 points) Reynolds company is evaluating its dividend policy. Selected data for the company are shown below.

Capital budget $10,000,000
Desired capital structure 40% Debt
60% Equity
Expected net income $7,000,000
Outstanding shares 5,000,000
Last annual dividend per share $0.50

a. If the company follows a residual policy, how much will it pay out in dividends?
b. If the company decides to maintain last year’s dividend, how much will it pay out in dividends this year?
c. What are the company’s options for raising the equity needed for the capital budget?
d. Should the company follow the residual dividend policy? Why or why not?
e. Which is better for the stockholder–cash dividends or stock repurchases? Why?

Question 4. (10 points) The exchange rate between the Japanese yen and the U.S. dollar is 94.72 yen = 1U.S$. A U.S. company agrees to purchase goods for 40 million yen, with payment due in 6 months. Payment will be made in yen.

a. How many U.S. dollars would the company need to purchase the goods and pay for them today?
b. Has the yen appreciated or depreciated against the dollar if the exchange rate is 95.61 yen to 1$US in 6 months? Why?
c. How many U.S. dollars will be needed to pay for the goods if the exchange rate is 95.61yen to 1$US?
d. Does the Japanese exporter or the U.S. importer bear the exchange rate risk ? Why?
e. Describe 3 ways in which the U.S. company can reduce exchange rate risk.

Question 5. (15 points) Taylor Corporation wants to raise $40 million. Its stock price is now $25 per share. The new issue will be priced at $23 per share. The company will incur expenses of $1 million. The underwriters’ compensation will be 8% of the issue price and the underwriter will incur expenses of $1.2 million.

a. How many shares of stock must be sold for the company to net $40 million after costs and expenses?
b. The out-of-pocket expenses incurred by the investment banker were $300,000. What profit or loss would the investment banker realize?
c. Explain the terms “best efforts basis” and “underwriting” as they are used in investment banking.
d. What is the most important single reason for a firm to go public.
e. What is the most important single reason for a firm NOT to go public.

Question 6. (15 points) Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The purchase price is $1.2 million, required modications to the equipment will cost $50,000. The company would depreciate the equipment over 4 years, using straight-line depreciation. A 4-year lease calls for a payment of $350,000 at the beginning of each year. If the equipment is purchased, the company will borrow from its bank at an interest rate of 10 percent.

a. Calculate the cost of purchasing the equipment.
b. Calculate the cost of leasing the equipment.
c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment?

Question 7 (15 points) How might Wal-Mart (or another company) take advantage of each of the following: Do not merely provide a definition. Provide a specific example of each

a. Flexibility option
b. Growth option
c. Investment timing option
d. Abandonment option
e. Decision-tree analysis

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