Use the cost information Jennifer has assembled to construct a forecast of cost of goods sold and operating expenses for 2004 through 2009. Assume first that the Bernoulli will be introduced, with its new cost structure, one year from now, and then calculate a cost forecast assuming that the $18 million is not provided for development of the new product. 3. Using the information developed for Questions 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004 through 2009. Working's board has asked for net present value and internal rate of the return when making decisions in the past.
80*7.1607+1000*.3555 = $928 • 5-2 Yield to Maturity for Annual payments Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? 100+1000-850/12/1000+850/2 = 112.5/925 = .1216 or 12.16% • 5-6 Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years.
Dividing the present value of future cash flows by the cost of the investment indicates that every dollar invested buys securities worth $1.18. Value is created. Table 1 The appropriate intrinsic value of PacifiCorp Assume: 1. 10-year investment horizon, when you liquidate at “book” or accumulated investment value 2. initial investment is $9.4 billion 3. no dividends are paid, all cash flows are reinvested 4. return on equity = 7.45% 5. cost of equity = 5.72% Year 0 1 2 3 4 5 6 7 8 9 10 Investment or Book Equity Value 9.4 10.1 10.9 11.7 12.5 13.5 14.5 15.5 16.7 17.9 19.3 Market Value (or Intrinsic Value) = Present value @ 5.72% of 19.3 = $11.07 Market/Book = $11.07/9.4 = $1.18 Value created: $1.00 invested becomes $1.18 in market value. Discounted Cash Flow Appendix 1 shows the discounted cash flow for following 15 years.
What is the value of this option today (use arbitrage pricing in a binomial tree)? Would Penelope want to invest under this scenario? Ignoring both the possibility of selling the equipment after two years and investing in the second-generation project, the NPV of the project will be ($3,154). To value the option to sell the equipment in the second year and to calculate NPV of the project with the option we use a binomial tree valuation. We assume: * the cash flows would either increase by 64.9% or decrease by 39.3% over each period * the risk free
FIN515 Week 4 Homework 9-1 Future Value of a Company Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price? Answer: Find price of stock in 1 year. Current Price = $50, Dividend = $2, Cost of Equity Capital = 15% X = Price the stock will sell right after paying the dividend: 50 = (2+ X) /(1+0.15) X = 55.50 Therefore, price the stock will sell right after paying the one year dividend is $55.5 9-4 Dividend Yield and Cost of Equity Capital Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?
8% b. 8% 2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond? Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b.
We measured ROE as: Net incomeTotal equity Assuming the return on equity would be 12 percent per year, at the end of year 2010, the book value of the company would be $5,990.90 million. In order to be able to compare the market value of the company
The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2010, the decision was made to change the depreciation method from straight-line to sum-of-years'-digits, and the estimates relating to useful life and salvage value remained unchanged. 2. Depreciable asset B was purchased January 3, 2006. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen.
If I took 25 years to pay off my loan the monthly Payment would be $761.22 per month. If it took 20 years to pay off my loan the monthly Payments would be $849.52 per month. So if I wanted to pay off the loan in 20 years I Would need to raise my total monthly payment by $88.30 per month. I also need to explain whether or not it would be reasonable to do this if I currently meet my monthly expenses with less than $100.00 left over. Yes I would be able to meet my monthly Expenses.
Here we just use the average number (from year 1977-1978) of debt and equity of each company to calculate it. Since the beta for debt is 0, by plugging these into the unlevering beta calculation of E/(D+E) * β E giving the asset beta column in the following two tables. Taking simple average of asset betas giving the number of 0.91. Brunswick Chemical (βE =1.10) 1974 1975 1976 1977 1978 Avg ('75-'79) D/(D+E) 0.19 0.15 0.17 E/(D+E) 0.81 0.85 0.83 βU =βE * E/(D+E) + βD * D/(D+E) 0.891 0.935 0.913 D/(D+E) E/(D+E) Southern Chemicals(βE =1.20) 1974 1975 1976 1977 0.28 0.72 0.846 1978 0.21 0.79 0.948 Avg ('75-'79) 0.25 0.76 0.906 βU =βE * E/(D+E) + βD * D/(D+E) Then we need to calculate the appropriate discount rate using CAPM model. Given the risk premium of 6% and risk free rate of 9.5%, we get the discount rate (Opportunity cost of capital of the project) which is 8.5%+0.91*6%=14.96%.