Question 1 a) Lisa, a new executive at Baba Capital, is required to perform simple analysis...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 1 a) Lisa, a new executive at Baba Capital, is required to perform simple analysis of bonds in the bond market. She wants to calculate the theoretical values of the following four (4) bonds. Using the information provided below, calculate the intrinsic value of cach bond and provide a short analysis from your findings. Par value for cach bond is RM1,000. Hint: the analysis should include the relationship between coupon rate, yield to maturity and bond price (discounted'at par/premium). Coupon rate (%) Coupon frequency Yield to maturity Time/Year to Intrinsic (i) maturity (n) Value/Price (PO) AA 10 Annually 10 8. BB 10 Semiannually 8. 10 CC 10 Annually 12 10 DD 12 Annually 9 15 b) Suria & Co. is entering into expansion project that may limit the carnings during the expansionary period. However, after the completion of the project in three year-time, it should allow the company to enjoy much improved growth in earnings and dividends. Last year the company paid a dividend of RM3.00 per share. It expects 2 percent growth in the next three years. In year 4 and 5, 6 percent growth is expected. In year 6 and thereafter, growth should be constant at 10 percent per year. Determine the maximum price per share that an investor who requires a return of l14 percent should pay for Suria & Co. common stock. QUESTION 2 a) Jasmine Enterprise is interested in measuring its overall cost of capital. The weighted average cost of capital (WACC) is to be measured using the following weights; 50 percent debt, 10 percent preferred stock, and 40 percent common stock. The firm is in the 30 percent tax bracket. Current investigation has gathered the following data. Debt: The firm can raise debt by selling RM1,000-par value, 8% coupon interest rate per annum of 20-year bonds. To sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay flotation costs of RM20 per bond. Preferred stock: The firm can sell 8% preferred stock at RM95 per share. The par value of preferred stock is RM100 per share. The cost of issuing and selling the preferred stock is expected to be RM5 per share. Common stock: The firm common stock is currently selling at RM90 per share. The fim expect to pay cash dividends of RM7 per share next year. The firm's dividends have been growing at an annual rate of 6 percent, and this growth rate are expected to continue into the future. The flotation costs of issuing common stock are expected to amount to RM6 per share. (10 marks) Determine overall cost of capital for Jasmine Enterprise. c) A merger is the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. While Consolidation is the combination of two or more firms to fom a completely new corporation. Briefly explains four (4) types of merger or consolidation activities in business. Provide an example for each type of merger. (10 marks) QUESTION 3 Swift Corp. is considering investing in the following independent projects provided the projects offer good retums to the corporation. Table below details the initial outlays, the cost of capital, the desired payback period, the projects" cash flows, and the internal rate of retums for each project. Project Project Project WIRA WAJA WALA Initial Capital RM3,500,000 RM500,000 RM500,000 Cost of Capital 20.00% 10.00% 25.00% Desired Payback Period 3.00 years 6.00 years 2.00 years Internal Rate of Retums 43.70% 9.61% 52.33% Cash Flow Year 1 RM1,500,000 RM80,000 RM250,000 Cash Flow Year 2 RM2,000,000 RM80,000 RM350,000 Cash Flow Year 3 RM2,500,000 RM80,000 RM375,000 Cash Flow Year 4 RM2,750,000 RM80,000 RM425,000 Cash Flow Year 5 RM80,000 Cash Flow Year 6 RM80,000 Cash Flow Year 7 RM80,000 Cash Flow Year 8 RM80,000 Cash Flow Year 9 RM80,000 Cash Flow Year 10 RM80,000 a) Given the above information, analyze the three (3) projects using the commonly used capital budgeting techniques; i) Payback Period, ii) Net Present value, and ii) Internal Rate of Return. (15 marks) b) Based on your analysis, rank the projects from the most preferable to the least preferable. Determine the project(s) that is profitable and acceptable for Swift Corp. Justification your answer. Question 1 a) Lisa, a new executive at Baba Capital, is required to perform simple analysis of bonds in the bond market. She wants to calculate the theoretical values of the following four (4) bonds. Using the information provided below, calculate the intrinsic value of cach bond and provide a short analysis from your findings. Par value for cach bond is RM1,000. Hint: the analysis should include the relationship between coupon rate, yield to maturity and bond price (discounted'at par/premium). Coupon rate (%) Coupon frequency Yield to maturity Time/Year to Intrinsic (i) maturity (n) Value/Price (PO) AA 10 Annually 10 8. BB 10 Semiannually 8. 10 CC 10 Annually 12 10 DD 12 Annually 9 15 b) Suria & Co. is entering into expansion project that may limit the carnings during the expansionary period. However, after the completion of the project in three year-time, it should allow the company to enjoy much improved growth in earnings and dividends. Last year the company paid a dividend of RM3.00 per share. It expects 2 percent growth in the next three years. In year 4 and 5, 6 percent growth is expected. In year 6 and thereafter, growth should be constant at 10 percent per year. Determine the maximum price per share that an investor who requires a return of l14 percent should pay for Suria & Co. common stock. QUESTION 2 a) Jasmine Enterprise is interested in measuring its overall cost of capital. The weighted average cost of capital (WACC) is to be measured using the following weights; 50 percent debt, 10 percent preferred stock, and 40 percent common stock. The firm is in the 30 percent tax bracket. Current investigation has gathered the following data. Debt: The firm can raise debt by selling RM1,000-par value, 8% coupon interest rate per annum of 20-year bonds. To sell the issue, an average discount of RM30 per bond would have to be given. The firm also must pay flotation costs of RM20 per bond. Preferred stock: The firm can sell 8% preferred stock at RM95 per share. The par value of preferred stock is RM100 per share. The cost of issuing and selling the preferred stock is expected to be RM5 per share. Common stock: The firm common stock is currently selling at RM90 per share. The fim expect to pay cash dividends of RM7 per share next year. The firm's dividends have been growing at an annual rate of 6 percent, and this growth rate are expected to continue into the future. The flotation costs of issuing common stock are expected to amount to RM6 per share. (10 marks) Determine overall cost of capital for Jasmine Enterprise. c) A merger is the combination of two or more firms, in which the resulting firm maintains the identity of one of the firms, usually the larger. While Consolidation is the combination of two or more firms to fom a completely new corporation. Briefly explains four (4) types of merger or consolidation activities in business. Provide an example for each type of merger. (10 marks) QUESTION 3 Swift Corp. is considering investing in the following independent projects provided the projects offer good retums to the corporation. Table below details the initial outlays, the cost of capital, the desired payback period, the projects" cash flows, and the internal rate of retums for each project. Project Project Project WIRA WAJA WALA Initial Capital RM3,500,000 RM500,000 RM500,000 Cost of Capital 20.00% 10.00% 25.00% Desired Payback Period 3.00 years 6.00 years 2.00 years Internal Rate of Retums 43.70% 9.61% 52.33% Cash Flow Year 1 RM1,500,000 RM80,000 RM250,000 Cash Flow Year 2 RM2,000,000 RM80,000 RM350,000 Cash Flow Year 3 RM2,500,000 RM80,000 RM375,000 Cash Flow Year 4 RM2,750,000 RM80,000 RM425,000 Cash Flow Year 5 RM80,000 Cash Flow Year 6 RM80,000 Cash Flow Year 7 RM80,000 Cash Flow Year 8 RM80,000 Cash Flow Year 9 RM80,000 Cash Flow Year 10 RM80,000 a) Given the above information, analyze the three (3) projects using the commonly used capital budgeting techniques; i) Payback Period, ii) Net Present value, and ii) Internal Rate of Return. (15 marks) b) Based on your analysis, rank the projects from the most preferable to the least preferable. Determine the project(s) that is profitable and acceptable for Swift Corp. Justification your answer.
Expert Answer:
Answer rating: 100% (QA)
Question 1 Solution a Calculation of intrinsic value price of bond P0 AI x PVIFARRn RV x PVIFRRn Bond AI Coupon frequency RR n P0 at par at premium at discount AA 1000 x 10 100 Annually 10 8 100 x PVI... View the full answer
Related Book For
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien
Posted Date:
Students also viewed these banking questions
-
If a series of defaults in the bond market make bonds riskier and as a result the demand for money rises, predict what will happen to interest rates and aggregate output.
-
If the current price in the bond market is above the equilibrium price, explain how the bond market adjusts to equilibrium.
-
What will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected?
-
Angelo Bank is planning to replace some old ATM machines and has decided to use the York Machine. Anita Chavez, the controller, has prepared the analysis shown here. She has recommended the purchase...
-
A customer service counter at a local bookstore is normally staffed by a single employee. The probabilities of arrival times and service times are shown in the following table: Simulate the arrival...
-
Dont ship air and dont ship water are the bases of some important supply chain strategies. What do these statements really mean? What are the related strategies? How do these strategies help?
-
Fill in the Blank. The standard normal variable has mean of _____________ and standard deviation of ______________ .
-
Robert Corporation's condensed comparative income statement and comparative balance sheets for 2011 and 2010 follow. Required 1. Prepare schedules showing the amount and percentage changes from 2010...
-
1. Alishba wakes up late and runs to school, covering a distance of 2.55 km in a direction of [N20 degrees E] as measured from her home. She then realizes that her friend Hawi has her homework and...
-
The Stephanowicz Company's January 1 account balances are: During January, the following transactions were completed: (a) Materials purchased on account cost $92,000. (b) Miscellaneous factory...
-
1. B Corporation is considering a copy machine that can be leased for $4,000 a year for 6 years. The company's marginal tax rate is 27 percent and the yield to maturity on the company's debt is 5.9...
-
A motor-cycle manufacturing company desires a profit of $600,000. The fixed costs are $800,000. The unit selling price of the motor-cycle is $750 and the variable cost per unit is $680. How many...
-
What theory directed at organizational improvement through understanding employee motivation and behavior?
-
Given the data below answer the question. Account | Debit | Credit Cash | 5,600 | Accounts Receivable|1,170 | Supplies | 450 | Equipment |5,580 | Accounts Payable | | 2230 Notes Payable | | 1,800...
-
Corporation Y has taxable income as follows: 2021 2022 Taxable income before charitable contributions and NOL 10,000 10,000 Net operating loss carryforward from 2020 2,000 Charitable contributions...
-
Why was initial capital equipment cost included and both marketing and commission excluded? Explain in details.
-
Describe Disney australia and new zealand in details? with references.
-
(8%) Problem 6: A student attaches a f= 3.5 kHz oscillator to one end of a metal rail of length L = 25 m. The student turns on the oscillator and uses a piezoelectric gauge at the other end to...
-
Suppose the Bank of Japan sells $5 billion of U.S. Treasury securities. Use a graph of the demand and supply of yen in exchange for dollars to show the effect on the exchange rate between the yen and...
-
If the Fed uses the federal funds rate as a policy instrument, will increases in the demand for reserves lead to an increase or a decrease in the level of reserves? If the Fed uses the level of...
-
In a blog post, former Federal Reserve Chairman Ben Bernanke described the four basic elements of a financial crisis: broad-based loss of confidence in banks, runs by providers of short-term funding,...
-
Continuing problem 6, CardioMeds cost accountants have identified cost totals for the periods production support activities and other overhead. The table below provides this information, along with...
-
Which are the main cost types in inventory valuation for manufacturing companies? What are the criteria for their classification?
-
CardioMed Inc. is a manufacturer of wearable heart monitoring products that automatically detect, record, and transmit abnormal heart rhythms for up to thirty days. In one accounting period the firm...
Study smarter with the SolutionInn App