- PAP Inc.’s financial statements are as follows:
|PAP Inc. Balance sheet For the Period ended 2016 and 2017 ($000)|
|Cash||$ 200||$ 150|
|CURRENT ASSETS||$ 1,200||$ 1,200|
|Plant & equipment||$2,200||$2,600|
|Less Accumulated Depreciation||(1,000)||(1,200)|
|Net Plant & equipment||$1,200||$1,400|
|LIABILITIES & Owner’s Equity|
|Accounts payable||$ 200||$150|
|Notes Payable current (9%)||0||150|
|CURRENT LIABILITIES||$ 200||$300|
|Total Owner’s Equity||$ 1,600||$1,700|
|Total liabilities & Equity||$2,400||$2,600|
|PAP Inc. Income Statements (000’s)|
|Selling, general, ADM Expenses||30||40|
|Operating Income||$ 250||$ 360|
|Taxes (40 %)||80||118|
(10 pts) Using the financial statements above, Calculate PAP Inc.’s free cash flows from operation for year ending in 2017?
- (10 pts) Renfro Rentals has issued bonds that have a 5% coupon rate, payable semi-annually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?
- Berdwen, Inc. is analyzing the merits of a potential project. There is great volatility in the marketplace which will impact the project with risky free cash flows. Berdwen, Inc. has a weighted average cost of capital of 12.2%, and forecasts the free cash flows below:
(10 pts) Use an appropriate capital budgeting technique to determine if the project should be accepted? Why or why not?
- (10 pts) Weisman Electronics just paid a $1.00 dividend, the market yield is 10%, the risk-free rate is 4%, and Weisman’s Beta is 2.5. How fast do investors expect the company to grow in the future if its stock is selling for $15.75?
- (10 pts) Larry, Inc. has three components of capital: preferred stock, common stock, and corporate bonds with a target capital mix of 10%, 45%, and 45%, respectively. It faces an after-tax cost of debt of 3.2%; 6% cost of preferred stock, and 12% cost of common stock. If Larry, Inc is in the 21% marginal tax rate, what is its weighted average cost of capital?
- (10 pts) Tysseland Company’s present market value capital structure shown below is optimal. There is no short-term debt:
|Capital Component||Market value|
Bonds have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholder’s required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 30%. What is Tysseland’s WACC?
- (10 pts) A project has an initial cost of $40,000, expected net cash flows of $9,000 per year for 7 years, and a cost of capital of 11%.
- What is the project’s NPV?
- What is the project’s IRR?
- What is the project’s MIRR?
- Should the project be accepted? Explain.
- (10 pts) A 30-year bond matures in 7 years sells for $950, pays interest semiannually, and has a yield to maturity of 10.5883%. What is the bond’s current yield?
- (10 pts) Two mutually exclusive projects, Alpha and Beta have free cash flows listed below with unequal lives. The firm has a cost of capital of 15%. Use the replacement chain method to determine which of the two projects should be selected:
- (10 pts) Using the table below, what is the maximum that an investor should be willing to pay for the share of common stock today?
Table below to be used with problem #6:
|Dividend growth estimate||5%, 0%||5% for next 2 years (annual estimate) and 0% per year indefinitely thereafter.|
|Current dividend||$1.00||Paid to shareholders on record as of 4/28/21|
|Beta coefficient||2.0||Expected future estimate of beta|
|Expected market return||12.0%||Expected (annual) return on the S&P 500 Index|
|RFR||5.0%||Expected 10-year Treasury bond yield|