Q.1:
a. Define the Project Analysis also discuss different stages of project analysis.
b. Define and differentiate among
Sensitivity Analysis, Scenario Analysis, Simulation Analysis, Break even Analysis
Q.2:
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.
1. What is Mullineaux's WACC?
2. The company president has approached you about Mullineaux's capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president?
Q.3:
Given the following information for Evenflow Power Co., find the WACC. Assume the company's tax rate is 35 percent.
Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.
Common stock: 250,000 shares outstanding, selling for $57 per share; the beta is 1.05.
Preferred stock: 15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share.
Market: 8 percent market risk premium and 4.5 percent risk-free rate.
Q.4:
We are evaluating a project that costs $724,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $43, variable cost per unit is $29, and fixed costs are $780,000 per year. The tax rate is 35 percent, and we require a 15 percent on this project.
a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point?
b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales.
c. What is the sensitivity of OCF to changes in the variable cost figure? Explain
Q.5:
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8%.
a. What is the gain from merger?
b. What is the cost of cash offer?
c. What is the NPV of the acquisition under the cash offer?
Now suppose Velcro Saddles considers offering Pogo shareholders a 50% holdings in Velcro Saddles.
d. What is value of the stock in the merged company held by the original Pogo shareholders?
e. What is the cost of the stock alternative?
f. What is it's NPV under stock offer?