ACCOUNTING ASSIGNMENT
1. Assignment: you are analyzing a valuation done on a stable firm by a well known analyst. based on the expected FCFF next year of $30m and an expected growth rate of 5%, the analyst has estimated a value of $750. however he has made the mistake of using the book values of debt and equity in his calculation. Although you do not know the book value weights he used, you know that the firm has accost of equity of 12% and an after tax cost of debt of 6%. You also know that the market value of equity is 3 times the book valueof equity and the market value of debt is equal to the book value of debt. Estimate the correct value of the firm. (Approx 1,500 words)
2. LMN corporation a real estate company is planning to pay a dividend of $0.50 per share. Most of the investors in LMN are other corporations that pay 40% of their ordinary income and 28% of their capital gains taxes. However, they are allowed to exempt 85% of the dividends they receive from taxes. If the shares are selling at $10 per share, how much would you expect the stock price to drop on the ex-dividend day. (1,000 words)
3. you are an analyst for a sporting goods corporation that is considering a new project that will take advantage of excess capacity in an existing plant. The plant has a project capacity to produce 50,000 tennis racquets, but only 25,000 are being produced currently though sales of the racquets are increasing 10% a year. You are to use some of the remaining capacity to manufacture 20,000 squash rackets each year for the next 10 years (which will use up to 40% of the total capacity) and this market is assumed to be stable (no growth). An average tennis racket sells for $100 and costs $40 to make. The tax rate for the corporation is 40% and the discount rate is 10%. Is there an opportunity cost involved? If so, how much is it. (Approx 1,000 words)
4. you are a manager of a pharmaceutical company and are considering what type of laptop computer to buy for your sales people to take with them on their calls.
a. you can buy fairly expensive (and less powerful) older machines for about $2,000 each. These machines will be obsolete in 3 years and are expected to have an annual maintenance cost of $150.
b. you can buy newer and more powerful laptops for about $4,000 each. These machines will last 5 years and are expected to have an annual maintenance cost of $50.
If your cost of capital is 12%, which option would you pick and why? (1,000 words)