Problem 1. ABC Corporation is evaluating new equipment that will cost $300,000 and another $20,000 for shipping, and $10,000 for installation. The equipment is in the MACRS 3-year class and would be sold after 3 years for $30,000. Use of the equipment will require an additional $20,000 in inventory, and accounts payable will increase by $10,000. The equipment will not affect revenues, but will save $225,000 per year in operating costs. The company's tax rate is 40 percent and its cost of capital is 12%.
a.) Calculate the cash flow in Year 0.
b.) Calculate the incremental operational cash flows using 'MACRS Depreciation Percentages for three-year class life assets:
c.) Calculate the terminal year cash flow.
d.) Calculate the project's NPV
e.) Calculate the project's IRR.
f.) Should the project be accepted or rejected?
Problem 2. Use the Black-Scholes model to value call option on the stock of ABC Corporation. The Analyst has accumulated the following information:
* The price of the stock is $40.
* The strike price is $38.
* The option matures in 90 days.
* Standard deviation of the stock return is 0.16.
* The risk-free rate is 5 percent.
Given the information, what is the value of the call option?
Problem 3. Kanga Resorts is interested in developing a new facility in Asia. The company estimates that the hotel would require an initial investment of $14 million. The company expects that the facility will produce positive cash flows of $2.6 million a year at the end of each of the next 10 years. The project's cost of capital is 12%.
a. Calculate the expected net present value of the project.
b. The company recognizes that the cash flows could, in fact, be much higher or lower than $2.6 million, depending on whether the host government imposes a large facility tax. One year from now, the company will know whether the tax will be imposed. There is a 40 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $2 million. At the same time, there is a 60 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $3 million. The company is deciding whether to proceed with the facility today or to wait 1 year to find out whether the tax will be imposed. If it waits 1 year, the initial investment will remain at $14 million. Assume that all cash flows are discounted at 12 percent. Calculate the value of the real option to wait a year before deciding.
Problem 4. An investment banker enters into a best efforts arrangement to try and sell 10 million shares of stock at $15 per share for Pierre Imports. The investment banker incurs expenses of $300,000 in floating the issue and the company incurs expenses of $100,000. The investment banker will receive 10 percent of the proceeds of the offering.
a. If the offering is successful and sells out at the expected price of $15, how much money will the company receive?
b. If the offering is successful and sells out at the expected price of $15, how much money will the investment banker receive?
c. If the offering is partially successful; all shares are sold, but at a price of $10. How much does the company receive?
d. If the offering is partially successful; all shares are sold, but at a price of $10. How much does the investment banker receive?
Problem 5. Capra's stock trades at $50 a share. The company is contemplating a 5-for-1 stock split. Currently, the company has EPS of $3.00, DPS of $1.00, and 10 million shares of stock outstanding. Assuming that the stock split will have no effect on the total market value of its equity;
a. What will be the company's stock price following the stock split?
b. How many shares of stock will be outstanding after the split?