FIN 516 Week 5 Homework

Download:

FIN 516 Week 5 Homework

Problem 25-6 on Purchase Versus Lease Based on Chapter 25

Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.)

a) What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease?

b) What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?

c) What are the incremental free cash flows of leasing versus buying?

Problem 25-7 on Purchase Versus Lease Based on Chapter 25

Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for 5 years.

Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.

a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

b) Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent loan?

c) What is the effective after-tax lease borrowing rate? How does this compare to Riverton’s actual after-tax borrowing rate?

FIN 516 Week 5 IPO Paper

Download:

FIN 516 Week 6 Homework

Download:

FIN 516 Week 6 Homework

Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions

(Excel file included)

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.

a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?

b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger?

c) What explains the change in earnings per share in part a)? Are your shareholders any better or worse off?

d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E ratio?

Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress, Managerial Incentives, and Information

(Excel file included)

As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)

a) What is the initial value of Gladstone’s equity without leverage?

Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year.

b) What is the initial value of Gladstone’s debt?

c) What is the yield-to-maturity of the debt? What is its expected return?

d) What is the initial value of Gladstone’s equity? What is Gladstone’s total value with leverage?

Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year.

e) If Gladstone does not issue debt, what is its share price?

f) If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares, what will its share price be? Why does your answer differ from that in part e)?

Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress, Managerial Incentives, and Information

Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other assets or opportunities.

Suppose the appropriate discount rate for Kohwe’s future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs.

a) What is the NPV of Kohwe’s investment?

b) What is Kohwe’s share price today?

Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s corporate tax rate is 40%, and expected free cash flows are still $10 million each year.

c) What is Kohwe’s share price today if the investment is financed with debt?

Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe’s future free cash flows is still 8%.

e) What is Kohwe’s share price today given the financial distress costs of leverage?

FIN 516 Week 7 Homework

Download:

FIN 516 Week 7 Homework

Problem 31-1 on Exchange Rates Based on Chapter 31 International Corporate Finance

(Excel file included)

You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur 1 year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F1 = $1.215/€. You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro discount rate is 7%.

a) What is the present value of the €5 million cash inflow computed by first discounting the euro and then converting it into dollars?

b) What is the present value of the €5 million cash inflow computed by first converting the cash flow into dollars and then discounting?

c) What can you conclude about whether these markets are internationally integrated, based on your answers to parts a) and b)?

Problem 31-2 on Currency Appreciation Based on Chapter 31 International Corporate Finance

(Excel file included)

Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Cyprus and is expecting a C£4 million cash inflow in 1 year. The current spot rate is S = $1.80/C£ and the 1-year forward rate is F1 = $1.8857/C£.

a) What is the present value of Mia Caruso’s C£4 million inflow computed by first discounting the cash flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars?

b) What is the present value of Mia Caruso’s C£4 million inflow computed by first converting the cash flow into dollars, and then discounting at the appropriate dollar discount rate of 10%?

c) What can you conclude about whether these markets are internationally integrated, based on your answers to parts a) and b)?

Problem 31-7 on Eurobonds Versus Domestic Bonds Based on Chapter 31 International Corporate Finance

The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there.

The risk-free interest rates on dollars and yen are r_$ = 5% and r_¥ = 1%, respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate.

What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt in dollars and then find the yen equivalent.)

Problem 31-12 on Credit and Exchange Rate Risk Based on Chapter 31 International Corporate Finance

Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what is the implied credit spread for Russian government bonds?

Problem 30-9 on Forward Market Hedge Based on Chapter 30 Risk Management

(Excel file included)

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in 1 year, you will deliver 4000 kg of frozen king crab for 100,000 euros. Your cost for obtaining the king crab is $110,000. All cash flows occur in exactly 1 year.