07 Aug There are two parts to this exam. The first pa
INSTRUCTION
There are two parts to this exam. The first part is problem solving and the second part is a capital-budgeting analysis. You must show all work to receive full credit. On the problem solving section, make sure to clearly identify your final answer. Make sure to format your work as necessary so that it is ready for immediate printing when downloaded from the drop box for grading purposes. For the capital budgeting analysis, make sure to clearly identify all cash flows and compute the NPV, IRR, and clearly state your recommendation.
Q 1.
You have finally saved up $5,000 for a down payment for a new jet ski. After weeks of intensive research, you decide to purchase a 2014 Kawasaki Ultra 310LX. You will have the ultimate combination of class-leading horsepower (310), precise handling, and superior luxury. Sea Doo riders won’t dare mess with you. You believe you have cut a sweet deal, negotiating the purchase price down to $14,999 plus 7% taxes. After making your $5,000 down payment, you will be financing the remainder. The salesperson mentions to you that you qualify for a great interest rate and informs you that your monthly payment on your 48 month loan will be based on an APR of 6%. He also tells you that the jet ski comes with a 4 year warranty, so any problems that may arise will be completely covered until you get it paid off. What is the monthly payment on this loan? (10 points)
Q 2.
Alex has not budgeted wisely. As a result, he needs a quick loan from Maddie. Alex needs $6,000 and Maddie has agreed to lend him the $6,000 if he makes 15 monthly payments to Maddie in the amount of $480, to be paid at the end of each month. Because the total amount to be repaid is $7,200, Maddie points out that she believes the interest rate is 20% ($1,200 in interest on a $6,000 principal loan). When pressed, Maddie acknowledges that the effective annual rate is the true measure of the annualized interest and that it will probably be higher because of compounding. However, neither Maddie nor Alex knows how to calculate the effective annual rate for this loan, so they have turned to you for help. What is the effective annual rate (E.A.R.) on this loan? (10 points)
Q 3.
Microsoft’s most recent yearly dividend was $1.12. Over the past five years, Microsoft’s dividends have experienced an average rate of growth of 15%. Use the following information to value Microsoft’s stock using the dividend growth model. Dividends are expected to grow at a rate of 15% per year for the next 3 years. For the following three years (i.e., years 4 – 6), dividends will grow by 10% per year. After that, the dividends are projected to grow at a constant rate of 4%, forever. The firm has a debt-to-equity ratio (in market value terms) of 0.2. The YTM on the company’s bonds averages 4% and the company’s tax rate is 31%. If the risk-free rate is 3.34%, the market risk premium is 7%, and the company’s beta is 0.7, what should the stock sell for based on a discounted valuation of its projected dividends? (10 points)
Q 4.
You have hit it rich. Oil has been discovered on the land that you inherited from your Grandma in Southern Indiana. After tense negotiations with Evansville Oil Extraction Inc.’s lawyer (Dewey, Cheatem & Howe), you have agreed to receive 15 years of monthly royalty payments of $3,000 per month from the Oil Company. Because it will take a little time to get the oil rig in place, the first of the monthly royalty payments will be paid exactly 18 months from now. If the interest rate implicit in the agreement is 3.36% APR, compounded monthly, what is the present value of the royalty agreement that you have made? (10 points)
Q 5.
Greenfield Manufacturing has hired you to estimate its cost of capital for new investment decisions. The firm has 1,600,000 shares of common stock outstanding that are trading for $38.75 per share. The company’s beta is 0.87. The rate on 30-year t-bonds (risk free rate) is currently 3.34%. The market risk premium is 7%. Greenfield has an average tax rate of 32.5% and a marginal tax rate of 35%. Greenfield’s bonds have a 7.25% coupon rate, a $1,000 face value, pay semi-annual coupons, and mature in 9 years. There are 32,000 of these bonds that are outstanding and they are currently selling in the open market for $1,023.35. What is Greenfield’s Weighted Average Cost of Capital (WACC)? (12 points).
Q 6.
Suppose two all equity-financed firms, Firm X and Firm Y, are considering the same new project that has a beta of 0.6. The project has an IRR of 9.5%. Firm X has a beta of 1.2 and Firm Y has a beta of 0.8. The risk-free rate is 4% and the expected market risk premium 8%. Which firm(s) should take the project? Clearly explain. (8 points).
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Wridemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.