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Student ID 21458913 Exam 500304RR - Cost of Capital and .docx
- 1. Student ID: 21458913 Exam: 500304RR - Cost of Capital and Financial Policy When you have completed your exam and reviewed your answers, click Submit Exam. Answers will not be recorded until you hit Submit Exam. If you need to exit before completing the exam, click Cancel Exam. Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer. 1. The interest tax shield is a key reason why A. the net cost of debt to a firm is generally less than the cost of equity. B. the value of an unlevered firm is equal to the value of a levered firm. C. the cost of debt is equal to the cost of equity for a levered firm. D. firms prefer equity financing over debt financing. 2. The unlevered cost of capital refers to the cost of capital for A. a privately owned entity.
- 2. B. a corporate shareholder. C. a governmental entity. D. an all-equity firm. 3. Deep Mines has 14 million shares of common stock outstanding with a beta of 1.15 and a market price of $42 a share. There are 900,000 shares of 9 percent preferred stock outstanding, valued at $80 a share. The 10 percent semiannual bonds have a face value of $1,000 and are selling at 91 percent of par. There are 220,000 bonds outstanding that mature in 17 years. The market risk premium is 11½ percent, T-bills are yielding 7½ percent, and the firm's tax rate is 32 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the firm's typical project? A. 14.72 percent B. 15.54 percent C. 13.15 percent D. 14.59 percent 4. River Walk Tours is expected to have an EBIT of $354,000 next year. Depreciation, the increase in net working capital, and capital spending, are expected to be $24,000, $2,000, and $33,000, respectively. All are expected to grow at 7 percent per year for three years. After year four, the adjusted cash flow from assets is expected to grow at 3.2 percent indefinitely. The company's WACC is 9.2 percent, and the tax
- 3. rate is 34 percent. What's the terminal value of the firm's cash flows? A. $4,008,051 B. $3,711,052 C. $4,691,189 D. $3,992,419 5. Hanover Tech is currently an all-equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share. The current cost of equity is 15.4 percent, and the tax rate is 34 percent. The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par value. What's the levered value of the equity? A. $5.209 million B. $6.708 million C. $6.512 million D. $5.288 million 6. What does the pecking order theory postulate? A. The optimal capital structure is dependent upon the effective tax rate. B. The optimal capital structure is a highly leveraged firm because of the tax shield.
- 4. C. There's no optimal debt-equity ratio; instead, a firm's capital structure is determined by its need for external financing. D. The optimal capital structure is the point at which the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress. 7. Alphabet, Inc. (GOOGL) has a 40 percent debt/asset ratio; assume a tax rate of 16 percent. The average yield to maturity on GOOGL's bonds is 3 percent. Your market analyst estimates that the risk-free rate is 1 percent and that the market risk premium is 7 percent. The firm's beta coefficient is 0.97. What's Alphabet's weighted average cost of capital (WACC)? (Round to the nearest tenth of a percent.) A. 7.3 percent B. 5.9 percent C. 5.7 percent D. 6 percent 8. What does the absolute priority rule establish? A. Priority of cash dividends B. Priority of suppliers C. Priority of control of key stakeholders D. Priority of claims in liquidation
- 5. 9. Which of the following is not a problem when using the dividend growth model? A. It's very sensitive to the estimated growth rate and assumes dividends grow at a constant rate. B. It's complicated and difficult to implement. C. It's only applicable to companies that pay dividends. D. It doesn't explicitly consider risk. 10. Jiminy's Cricket Farm issued a 30-year, 8 percent, semiannual bond six years ago. The bond currently sells for 114 percent of its face value. What's the aftertax cost of debt if the company's tax rate is 31 percent? A. 4.82 percent B. 4.70 percent C. 4.63 percent D. 4.75 percent 11. Silo Mills is an all-equity financed firm that has a beta of 1.14 and a cost of equity of 12.8 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this project?
- 6. A. 11.84 percent B. 13.62 percent C. 12.09 percent D. 13.33 percent 12. According to the static tradeoff theory, what's the optimal capital structure? A. A firm should have equal parts equity and debt. B. A firm should borrow up to the point at which the tax benefit from an extra dollar is equal to zero. C. A firm should borrow up to the point at which the interest is equal to the total tax expense. D. A firm should borrow up to the point at which the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress. 13. D. L. Tuckers has $48,000 of debt outstanding that's selling at par and has a coupon rate of 6.75 percent. The tax rate is 35 percent. What's the present value of the tax shield? A. $16,200 B. $2,106 C. $3,240 D. $16,800
- 7. 14. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court? A. 45 days B. 18 months C. 12 months D. 180 days 15. Fama's Llamas has a weighted average cost of capital of 9½ percent. The company's cost of equity is 15½ percent, and its pretax cost of debt is 8½ percent. The tax rate is 34 percent. What's the company's target debt-equity ratio? A. 1.54 B. 1.01 C. 0.92 D. 0.89 16. Which of the following is true about a firm with no debt financing? A. Cost of debt = WACC B. Return on equity = WACC C. Cost of Equity = coupon rate
- 8. D. Return on equity = cost of debt End of exam 17. Because the WACC varies with the use of funds rather than the source of funds, some firms evaluate new projects based on the WACC of companies in similar lines of business. This approach is called the A. DuPont approach. B. subjective approach. C. divisional approach. D. pure play approach. 18. SLG Corp. is an all-equity firm with a weighted average cost of capital of 9.68 percent. The current market value of the equity is $27½ million, and the tax rate is 35 percent. What is EBIT? A. $1,730,300 B. $6,180,000 C. $4,095,385 D. $2,821,194 19. U.S. Treasury bills are paying about 0.2 percent, and the
- 9. estimated market risk premium (based on large common stocks) is about 8 percent. Apple (AAPL) has an estimated beta of 1.44. Using the SML approach, what's the return on equity of Apple stock? A. 11 percent B. 11.32 percent C. 10.32 percent D. 11.72 percent 20. What's the concept of using debt to make a return known as? A. Financial leverage B. Debt coverage C. Debt reliance D. Financial liquidity Part 1 Financial Information20152016Cost of Goods Sold235,942297,915Cash36,54251,940Depreciation61,05669,01 1Interest Expense13,87715,905Selling and Admin Exp40,95258,569Accounts Payable32,19433,999Net Fixed Assets269,369328,185Sales482,155587,715Accounts Receivable24,12024,089Notes Payable24,86626,972Long-Term Debt142,148161,000Inventory32,76658,798New Equity016,000 Part 2 Loan Amortization Sched Part 2 Chart Part 3 Data ReportEquipment10,500,000Pretax salvage value1,100,000R&D200,000Marketing study150,000Year 1Year 2Year 3Year 4Year 5Sales (units)75,00085,00080,00070,00060,000Sales of old
- 10. product45,00025,000Lost sales10,00010,000Depreciation rate14.29%24.49%17.49%12.49%8.93%Price240VC140FC2,100 ,000Price of old product150Product price after reduction120VC of old product95Tax rate30%NWC percentage22%Required return10%SalesYear 1Year 2Year 3Year 4Year 5New18,000,00020,400,00019,200,00016,800,00014,400,000Lo st sales1,500,0001,500,000Lost revenue1,050,000450,000Net sales15,450,00018,450,00019,200,00016,800,00014,400,000VC New10,500,00011,900,00011,200,0009,800,0008,400,000Lost sales950,000950,000Total VC9,550,00010,950,00011,200,0009,800,0008,400,000Sales15, 450,00018,450,00019,200,00016,800,00014,400,000VC9,550,00 010,950,00011,200,0009,800,0008,400,000Fixed costs2,100,0002,100,0002,100,0002,100,0002,100,000Dep1,500 ,4502,571,4501,836,4501,311,450937,650EBT2,299,5502,828,5 504,063,5503,588,5502,962,350Tax689,865848,5651,219,0651, 076,565888,705NI1,609,6851,979,9852,844,4852,511,9852,073, 645+Dep1,500,4502,571,4501,836,4501,311,450937,650OCF3,1 10,1354,551,4354,680,9353,823,4353,011,295NWCBeg03,399,0 004,059,0004,224,0003,696,000End3,399,0004,059,0004,224,00 03,696,000- 0NWC CF(3,399,000)(660,000)(165,000)528,0003,696,000Net CF(288,865)3,891,4354,515,9354,351,4356,707,295BV of equipment2,342,550Salvage6,100,000Taxes on sale of equipment(1,127,235)Salvage CF6,100,000Cash flow on sale of equipment4,972,765Year012345CF(10,500,000)(288,865)3,891, 4354,515,9354,351,43511,680,060 Part 4 Stock DataDateRisk-FreeMonthly Risk-FreeS&P 500S&P 500 ReturnStock PriceReturnMutual Fund Price (VINIX)Mutual Fund ReturnS&P Risk PremiumELY Risk PremiumMutual Fund Risk Premium2012-03- 010.000600.000051408.4699716.593309115.3748932012-04- 010.000700.000061397.910034-0.00749745275.978844- 0.0931952378114.650108-0.0062819993-0.00756-0.09325- 0.006342012-05-010.000700.000061310.329956- 0.06265072565.393764-0.097858382107.760185-0.060095216-
- 15. Company LtdEl Cap Climbing Company LtdCost of Goods Sold235,942297,915Income Statement for Year ended 2015Income Statement for Year ended 2016Cash36,54251,940Depreciation61,05669,011Sales482,155S ales587,715Interest Expense13,87715,905Less:Less:Selling and Admin Exp40,95258,569Cost of goods sold(235,942)Cost of goods sold(297,915)Accounts Payable32,19433,999Net Fixed Assets269,369328,185Gross profit246,213Gross profit289,800Sales482,155587,715Accounts Receivable24,12024,089Less: Expenses:Less: Expenses:Notes Payable24,86626,972Selling and Admin Exp(40,952)Selling and Admin Exp(58,569)Long-Term Debt142,148161,000Interest expense(13,877)Interest expense(15,905)Inventory32,76658,798Depreciation(61,056)De preciation(69,011)New Equity016,000Profit before tax130,328Profit before tax146,315Less: Tax @ 30% * profit before tax(39,098)Less: Tax @ 30% * profit before tax(43,895)Net profit91,230Net profit102,421Less: Dividends @ 40%*net profit(36,492)Less: Dividends @ 40%*net profit(40,968)Retained earnings54,738Retained earnings61,452b) Prepare balance sheet for year 2015 and 2016. El Cap Climbing Company LtdEl Cap Climbing Company LtdBalance sheet as at 2015Balance sheet as at 2016Non- Current AssetsNon-Current AssetsNet Fixed Assets269,369Net Fixed Assets328,185Current AssetsCurrent AssetsAccounts Receivable24,120Accounts Receivable24,089Cash36,542Cash51,940Inventory32,766Invent ory58,798Total Assets362,797Total Assets463,012Current LiabilitiesCurrent LiabilitiesAccounts Payable32,194Accounts Payable33,999Notes Payable24,866Notes Payable26,972Non Current LiabilitiesNon Current LiabilitiesLong-Term Debt142,148Long-Term Debt161,000CapitalCapitalInitial Capital108,851Initial Capital108,851New Equity0New Equity16,000Retained Earnings54,738Retained Earnings116,190 DMM: Retained earnings for both 2015 & 2016
- 16. Total Liabilities & Capital362,797Total Liabilities & Capital463,012El Cap Climbing Company LtdOperating cashflow for period ended 20162015they asked for this for both yearsc) Operating Cashflow Net profit146,315Non-cash expensesFinal grade 64 Add back: depreciation expense69,011Please fix this project and return for grading. Less: corporate tax(43,895) Less; dividends paid(40,968)Cashflow from Operating activities130,463d) Cashflow from assetsIncrease in net fixed assets(58,816)You need to check I think Chapter 3 on formula for what goesDecrease in accounts receivable31into finding each cash flow answer. Increase in Inventory(26,032)Cashflow from assets(84,817)e) Cashflow from creditorsIncrease in accounts payable1,805Increase in notes payable2,106Increase in Long- term debt18,852Cashflow from creditors22,763f) Cashflow from stockholdersNew equity16,000Cashflow from stockholders16,000-11pts total B: Answer the following1.) Financial Position of the Firm in 2016The financial position of El Cap Climbing limited has improved in 2016 as compared to 2015. This assertion is evidenced by the increase in total sales from 482,155 in 2015 to 587,715 in 2016.This represents 22% increase in total sales. As a result, the company reported 18%increase in gross profit.There is a relatively less increase in other expenses attributable to increase in salesvolume.However, the corporation has increased it's debt position by 22,763 and issuance of equity shares of 16,000. 2.) Leah's plans to expandThe company is in good financial position to expand as by the increase in sales volume. Part2Amount Borrowed500,000.00Period (in months)360Interest rate (PM)0.4167%Monthly payment2,684.11Payment NumberBeginning balancePayment Amount5% Interest expensePrincipleBalanceAnnual interest expense00- 0- 0- 0500,000.00The principal gets off by about $2 as we continue down the 1500,000.002,684.112,083.33600.77499,399.23chart. Some of this may be due to the last payment listed. 2499,399.232,684.112,080.83603.28498,795.95total off -1pt.
- 25. Part 3B: How can you describe relationship between time and amount paid towards principle and interest.Their relationship is inversely proportional. As Interest expense decreases, principle payment increasescYes. Firstly, the amount of capital available for investment will increase. This will result into debt to equity ratio of 2:1From the cashflow, ECCC has an upward trajectory in sales. Therefore, increased investment will yield more revenue.Interest ExpensePrinciple Payment2,083.33600.772,080.83603.282,078.32605.792,075.79 608.322,073.26610.852,070.71613.402,068.16615.952,065.5961 8.522,063.01621.102,060.43623.682,057.83626.282,055.22628. 892,052.60631.512,049.97634.142,047.32636.792,044.67639.44 2,042.01642.102,039.33644.782,036.64647.462,033.95650.162, 031.24652.872,028.52655.592,025.78658.322,023.04661.072,02 0.29663.822,017.52666.592,014.74669.362,011.95672.152,009. 15674.952,006.34677.772,003.52680.592,000.68683.431,997.83 686.271,994.97689.131,992.10692.001,989.22694.891,986.3269 7.781,983.42700.691,980.50703.611,977.57706.541,974.62709. 491,971.67712.441,968.70715.411,965.72718.391,962.72721.38 1,959.72724.391,956.70727.411,953.67730.441,950.62733.481, 947.57736.541,944.50739.611,941.42742.691,938.32745.781,93 5.22748.891,932.10752.011,928.96755.151,925.82758.291,922. 66761.451,919.48764.621,916.30767.811,913.10771.011,909.89 774.221,906.66777.451,903.42780.691,900.17783.941,896.9078 7.211,893.62790.491,890.33793.781,887.02797.091,883.70800. 411,880.36803.741,877.02807.091,873.65810.461,870.28813.83 1,866.88817.221,863.48820.631,860.06824.051,856.63827.481, 853.18830.931,849.72834.391,846.24837.871,842.75841.361,83 9.24844.871,835.72848.391,832.19851.921,828.64855.471,825. 07859.031,821.49862.611,817.90866.211,814.29869.821,810.67 873.441,807.03877.081,803.37880.741,799.70884.401,796.0288 8.091,792.32891.791,788.60895.511,784.87899.241,781.12902. 981,777.36906.751,773.58910.521,769.79914.321,765.98918.13 1,762.15921.951,758.31925.801,754.46929.651,750.58933.531, 746.69937.421,742.79941.321,738.86945.241,734.93949.181,73 0.97953.141,727.00957.111,723.01961.101,719.01965.101,714.
- 27. 2.281,691.83985.231,698.88978.151,705.96971.041,713.06963. 911,720.20956.741,727.37949.541,734.57942.311,741.79935.06 1,749.05927.771,756.34920.451,763.66913.101,771.01905.721, 778.38898.311,785.79890.871,793.24883.401,800.71875.901,80 8.21868.361,815.74860.801,823.31853.201,830.91845.571,838. 54837.911,846.20830.221,853.89822.491,861.61814.741,869.37 806.951,877.16799.131,884.98791.271,892.83783.391,900.7277 5.471,908.64767.511,916.59759.531,924.58751.511,932.60743. 461,940.65735.371,948.74727.251,956.86719.101,965.01710.91 1,973.20702.691,981.42694.431,989.68686.141,997.97677.822, 006.29669.462,014.65661.062,023.05652.632,031.47644.172,03 9.94635.672,048.44627.132,056.97618.562,065.54609.962,074. 15601.312,082.79592.642,091.47583.922,100.19575.172,108.94 566.382,117.72557.562,126.55548.702,135.41539.802,144.3153 0.872,153.24521.902,162.21512.892,171.22503.842,180.27494. 762,189.35485.632,198.48476.472,207.64467.272,216.83458.04 2,226.07448.762,235.35439.452,244.66430.102,254.01420.702, 263.40411.272,272.84401.802,282.31392.292,291.82382.742,30 1.36373.152,310.95363.532,320.58353.862,330.25344.152,339. 96334.402,349.71324.612,359.50314.782,369.33304.902,379.20 294.992,389.12285.042,399.07275.042,409.07265.002,419.1125 4.922,429.19244.802,439.31234.642,449.47224.432,459.68214. 182,469.93203.892,480.22193.562,490.55183.182,500.93172.76 2,511.35162.292,521.81151.792,532.32141.242,542.87130.642, 553.47120.002,564.11109.322,574.7998.592,585.5287.822,596. 2977.002,607.1166.132,617.9755.232,628.8844.272,639.8433.2 72,650.8322.232,661.8811.142,672.97 Mortgage Principle and Interest Interest Expense 2083.3333333333335 2080.8301050761361 2078.3164467012002 2075.7923147497022 2073.2576655817402 2070.7124553755775 2068.1566401268897 2065.5901756479989 2063.0130175671125 2060.4251213275561 2057.8264421870012 2055.2169352166943 2052.5965553006777 2049.9652571350107 2047.3229952269871
- 28. 2044.6697238943466 2042.0053972644869 2039.3299692736693 2036.6433936662233 2033.9456239937465 2031.2366136143007 2028.5163156916074 2025.7846831942363 2023.0416688947926 2020.2872253691014 2017.5213049953863 2014.7438599534476 2011.954842223834 2009.1542035870136 2006.3418956225401 2003.5178697082144 2000.6820770192458 1997.8344685274062 1994.974995000184 1992.103606999932 1989.2202548830121 1986.3248887989387 1983.4174586895147 1980.4979142879681 1977.5662051180818 1974.6222804933209 1971.6660895159566 1968.6975810761869 1965.7167038512516 1962.7234063045455 1959.7176366847282 1956.6993430248285 1953.6684731413457 1950.6249746333485 1947.568794881568 1944.4998810474881 1941.4181800724332 1938.3236386766487 1935.2162033583818 1932.0958203929556 1928.9624358318401 1925.8159955017197 1922.6564450035576 1919.4837297116528 1916.2977947726984 1913.0985851048317 1909.8860453966822 1906.6601201064157 1903.4207534607729 1900.1678894541064 1896.901471847412 1893.6214441673567 1890.3277497053014 1887.0203315163205 1883.6991324182191 1880.3640949905421 1877.0151615735831 1873.6522742673869 1870.2753749307481 1866.8844051802064 1863.4793063890377 1860.0600196862392 1856.6264859555122 1853.1786458342406 1849.7164397124636 1846.2398077318462 1842.7486897846427 1839.2430255126592 1835.7227543062088 1832.187815303065 1828.6381473874083 1825.0736891887695
- 29. 1821.49437908097 1817.9001551810545 1814.2909553482225 1810.6667171827539 1807.0273780249292 1803. 3728749539468 1799.7031447868353 1796.0181240773609 1792.3177491149304 1788.6019559234896 1784.8706802604181 1781.1238576154171 1777.3614232093951 1773.5833119933482 1769.7894586472341 1765.9797975788449 1762.1542629226706 1758.3127885387621 1754.4553080115875 1750.5817546488829 1746.6920614805001 1742.7861612572494 1738.8639864497352 1734.9254692471895 1730.9705415563001 1726.9991350000316 1723.0111809164455 1719.0066103575111 1714.9853540879146 1710.9473425838614 1706.8925060318745 1702.820774327588 1698.7320770745332 1694.6263435829244 1690.5035028684335 1686.3634836509659 1682.2062143534254 1678.0316231004783 1673.839637717311 1669.6301857283802 1665.4031943561622 1661.1585905198933 1656.8963008343067 1652.6162516083634 1648.3183688439788 1644.0025782347423 1639.6688051646343 1635.3169747067338 1630.9470116219259 1626.5588403575975 1622.1523850463348 1617.7275695046083 1613.2843172314579 1608.8225514071696 1604.3421948919465 1599.8431702245769 1595.3253996210931 1590.7888049734281 1586.2333078480647 1581.6588294846786 1577.0652907947785 1572.4526123603373 1567.8207144324192 1563.1695169298014 1558.4989394375893 1553.8089012058265 1549.0993211480977 1544.3701178401286 1539.6212095183764 1534.8525140786167 1530.0639490745248 1525.2554317162492
- 30. 1520.4268788689806 1515.5782070515152 1510.7093324348102 1505.8201708405356 1500.9106377396181 1495.9806482507804 1491.0301171390722 1486.0589588143989 1481.0670873300394 1476.0544163811614 1471.0208593033301 1465.9663290710077 1460.8907382960506 1455.7939992261979 1450.6760237435544 1445.5367233630664 1440.3760092309928 1435.1937921233691 1429.9899824444635 1424.7644902252293 1419.5172251217482 1414.2480964136694 1408.95701300264 1403.6438834107314 1398.3086157788566 1392.9511178651821 1387.5712970435343 1382.1690603017962 1376.7443142403008 1371.2969650702159 1365.8269186119223 1360.3340802933858 1354.8183551485222 1349.2796478155547 1343.7178625353665 1338.1329031498442 1332.5246731002158 1326.8930754253806 1321.2380127602335 1315.5593873339815 1309.8571009684533 1304.1310550764024 1298.3811506598011 1292.6072883081306 1286.8093681966616 1280.9872900847283 1275.1409533139952 1269.2702568067173 1263.3750990639924 1257.4553781640061 1251.5109917602699 1245.5418370798513 1239.5478109215978 1233.5288096543516 1227.4847292151583 1221.4154651074687 1215.3209123993302 1209.2009657215744 1203.0555192659949 1196.8844667835169 1190.687701582362 1184.4651165262021 1178.2166040323086 1171.9420560696901 1165.6413641572278 1159.3144193617966 1152.9611122963845 1146.5813331181998 1140.1749715267727 1133.7419167620478 1127.2820576024703 1120.795282363061
- 31. 1114.2814788934875 1107.7405345761242 1101.1723363241049 1094.5767705793692 1087.9537233106969 1081.3030800117385 1074.6247256990346 1067.9185449100275 1061.1844217010666 1054.4222396454015 1047.6318818311711 1040.8132308593813 1033.9661688418757 1027.0905773992974 1020.1863376590416 1013.2533302532014 1006.2914353165036 999.3005324842361 992.28050089016745 985.23121916445689 978.1525654315559 971.04441730810117 963.90665190079869 956.73914580429903 949.54177509906401 942.31441534922385 935.05694160042606 927.76922837767495 920.45114968316238 913.1025789940893 905.72338926047848 898.31345290297759 890.87264181065382 883.40082733877864 875.89788030660395 868.36367099512859 860.7980691448555 853.20094395353954 845.57216407392639 837.91159761148151 830.21911212210978 822.49457460986571 814.73785152465393 806.94880875992033 799.12731165033381 791.27322496945726 783.38641292741045 775.46673916852183 767.51406676897102 759.5282582344222 751.50917549764597 743.45667991613323 735.37063226969758 727.25089275806829 719.09732099847406 710.90977602321482 702.68811627722539 694.4321996156275 686.14188330127 308 677.8170240022755 669.45747778953205 661.06310013423547 652.63374590537524 644.16926936722803 635.66952417683865 627.13436338148915 618.56363941615916 609.95720410097363 601.31490863864144 592.63660361188283 583.92213898084606 575.1713640805134
- 32. 566.38412761809593 557.56027767041849 548.69966168129235 539.80212645887821 530.8675181730373 521.895682352672 512.88646388305528 503.83970700314848 494.75525530290867 485.63295172058457 476.47263854000079 467.27415738783122 458.03734923086097 448.76205437323665 439.44811245370556 430.09536244284311 420.7036426402687 411.27279067185026 401.80264348689678 392.29303735533927 382.7438078649003 373.1547899182512 363.52581773015766 353.85672482461376 344.14734403196343 334.39750748601034 324.60704662111584 314.77579216928427 304.90357415723673 294.99022190347227 285.03556401531722 275.03942838596146 265.00164219148337 254.92203188786166 244.80042320797486 234.63664115858853 224.43051001732974 214.18185332964907 203.89049390576972 193.5562538176242 183.17895439577808 172.75841622634093 162.29445914786444 151.78690224822765 141.23556386150904 130.64026156484576 120.00081217527971 109.31703174659047 98.588735566115048 87.815738151554299 76.997853247766216 66.134893823545667 55.226672068390883 44.272999389256285 33.273686407291954 22.228542954569441 11.137378070793918 Principle Payment 600.77478172736164 603.27800998455905 605.79166835949491 608.31580031099293 610.85044947895494 613.39565968511761 615.95147493380546 618.51793941269625 621.09509749358267 623.68299373313903 626.28167287369388 628.89117984400082 631.51155976001746 634.14285792568444
- 33. 636.78511983370799 639.43839116634854 642.10271779620825 644.77814578702578 647.46472139447178 650.16249106694863 652.8715014463944 655.59179936908777 658.3234318664588 661.06644616590256 663.82088969159372 666.58681006530878 669.36425510724757 672.15327283686111 674.9539114736815 677.76621943815508 680.59024535248068 683.42603804144937 686.27364653328891 689.13312006051115 692.0045080607631 694.88786017768302 697.78322626175645 700.69065637118047 703.61020077272701 706.5419099426133 709.48583456737424 712.4420255447385 715.41053398450822 718.3914112094435 721.38470875614962 724.39047837596695 727.4087720358666 730.43964191934947 733.4831404273466 736.53932017912712 739.60823401320704 742.68993498826194 745.78447638404646 748.89191170231334 752.01229466773952 755.14567922885499 758.2921195589754 761.45167005713756 764.62438534904231 767.81032028799677 771.0095299558634 774.22206966401291 777.44799495427947 780.68736159992227 783.94022560658868 787.20664321328309 790.48667089333844 793.78036535539377 797.08778354437459 800.40898264247608 803.74402007015306 807.09295348711203 810.4558407933082 813.83274012994707 817.22370988048874 820.62880867165745 824.0480953744559 827.48162910518295 830.92946922645456 834.3916753482315 837.86830732884891 841.35942527605243 844.86508954803594 848.38536075448633 851.92029975763012 855.46996767328687
- 34. 859.03442587192558 862.61373597972511 866.20795987964061 869.81715971247263 873.4413978779412 877.08073703576588 880.73524010674828 884.40497027385982 888.08999098333425 891.79036594576473 895.50615913720549 899.23743480027701 902.98425744527799 906.74669185130006 910.52480306734697 914.31865641346099 918.12831748185022 921.95385213802456 925.79532652193302 929.65280704910765 933.52636041181222 937.41605358019501 941.32195380344569 945.24412861095993 949.18264581350559 953.13757350439505 957.1089800606635 961.09693414424964 965.10150470318399 969.1227609727805 973.1607724768337 977.21560902882061 981.28734073310716 985.37603798616192 989.48177147777074 993.60461219226158 997.74463140972921 1001.9019007072698 1006.0764919602168 1010.2684773433841 1014.4779293323149 1018.7049207045329 1022.9495245408018 1027.2118142263885 1031.4918634523317 1035.7897462167164 1040.1055368259529 1044.4393098960609 1048.7911403539613 1053.1611034387693 1057.5492747030976 1061.9557300143604 1066.3805455560869 1070.8237978292373 1075.2855636535255 1079.7659201687486 1084.2649448361183 1088.782715439602 1093.319310087267 1097.8748072126305 1102.4492855760166 1107.0428242659166 1111.6555027003578 1116.2874006282759 1120.9385981308938 1125.6091756231058 1130.2992138548686 1135.0087939125974 1139.7379972205665 114 4.4869055423187 1149.2556009820785 1154.0441659861704
- 35. 1158.8526833444459 1163.6812361917146 1168.52990800918 1173.3987826258849 1178.2879442201595 1183.197477321077 1188.1274668099147 1193.0779979216229 1198.0491562462962 1203.0410277306557 1208.0536986795337 1213.087255757365 1218.1417859896874 1223.2173767646445 1228.3141158344972 1233.4320913171407 1238.5713916976288 1243.7321058297023 1248.914322937326 1254.1181326162316 1259.3436248354658 1264.5908899389469 1269.8600186470258 1275.1511020580551 1280.4642316499637 1285.7994992818385 1291.156997195513 1296.5368180171608 1301.9390547588989 1307.3638008203943 1312.8111499904792 1318.2811964487728 1323.7740347673093 1329.2897599121729 1334.8284672451405 1340.3902525253286 1345.9752119108509 1351.5834419604794 1357.2150396353145 1362.8701023004617 1368.5487277267137 1374.2510140922418 1379.9770599842927 1385.7269644008941 1391.5008267525645 1397.2987468640335 1403.1208249759668 1408.9671617467 1414.8378582539779 1420.7330159967028 1426.652736896689 1432.5971233004252 1438.5662779808438 1444.5603041390973 1450.5793054063436 1456.6233858455369 1462.6926499532265 1468.787202661365 1474.9071493391207 1481.0525957947002 1487.2236482771782 1493.4204134783331 1499.642998534493 1505.8915110283865 1512.166058991005 1518.4667509034673 1524.7936956988985 1531.1470027643106 1537.5267819424953 1543.9331435339225 1550.3661982986473 1556.8260574582248
- 36. 1563.3128326976341 1569.8266361672077 1576.3675804845709 1582.9357787365902 1589.531344481326 1596.1543917499982 1602.8050350489566 1609.4833893616606 1616.1895701506676 1622.9236933596285 1629.6858754152936 1636.476233229524 1643.2948842013138 1650.1419462188194 1657.0175376613977 1663.9217774016536 1670.8547848074936 1677.8166797441916 1684.807582576459 1691.8276141705278 1698.8768958962382 1705.9555496291391 1713.063697752594 1720.2014631598963 1727.3689692563962 1734.566339961631 1741.7936997114712 1749.0511734602692 1756.3388866830201 1763.6569653775327 1771.0055360666058 1778.3847258002165 1785.7946621577175 1793.2354732500412 1800.7072877219166 1808.2102347540913 1815.7444440655665 1823.3100459158395 1830.9071711071556 1838.5359509867687 1846.1965174492136 1853.8890029385852 1861.6135404508295 1869.3702635360412 1877.1593063007749 1884.9808034103612 1892.8348900912379 1900.7217021332847 1908.6413758921733 1916.594048291724 1924.579856826273 1932.598939563049 1940.6514351445619 1948.7374827909975 1956.8572223026267 1965.0107940622211 1973.1983390374803 1981.4199987834697 1989.6759154450676 1997.966231759422 2006.2910910584196 2014.6506372711631 2023.0450149264598 2031.4743691553199 2039.9388456934671 2048.4385908838567 2056.9737516792061 2065.5444756445359 2074.1509109597214 2082.7932064220536 2091.4715114488122 2100.1859760798488
- 37. 2108.9367509801818 2117.7239874425991 2126.5478373902765 2135.408453379403 2144.3059886018168 2153.2405968876578 2162.2124327080232 2171.2216511776396 2180.2684080575468 2189.3528597577865 2198.4751633401106 2207.6354765206943 2216.833957672864 2226.0707658298343 2235.3460606874587 2244.6600026069896 2254.0127526178521 2263.4044724204264 2272.835324388845 2282.3054715737985 2291.8150777053561 2301.3643071957949 2310.9533251424441 2320.5822973305376 2330.2513902360815 2339.9607710287319 2349.7106075746847 2359.5010684395793 2369.332322891411 2379.2045409034586 2389.1178931572231 2399.0725510453781 2409.0686866747337 2419.1064728692118 2429.1860831728336 2439.3076918527204 2449.4714739021065 2459.6776050433655 2469.926261731046 2480.2176211549254 2490.551861243071 2500.9291606649172 2511.3496988343541 2521.8136559128307 2532.3212128124674 2542.8725511991861 2553.4678534958493 2564.1073028854153 2574.7910833141045 2585.5193794945799 2596.2923769091408 2607.1102618129289 2617.9732212371496 2628.8814429923041 2639.8351156714389 2650.8344286534034 2661.8795721061256 2672.9707369899011 Payment Month Dollars Part 4Equipment10,500,000Pretax salvage value1,100,000R&D200,000Marketing study150,000Year 1Year 2Year 3Year 4Year 5Sales (units)75,00085,00080,00070,00065,000Sales of old product45,00025,000Lost sales10,00010,000Depreciation
- 38. rate14.29%24.49%17.49%12.49%8.93%Price240VC140FC2,100 ,000Price of old product150Product price after reduction120VC of old product95Tax rate30%NWC percentage22%Required return10%SalesYear 1Year 2Year 3Year 4Year 5New18,000,00020,400,00019,200,00016,800,00015,600,000Lo st sales1,500,0001,500,000Lost revenue1,050,000450,000Net sales15,450,00018,450,00019,200,00016,800,00015,600,000VC New10,500,00011,900,00011,200,0009,800,0009,100,000Lost sales950,000950,000Total VC9,550,00010,950,00011,200,0009,800,0009,100,000Sales15, 450,00018,450,00019,200,00016,800,00015,600,000VC9,550,00 010,950,00011,200,0009,800,0009,100,000Fixed costs2,100,0002,100,0002,100,0002,100,0002,100,000Dep1,500 ,4502,571,4501,836,4501,311,450937,650EBT2,299,5502,828,5 504,063,5503,588,5503,462,350Tax689,865848,5651,219,0651, 076,5651,038,705NI1,609,6851,979,9852,844,4852,511,9852,42 3,645+Dep1,500,4502,571,4501,836,4501,311,450937,650OCF3 ,110,1354,551,4354,680,9353,823,4353,361,295NWCBeg03,399 ,0004,059,0004,224,0003,696,000End3,399,0004,059,0004,224, 0003,696,000- 0NWC CF(3,399,000)(660,000)(165,000)528,0003,696,000Net CF(288,865)3,891,4354,515,9354,351,4357,057,295BV of equipment2,342,550Salvage6,100,000Taxes on sale of equipment(1,127,235)Salvage CF6,100,000Cash flow on sale of equipment4,972,765Year012345CF(10,500,000)(288,865)3,891, 4354,515,9354,351,43512,030,0601. ) Payback PeriodThis metric seeks to calculate the number of years the company will take to repay back initial investment. The project is viable if it can repay before end of its life. Short period is an indicator of viable project. YearsCFCumulative CFMonths1(288,865)(288,865)23,891,4353,602,57034,515,9358 ,118,50544,351,43512,469,9407.81512,030,060They do this as a year amount in decimal form. Payback period is 3 years and 8 Monthstotal of -2pts. 2.) Profitability IndexThis index measures profit margin of the investment. It is obtained by taking the formula:-Net Present Value/Initial InvestmentIf the index is
- 39. more than 1, the project is profitable. YearsCFPVIF, 5 Years, 10%Present value1(288,865)0.9091(262,607)23,891,4350.82643,215,88234, 515,9350.75133,392,82244,351,4350.6832,972,030512,030,060 0.62097,469,464Net cashflow16,787,591Profitability index1.5993.) IRR of the projectThis is the rate at which net present value equals zero. The IRR should be higher than required return for the project to be viable. Initial InvestmentCashflowsYear 0Year 1Year 2Year 3Year 4Year 5(10,500,000)(288,865)3,891,4354,515,9354,351,43512,030,060 IRR24.35%Your final year cashflow is wrong throw off this answer. -1pt. 4.) NPV of the projectNet present value is the compounded future proceeds of a project. This is obtained by taking Present value of all cashflows - Initial investment outlay. Net present value should be positive for project to be viable. NPV CalculatorInterest Rate10.00%Initial Investement10,500,000Net Cash Flows1(288,865)should be discounted CF not these 23,891,43534,515,93544,351,435512,030,060NPV6,288,155.67t otal off -5pts5. ) Yes, Leah should accept the project because:- i) The payback period is 3 years and 8 months. This is shorter than 5 year investment period. ii) The profitability index is more than 1. iii) IRR is higher than required return. iv) The NPV of the project is very high. 6.) Break-even Price that Leah can setAt breakeven point, NPV will be zero. Break-even point in units is achieved by taking:-Fixed cost/(selling price-variable cost) Therefore, Leah can set selling price at207.8794081528Not sure how you got this but it is about a $1 higher per unit. NPV CalculatorInterest Rate10.00%Initial Investement10,500,000total off step -9pts. Net Cash Flows1(1,445,206)22,050,92532,681,84942,706,861510,073,916 Part 5DateRisk-FreeMonthly Risk-FreeS&P 500S&P 500 ReturnStock PriceReturnMutual Fund Price (VINIX)Mutual Fund ReturnS&P Risk PremiumELY Risk PremiumMutual Fund Risk Premium2012-03- 010.000600.000051408.4699716.593309115.3748932012-04-
- 44. 0.000940.094410.00057 Risk Premium Analysis S & P Risk Premium ELY Risk Premium 0 - 0.007555786 -0.093253571 -6.3403326587844703E-3- 0.062709059 -0.097916715 -6.0153549292484419E-2 0.039513315 0.070610664 4.1114730754143174E-2 0.012539241 -0.071124471 1.3810548016195974E-2 0.01968837 0.048992472 2.238087186100533E-2 0.024169487 0.06775945 2.5876742030958425E-2 - 0.019881077 -0.110840825 -1.8659239256941046E-2 0.002746717 0.236372649 5.6914596832990921E-3 0.007034897 -0.035641593 9.0715610994864786E-3 0.05038643 0.009189011 5.1827686168108081E-2 0.010993983 0.025756333 1.3481301214936849E-2 0.035921057 -0.014947556 3.7399470075788116E-2 0.018044101 0.012042905 1.9166259325020911E-2 0.020746145 0.023920446 2.3335963615952231E-2 - 0.015024302 -0.039441142 -1.341917752460859E-2 0.049445413 0.091168757 5.0772016004189034E-2 - 0.031331352 -0.034862278 -2.9020670207036043E-2 0.029732857 0.028885005 3.1355685780640012E-2 0.044504086 0.183897265 4.5882429981043027E-2 0.028007805 -0.038018694 3.037790255247344E-2 0.023546125 0.040724037 2.528556090766082E-2 - 0.035599572 -0.030858826 -3.4633865519540438E-2 0.043075363 0.031833654 4.566886378638798E-2 0.006890499 0.213735019 8.3279114382106972E-3 0.006184122 -0.147766127 7.3302582336830929E-3 0.02100528 -0.078122874 2.3417955709992999E-2 0.019041665 0.037389856 2.0641850744345679E-2 - 0.015096497 -0.086555216 -1.3820561780359116E-2 0.037630295 0.002611819 3.9934351171928624E-2 - 0.015522171 -0.048628527 -1.4036990523593459E-2 0.023184794 0.082856313 2.4374985935330436E-2 0.024500255 -0.053630134 2.6908994566372375E-2 - 0.004213588 0.039111298 -2.5624802833447984E-3-
- 45. 0.031057472 0.059723636 -3.0016145328762601E-2 0.054875844 0.101698979 5.7411967536850607E-2 - 0.017412774 0.061253273 -1.5886396910221041E-2 0.008504153 0.015723162 9.5152207969610453E-3 0.010483049 -0.023798447 1.2843126701959685E-2 - 0.021020006 -0.052974427 -1.9329552585910556E-2 0.01971703 0.02458352 2.0929849104039121E-2 - 0.062614152 -0.032809596 -6.0360702564987836E-2- 0.026451165 -0.056505604 -2.4934861469093923E-2 0.082974784 0.191608317 8.4370218986404247E-2 0.000446536 0.014049319 2.9385776395821853E-3 - 0.017671852 -0.065617868 -1.6026102740683897E-2-0 .050926989 -0.075563288 -4.9864781697257887E-2- 0.004345027 0.02166741 -1.5699702989695886E-30.065782781 0.025663297 6.7637458766985126E-2 0.002541065 0.023964451 3.7223124041833181E-3 0.015132936 0.078065729 1.7707121347218174E-2 0.000727588 0.014727031 2.4169910507285297E-3 0.035393134 0.047775572 3.6596289907600769E-2 -0.00143591 0.06798842 1.1914918718576018E-3 -0.001392784 0.016479112 -4.5364082060776354E-6-0.019625679 - 0.12078571 -1.847368516863436E-2 0.033924522 0.190717119 3.6771775776658425E-2 0.017850762 - 0.098292347 1.9411882366709994E-2 0.017467692 0.0333425 1.8520692225696928E-2 0.03679816 - 0.107218263 3.9274430739089386E-2 -0.000939197 0.09440549 5.7362896952863225E-4 Part 61.)Jensen's alpha measures excess return.where are the regression analysis they ask you to runIf an asset has a positive alpha, the stock will plot above SML.how can you answer these questions without them for both ELY and the mutual fund2.) Alpha on both ELY and Mutual fund is less than zero. R squared would only show up there. is it significantly, how do you know where do it show this 3.) On mutual fund, Beta is 1.00This indicates that the risk of the stock is neither more nor less volatile than the wider market.What is ELY's 4.) Mutual
- 46. Fund Risk Analysis has the highest R-Squared.Total off step - 15ptsYes, this was expected. Why would you expect this?BreakdownThet R-squared measures the degree of relationship between independent and dependent variables. Mutual fund is a combination of many stocks which include S&P. The relationship between mutual stock and S&P stock is high.ELY is an independent stock. It does not have any similar characteristics to S&P. As a result, there is no close relationship between the two.So as expected R-squared to be high in Mutual fund regression analysis and low in ELY regression analysis. This is not to correct graph they ask you to use Mutual Fund, S&P Scatter Plot 0 0 -7.5557860426037609E-3-6.3403326587844703E-3- 6.3403326587844703E-3 -6.0153549292484419E-2 4.1114730754143174E-2 1.3810548016195974E-2 2.238087186100533E-2 2.5876742030958425E-2 - 1.8659239256941046E-2 5.6914596832990921E-3 9.0715610994864786E-3 5.1827686168108081E-2 1.3481301214936849E-2 3.7399470075788116E-2 1.9166259325020911E-2 2.3335963615952231E-2 - 1.341917752460859E-2 5.0772016004189034E-2 - 2.9020670207036043E-2 3.1355685780640012E-2 4.5882429981043027E-2 3.037790255247344E-2 2.528556090766082E-2 -3.4633865519540438E-2 4.566886378638798E-2 8. 3279114382106972E-3 7.3302582336830929E-3 2.3417955709992999E-2 2.0641850744345679E-2 -1.3820561780359116E-2 3.9934351171928624E-2 -1.4036990523593459E-2 2.4374985935330436E-2 2.6908994566372375E-2 - 2.5624802833447984E-3 -3.0016145328762601E-2 5.7411967536850607E-2 -1.5886396910221041E-2 9.5152207969610453E-3 1.2843126701959685E-2 - 1.9329552585910556E-2 2.0929849104039121E-2 - 6.0360702564987836E-2 -2.4934861469093923E-2 8.4370218986404247E-2 2.9385776395821853E-3 -
- 47. 1.6026102740683897E-2 -4.9864781697257887E-2- 1.5699702989695886E-3 6.7637458766985126E-2 3.7223124041833181E-3 1.7707121347218174E-2 2.4169910507285297E-3 3.6596289907600769E-2 1.1914918718576018E-3 -4.5364082060776354E-6- 1.847368516863436E-2 3.6771775776658425E-2 1.9411882366709994E-2 1.8520692225696928E-2 3.9274430739089386E-2 5.7362896952863225E-4 - 9.3919718808453982E-4 -7.5557860426037609E-3- 6.2709058966510925E-2 3.9513315467924748E-2 1.2539240792821125E-2 1.9688369680148136E-2 2.416948702981038E-2 -1.988107654489411E-2 2.7467170173433274E-3 7.0348971305312308E-3 5.0386429852911828E-2 1.0993982528592435E-2 3.5921056850289457E-2 1.8044101192585742E-2 2.074614505437954E-2 -1.5024301636062793E-2 4.9445413148558416E-2 -3.1331352367200242E-2 2.973285651057243E-2 4. 4504085951339437E-2 2.8007804968519859E-2 2.3546124883826153E-2 - 3.5599572341829311E-2 4.3075363309928665E-2 6.8904989412690472E-3 6.1841222983860886E-3 2.100528001299596E-2 1.9041664992253935E-2 - 1.5096497248586501E-2 3.7630295489735198E-2 - 1.5522170556397083E-2 2.3184794120105559E-2 2.4500255427031433E-2 -4.2135878779204061E-3- 3.1057472457136841E-2 5.487584434788733E-2 - 1.741277358042289E-2 8.5041530634580725E-3 1.0483049059983523E-2 -2.1020005709233854E-2 1.9717029696721344E-2 -6.2614151500536161E-2- 2.6451164906560427E-2 8.2974784427060799E-2 4.4653592739068499E-4 -1.7671851842981083E-2- 5.0926988639613056E-2 -4.3450270969657891E-3 6.5782781244031807E-2 2.5410651475399298E-3 1.5132935690905888E-2 7.2758778764477788E-4 3.5393134458587619E-2 -1.4359098027147005E-3- 1.3927841776587278E-3 -1.9625679279557544E-2
- 48. 3.3924522187570479E-2 1.7850762196895176E-2 1.7467691504797912E-2 3.6798160337279152E-2 - 9.3919718808453982E-4 ELY, S&P Scatter Plot S & P Risk Premium 0 -0.007555786 - 9.3253571111511183E-2 -0.062709059 - 9.7916715321557074E-2 0.039513315 7.0610664432728884E-2 0.012539241 - 7.1124470854576391E-2 0.01968837 4.8992471968235418E-2 0.024169487 6.7759449647900441E-2 -0.019881077 - 0.1108408246903074 0.002746717 0.23637264888170298 0.007034897 -3.5641592538916279E-20.05038643 9.1890108198647152E-3 0.010993983 2.5756332688026618E-2 0.035921057 - 1.4947556339870952E-2 0.018044101 1.2042904559322502E-2 0.020746145 2.3920446074753389E-2 -0.015024302 - 3.9441142496485837E-2 0.049445413 9.1168757292590621E-2 -0.031331352 - 3.4862278112816336E-2 0.029732857 2.8885004658387801E-2 0.044504086 0.18389726526597441 0.028007805 - 3.8018694191397466E-2 0.023546125 4.0724036503916511E-2 -0.035599572 - 3.0858825711658475E-2 0.043075363 3.1833653978751333E-2 0.006890499 0.21373501941170331 0.006184122 - 0.14776612718433182 0.02100528 - 7.8122873999087808E-2 0.019041665 3.7389856454607129E-2 -0.015096497 - 8.6555215914406819E-2 0.037630295 2.6118189343944964E-3 -0.015522171 - 4.8628527111354125E-2 0.023184794 8.2856313178651289E-2 0.024500255 -
- 49. 5.3630134452390003E-2 -0.004213588 3.91112978828713E-2 -0.031057472 5.9723636309699069E-2 0.054875844 0.1016989788354454 -0.017412774 6.1253273394152631E-2 0.008504153 1.572316220040551E-2 0.010483049 - 2.3798447041910021E-2 -0.021020006 - 5.2974427117654425E-2 0.01971703 2.4583519766975041E-2 -0.062614152 -3.2809 595758037505E-2 -0.026451165 -5.650560351778218E- 2 0.082974784 0.19160831698917263 0.000446536 1.4049318582413173E-2 -0.017671852 - 6.5617867824352638E-2 -0.050926989 -7.55632879062626E-2 -0.004345027 2.1667409730886426E-2 0.065782781 2.566329743962166E-2 0.002541065 2.3964451238429819E-2 0.015132936 7.8065729462552039E-2 0.000727588 1.4727030568048203E-2 0.035393134 4.7775571552444579E-2 -0.00143591 6.7988419828336213E-2 -0.001392784 1.6479112129654878E-2 -0.019625679 - 0.12078570993324902 0.033924522 0.19071711880065506 0.017850762 -9.8292346758119389E-20.017467692 3.334249966885669E-2 0.03679816 - 0.10721826313699384 -0.000939197 9.4405489614243415E-2 Graded Project Corporate Finance © PENN FOSTER, INC. 2017 PAGE 1CORPORATE FINANCE Graded Project
- 50. CONTENTS INTRODUCTION 2 Part 1: El Cap Climbing Company 2 Part 2: Mortgage Decision 3 Part 3: Can We Upgrade? 5 Part 4: Risky Business 6 GRADING CRITERIA 10 Submitting Your Project 11 © PENN FOSTER, INC. 2017 PAGE 2CORPORATE FINANCE Graded Project CORPORATE FINANCE INTRODUCTION The purpose of this graded project is to bring together in a practical way some important concepts you’ve learned in the course. Once you’ve completed this project, you can perform similar analyses on other organiza- tions. Some of the work for this project will be completed in Excel. Once you’ve completed these problems in Excel, and if you’ve linked all your cells properly, you can reuse your spreadsheets, only changing the inputs. Go to your student portal and download the 500306_Project_Files. This spreadsheet contains information needed to complete the project. You’ll be submitting this Excel spreadsheet along with your project.
- 51. Part 1: El Cap Climbing Company El Cap Climbing Company (ECCC) is a small startup that manufactures and sells high-quality climbing gear in Fresno, California. The founder of the company, Leah, has been incredibly successful, but hasn’t kept the company’s financial records as well as she might have. The initial investment for El Cap was provided by her friends and family, and was small. However, current operations can’t meet the demand for the product, and Leah has plans to increase both production and the number of storefronts. These plans require a large investment from both equity and debt financing. The new investors and creditors require detailed financial statements. Leah has hired you, a finan- cial analyst, to prepare these statements and give insight into the financial position of the firm. Leah has provided information from her bank statements, bills, and receipts in an Excel spreadsheet, which is found in your downloaded project files. She explained to you that taxes are paid at a rate of 30 percent, and dividends are paid at a rate of 40 per- cent. (Note: You can create the statements in the same Excel spreadsheet that has the financial information. Be sure to let the instructor know if you choose to do this instead of creating them in a Word document.) Prepare the following:
- 52. n An income statement for 2015 and 2016 n A balance sheet for 2015 and 2016 n Operating cash flows for the two years n Cash flows from assets in 2016 n Cash flows to creditors for 2016 n Cash flows to stockholders for 2016 © PENN FOSTER, INC. 2017 PAGE 3CORPORATE FINANCE Graded Project B. Answer the following: 1. How would you describe the financial position of the firm in 2016? Write a brief overview. 2. What do you think about Leah’s plans to expand? Part 2: Mortgage Decision In order to expand, El Cap Climbing Company (ECCC) is considering taking out a mort- gage for a new store location, a nonresidential real property that includes land and a building. Leah is unsure if she has the cash flow to take on any more debt. She asked you to create a loan amortization schedule for the proposed mortgage loan. Then, you’ll create a chart that represents the portion of each payment that goes toward principal and interest.
- 53. A. Prepare the following: n A loan amortization schedule n A chart showing the percentage of the payment applied toward the principal and interest Loan Amortization Schedule First, you’ll need to create a loan amortization schedule in the downloaded Excel spreadsheet. Create the table on the tab named “Part 2 Loan Amortization Sched.” The following table illustrates the payments and interest amounts for a fixed-rate, 30-year, $500,000 mortgage, at a five-percent interest rate. The monthly payment will be 2,684.11. Payment Number Payment Amount 5% Interest Expense Principal Balance Annual Interest Expense 0 500,000.00 - 1 2,684.11 2,083.33 600.78 499,399.22
- 54. 2 2,684.11 2,080.83 603.28 498,795.94 …break in the sequence… Totals 466,278.03 500,000.00 359 2,684.11 22.22 2,661.89 2,671.41 360 2,682.54 11.13 2,671.41 - 855.56 The table serves as an example of what you’ll create in Excel. Note that the table shows only the figures for the first and the last year of payments; you’ll need to calculate the amounts for the remaining payments, and fill them in. Once you’ve determined how each of the amounts in the table is obtained, you can use relative and absolute cell references to fill in the full 360 payments. © PENN FOSTER, INC. 2017 PAGE 4CORPORATE FINANCE Graded Project The following is an explanation of the columns in the table: n Payment number—The first column in the table shows the 360 payments required to pay off the mortgage loan (30 years, with 12 monthly payments per year). n Payment amount—The second column shows the monthly payment amount.
- 55. n Interest—The third column shows the portion of the monthly payment that goes to interest. n Principal—The fourth column shows the portion paid toward the principal. n Balance—The fifth column shows the starting balance of $500,000, and the remaining balance each month after the principal is subtracted. n Annual interest expense—The last column provides a running total of the interest expense on the mortgage for the entire 12-month period. It’s the amount that would be reported on the financial statements. n Totals—The “Totals” under the “5% Interest Expense” and “Principal” columns show the final totals for the 30-year life of the mortgage. Mortgage Principal and Interest Chart Next, you’ll create a chart following these steps. Create the table on the tab named “Part 2 Chart.” 1. Start by selecting the Interest Expense and Principal columns. Make sure to select the column headers and values. Don’t select the Totals row. 2. Click on the Insert tab and select a “Stacked Column.” Make sure to label the x-axis (payment month) and y-axis (dollars), and include a legend for the two
- 56. values (interest and principal). 3. Your final chart should be set up similar to the chart below, with the data populating the chart. (The increments don’t need to be the same). © PENN FOSTER, INC. 2017 PAGE 5CORPORATE FINANCE Graded Project B. Answer the following: 1. How can you describe the relationship between time and the amount paid towards principal and interest? 2. Knowing what we know about ECCC’s cash flow from Part 1, is it reason- able to believe that ECCC can take on this new debt? Part 3: Can We Upgrade? It’s now 2017, and El Cap Climbing Company (ECCC) has continued to grow. One of ECCC’s major revenue-producing products is a spring-loaded camming device called SLCD, or cams. It’s a device with a small handle (called the “trigger”) and two spring loaded “cams” on an axle. When the trigger is pulled, the cams move together, decreasing the size of the cams. It’s then inserted into a crack or pocket in the rock. When the trigger is released, the cams expand. These cams are used as anchors when “trad” rock climbing.
- 57. ECCC currently has one set of cams on the market, and sales have been excellent. The cams are lighter and perform better than their competitors. However, as with any high-performance item, technology changes rapidly, and the cams are now falling behind the competition. ECCC spent $200,000 to develop a prototype for a new line of cams that has all the features of the existing cams, but are made from an even lighter and stronger 7075-T6 aluminum alloy. The company has spent a further $150,000 for a marketing study to determine the expected sales figures for the cam line. ECCC can manufacture a set of the new cams for an average of $140 each in variable costs. Fixed costs for the operation are estimated to run an additional $2.1 million per year if the new project is undertaken. The estimated sales volume is 75,000, 85,000, 80,000, 70,000, and 65,000 per year for the next five years, respectively. The unit price of the new cam set will be $240. The necessary equipment can be purchased for $10.5 million and will be depreciated on a seven-year MACRS schedule. It’s believed the value of the equipment in five years will be $1.1 million. Production of the current cam line is expected to be terminated in two years. If ECCC doesn’t introduce the new line of cams, sales will be 45,000 units and 25,000 units for the next two years, respectively. The price of the cam set is $150, with variable costs of $95
- 58. each, and fixed costs of $1.5 million per year. If ECCC does introduce the new cams, sales of the existing product will fall by 10,000 units per year, and the price of the existing sets should be lowered to $120 each. Net working capital for the cams will be 22 percent of sales and will occur with the timing of the cash flows for the year; for example, there’s no initial outlay for NWC, but changes in NWC will occur in Year 1 with the first year’s sales. ECCC has a 30-percent corporate tax rate and a required return of 10 percent. (Note: You can create the solutions in the same Excel spreadsheet that has the data report informa- tion. Be sure to let the instructor know if you choose to do this instead of creating them in a Word document.) © PENN FOSTER, INC. 2017 PAGE 6CORPORATE FINANCE Graded Project Leah has provided you with a data report in an Excel spreadsheet that contains information to answer the following questions: 1. What’s the payback period of the project? 2. What’s the profitability index of the project? 3. What’s the IRR of the project? 4. What’s the NPV of the project? 5. Should Leah accept the project?
- 59. 6. If Leah needs to adjust the price of the product, what’s the lowest Leah could make the price of the new cam set and still have a positive NPV project (keeping all other assumptions the same)? Part 4: Risky Business Lastly, just for fun, El Cap Climbing Company (ECCC) is looking at determining their sensitivity to market fluctuations. Since ECCC isn’t publically traded and can’t look at their own stock history, they must evaluate their competitors. Black Diamond Equipment is their closest competitor, but the company doesn’t have enough trading volume to make any sound conclusions. Leah identifies Callaway Golf Company (ELY) as ECCC’s closest publicly-traded competitor. Even though ELY sells golf equipment, it too is a specialized company selling high-tech sports equipment. Finding Beta with CAPM Note: This information is also in your textbook. The CAPM is one of the most thoroughly researched models in financial economics. When beta is estimated in practice, a variation of CAPM, called the market model, is often used. To derive the market model, we start with the CAPM: E(R
- 60. i ) 5 R f 1 β[E(R M ) 2 R f ] Since CAPM is an equation, we can subtract the risk-free rate from both sides, which gives us: E(R i ) 2 R f 5 β[E(R M ) 2 R f ] This equation is deterministic—that is, exact. In a regression, we realize that there’s some indeterminate error. We need to formally recognize this in the equation by adding epsilon, which represents this error: E(R
- 61. i ) 2 R f 5 β[E(R M ) 2 R f ] 1 ε © PENN FOSTER, INC. 2017 PAGE 7CORPORATE FINANCE Graded Project Finally, think of the above equation in a regression. Since there’s no intercept in the equa- tion, the intercept is zero. However, when we estimate the regression equation, we can add an intercept term, which we’ll call alpha: E(R i ) 2 R f 5 α i 1 β[E(R M ) 2 R
- 62. f ] 1 ε The intercept term is known as Jensen’s alpha, and it represents the “excess” return. If CAPM holds exactly, this intercept should be zero. Think of alpha in terms of the SML: If the alpha is positive, the stock plots above the SML; if the alpha is negative, the stock plots below the SML. You’ll first create a scatter plot and then perform a regression analysis for ELY stock and the mutual fund. Then use those results to compare and analyze the results. A. Scatter Plotting and Regression Analysis Use the following steps to create the scatter plot: 1. Go to the Part 4 Stock Data tab in your Excel spreadsheet. Highlight column K–M headings, then hold down the Ctrl button and select cells K-3 through M-62. 2. Go to the INSERT tab, click on Scatter Chart, and select the first style. 3. Move the chart to the side of the data, and increase the size of the chart. Click on the Chart Title and change it to Risk Premium Analysis. © PENN FOSTER, INC. 2017 PAGE 8CORPORATE FINANCE Graded Project
- 63. 4. In the DESIGN tab, click on Quick Layout. Select the layout that gives you the y formulas and the R2. 5. Move the y formulas and the R2 to the bottom right-hand corner of the chart. Now use the following steps to create a regression analysis for ELY and for the Mutual Fund: 1. First, check to see that you have the ability to run the analysis. Go to the DATA tab in Excel, and look for the Data Analysis feature shown in the image below. If you don’t see Data Analysis, you might need to add Analysis Toolpak in Excel. For instructions on how to load the Analysis Tookpak into your version of Excel, visit https://support.office.com/en- us/article/Load- the-Analysis-ToolPak-6a63e598-cd6d-42e3-9317- 6b40ba1a66b4. Contact Microsoft Support if you have any issues with this add- in. Once you've completed all these steps, you can continue with your project. © PENN FOSTER, INC. 2017 PAGE 9CORPORATE FINANCE Graded Project 2. Click on Data Analysis. A dialog box with a list of analysis
- 64. tools will open. Select Regression from the list and click OK. 3. Next, another dialog box opens for you to select your Inputs and Output for the regression. Select the input data ranges by highlighting S&P Risk Premium numbers (x-axes range) and the number for the asset you’re com- paring as the y-axes range. Output to a new worksheet (do not type a name in the text box). Select the check boxes for Labels, Confidence Level, and Residuals. Click OK. 4. Your regression analysis will open in a new worksheet. Rename the worksheet based on the premium being compared to the S&P premium, for example: “ELY Regression Analysis.” © PENN FOSTER, INC. 2017 PAGE 10CORPORATE FINANCE Graded Project B. Answer the following questions: 1. In this regression, R t is the return on the stock and R ft is the risk-free rate for
- 65. the same period. R Mt is the return on a stock market index, such as the S&P 500 index. αi is the regression intercept, and β i is the slope (and the stock’s estimated beta). ε t represents the residuals for the regression. The intercept, α i , is often called Jensen’s alpha. What does it measure? If an asset has a positive Jensen’s alpha, where would it plot with respect to the SML? R t 2 R ft 5 α i 1 β i [R Mt 2 R
- 66. ft ] 1 ε t 2. Is the alpha of either ELY or the mutual fund significantly more or less than zero? (Hint: The alpha is the intercept.) 3. How do you interpret the beta for the stock and the mutual fund? (Hint: The beta is next to the coefficient.) 4. Which of the two regression estimates has the highest R- squared? Is this what you would have expected? Use the scatterplot to explain why. GRADING CRITERIA Your project is worth a total of 100 points. Your instructor will use the following breakdown of points for each portion of the project to calculate your final grade: Part 1— 25 Points Total Part 2— 25 Points Total Part 3— 25 Points Total Part 4—
- 67. 25 Points Total Income Statement: 6 Points Balance Sheet: 5 points Operating Cash Flows: 4 points Asset Cash Flows: 6 points Creditor Cash Flows: 2 points Stockholder Cash Flows: 2 points Interest: 4 points Principal: 2 points Balance: 3 points Annual interest: 4 points Sub Totals: 2 points Graph: 5 points Question 1: 2 points Question 2: 3 points
- 68. Question 1: 3 points Question 2: 5 points Question 3: 5 points Question 4: 5 points Question 5: 2 points Question 6: 5 points Graph: 5 points Display Amounts: 6 points Question 1: 4 points Question 2: 2 points Question 3 : 2 points Question 4: 6 points Part 1 Financial Information20152016Cost of Goods Sold235,942297,915Cash36,54251,940Depreciation61,05669,01 1Interest Expense13,87715,905Selling and Admin Exp40,95258,569Accounts Payable32,19433,999Net Fixed Assets269,369328,185Sales482,155587,715Accounts Receivable24,12024,089Notes Payable24,86626,972Long-Term Debt142,148161,000Inventory32,76658,798New Equity016,000 Part 2 Loan Amortization Sched Part 2 Chart
- 69. Part 3 Data ReportEquipment10,500,000Pretax salvage value1,100,000R&D200,000Marketing study150,000Year 1Year 2Year 3Year 4Year 5Sales (units)75,00085,00080,00070,00060,000Sales of old product45,00025,000Lost sales10,00010,000Depreciation rate14.29%24.49%17.49%12.49%8.93%Price240VC140FC2,100 ,000Price of old product150Product price after reduction120VC of old product95Tax rate30%NWC percentage22%Required return10%SalesYear 1Year 2Year 3Year 4Year 5New18,000,00020,400,00019,200,00016,800,00014,400,000Lo st sales1,500,0001,500,000Lost revenue1,050,000450,000Net sales15,450,00018,450,00019,200,00016,800,00014,400,000VC New10,500,00011,900,00011,200,0009,800,0008,400,000Lost sales950,000950,000Total VC9,550,00010,950,00011,200,0009,800,0008,400,000Sales15, 450,00018,450,00019,200,00016,800,00014,400,000VC9,550,00 010,950,00011,200,0009,800,0008,400,000Fixed costs2,100,0002,100,0002,100,0002,100,0002,100,000Dep1,500 ,4502,571,4501,836,4501,311,450937,650EBT2,299,5502,828,5 504,063,5503,588,5502,962,350Tax689,865848,5651,219,0651, 076,565888,705NI1,609,6851,979,9852,844,4852,511,9852,073, 645+Dep1,500,4502,571,4501,836,4501,311,450937,650OCF3,1 10,1354,551,4354,680,9353,823,4353,011,295NWCBeg03,399,0 004,059,0004,224,0003,696,000End3,399,0004,059,0004,224,00 03,696,000- 0NWC CF(3,399,000)(660,000)(165,000)528,0003,696,000Net CF(288,865)3,891,4354,515,9354,351,4356,707,295BV of equipment2,342,550Salvage6,100,000Taxes on sale of equipment(1,127,235)Salvage CF6,100,000Cash flow on sale of equipment4,972,765Year012345CF(10,500,000)(288,865)3,891, 4354,515,9354,351,43511,680,060 Part 4 Stock DataDateRisk-FreeMonthly Risk-FreeS&P 500S&P 500 ReturnStock PriceReturnMutual Fund Price (VINIX)Mutual Fund ReturnS&P Risk PremiumELY Risk PremiumMutual Fund Risk Premium2012-03- 010.000600.000051408.4699716.593309115.3748932012-04-