Business Finance 5 questions

timer Asked: May 5th, 2015

Question description

I just need the answers next to each question

Question 1 Use the following data for securities issued by Vandelay Industries to answer questions 1 - 5:  Bonds: The company issued 240,000 bonds.  The bonds have a $1,000 face value with 7.5% coupons with annual payments, 20 years to maturity, and currently sell for $940.  The marginal tax rate is 40%.  Equity: The company has 9,000,000 shares of (common) stock outstanding, selling for $71 per share.  The company’s beta is 1.2, the risk free rate is 1%, and the market risk premium is 10%.

What is the total market value of this firm?

What percent of the company’s financing is debt?

 What percent of the company’s financing is equity?

What is the after-tax cost of debt?

What is the cost of equity?

 What is the company’s weighted average cost of capital?

Question 2 Your company has decided to produce a new line of television/electronic media player.  You estimate that your company will sell 51,000 per year, and that this product will sell for $750 each.  The plant and equipment (new fixed assets) needed to manufacture this product costs $22,400,000 and will be depreciated on a straight-line basis over the seven year project.  Additional manufacturing costs to produce the media players would total $16,980,000 each year.  The tax rate is 40%.  Sketch a simplified income statement and calculate the firm’s operating cash flow. (That is, explain what goes on each line of the income statement)

Question 3 What is the arithmetic average of 12%, 14%, -20% (that’s negative 20) and 10%? 

What is the geometric average? 

Question 4 A production project will generate an expected operating cash flow of $50,000 per year for 4 years (years 1 – 4).  Undertaking the project will require an increase in the company’s net working capital (inventory) of $10,000 today (year 0).  At the end of the project (year 4), inventory will return to the original level.  The project would cost $150,000.  The weighted average cost of capital for the firm is 9%.  Sketch a timeline (explain what amount is considered in each year of the timeline) to illustrate the relevant cash flows.  What is the net present value of this project?

Question 5 The S&P 500 Index had the following annual returns:

2010: 12.78  2011: 0.00  2012: 13.41  2013: 29.6  2014: 11.39

Using just these last 5 years of data, what is the expected return for the Dow Jones?  What is the standard deviation of the returns? (Please explain each step of the formula)

Question 6 On December 8, 2014, Kiplinger Magazine posted an article online entitled, “8 Stocks to Buy for 2015.”  Suppose your friend is considering investing in these 8 companies by purchasing their stocks today. 

a) If markets are strong form efficient, would the expected return on your friend’s investment be greater than the overall stock market return? 

b) What is a difference between the strong form of the efficient market hypothesis and the weak form?

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