I just need the answers next to each 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%.
the total market value of this firm?
percent of the company’s financing is debt?
percent of the company’s financing is equity?
What is the after-tax cost of debt?
the cost of equity?
is the company’s weighted average cost of capital?
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
3 What is the arithmetic average of
12%, 14%, -20% (that’s negative 20) and 10%?
What is the geometric
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?
5 The S&P 500 Index had the
following annual returns:
12.78 2011: 0.00 2012: 13.41 2013: 29.6 2014:
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)
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.
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