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Pacific States University FI500 Final Exam

e. Identify1. thefirm's investmentdepreciatingpaymentan due Japanese companycycle?ofappearspossible The merchandise must be paid for in yen. Exchange rates are shown b. What many U.S. company Hamlinthe U.S. company theinventory days? The at aor both? Explain. receivables in excess inventory and financing extensively QuestionbearsU.S. dollars must becompany could reduce its cashcompany period of 57 days, a be carrying Problem is threefirm's level oforthe accounts against is the today? conversion cost b. What dollar points) The risk, merchandise from a c. Is the is A appreciating orders raised if receivable?yen? 30 a. How 6. the exchange rate accounts payable?has or Japaneseconversion c. d. Who (15 ways in which in Corporation in Explain. 100 are to NAME__________________________________________________________ company What million yen. risks Question 1. An investment banker enters into a best efforts arrangement to try and sell 8 million shares of stock at $20 pe r share for Kemp Corporation. The investment banker incurs expenses of $1 million in floating the issue and the company incurs expenses of $ 750,000. The investment banker will receive 8 percent of the proceeds of the offering.

a. If the offering is successful and sells out at the expected price of $20, how much money will the company receive?

Shares of Stock Stock per share Incurs expenses The investment banker Incurs expenses The company Investment banker receive The company receive $

8,000,000 $20 $1,000,000 $750,000 8% 159,999,983

b. If the offering is successful and sells out at the expected price of $20, how much money will the investment banker receive?

The investment Babker receive $

$159,000,000 12,720,000

c. If the offering is partially successful and 6 million shares are sold at a price of $15, how much does the company receiv e?

Share Price per share Company recive

d Same facts as part c. How much does the investment banker receive?

6,000,000 $15 $89,250,000

Investment Banker receive

89,000,000 7120000

e. Who bears more risk with a best efforts deal, the company or the investment banker? Why

Most agreements for the sale of new securities are an underwriting, but sometimes the investment bank will agree to a best efforts approach because the company is perceived as a risky investment for a new issue. The investment bank will do its best to sell all of the new securities, but it does not guarantee it. The company bears the risk that the investment bank may fail to sell all of the new issue, thereby lessening the amount of money that the company receives.

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Pacific States University FI500 Final Exam

Question 2. Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares outstanding and a target capital structure consisting of 40 percent debt. Tantrell's debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the market risk premium is 7 percent. Tantrell's free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.

Tantrell shares Target capital Debt interest Rrf Rpm

2,000,000 40% 8% 3% 7%

FCF per year Expected to grow Tantrell in debt Tax rate

3,000,000 6% 5,000,000.00 30%

21 a. Calculate the required rate of return on equity using equation: rs= rRF + RPM(b)

rRF rM b rs

3.0% 7% 8% 3%

28 b. Calculate weighted average cost of capital, using equation: WACC = W drd(1-%) + wsrs

40 c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g) 41 42 43 44 45 46 d. Calculate the value of the company's equity, using equation: Vs = Vops - debt 47 48 49 50 51 52 53 e. Calculate the current value of the company's stock, using equation: 54 Price per share = Vs/shares outstanding 55 56 57

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Pacific States University FI500 Final Exam

Question 3. The standard deviation of stock returns for Stock A is 30%. The standard deviation of the market return is 20% and the correlation between Stock A and the market is 0.75.

Standard deviation of stock a Standard deviation of market Correlation between A and market

30% 20% 0.75 1.125

A's beta

b. In a bull market with rapdily increasing stock prices, will Stock A likely outperform or underperform the average stock? Why? outperform becaue it risk it should be sell it not good for keep it.

c. Is the beta of a diversified porftolfio less stable or more stable than the beta of a single security? Why?

it less stable because beta>1.00 stock is risker than average

Pacific States University FI500 Final Exam

Question 4. Caravan Gaming Company is interested in developing a new facility in Brazil. The company estimates that the project would require an initial investment of $31 million. The company expects that the project will produce positive cash flows of $5,050,000 a year at the end of each of the next 15 years. The project's cost of capital is 14%. a. Calculate the expected net present value of the project.

invesment cash flow cost of capital year

31000000 $5,050,000 14 15

npv

206666666.7%

b. The company recognizes that the cash flows may be much higher or lower, depending on whether the host government imposes a tax. One year from now, the company will know whether the tax will be imposed. There is a 45 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $4.5 million and there is a 55 percent chance that the tax will not be imposed, in which case the yearly cash flows will be $5.5 million. If the company waits a year to start the project, the initial investment will remain at $31 million. Using decision tree analysis, calculate the value of the real option to wait a year before deciding. Use a discount rate of 14 percent.

invesment rate

31000000 14%

c. Discuss 2-3 other factors that the company should consider in making a decision to go ahead with the project now or wait for one year.

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would require an at the end of each of

rnment imposes a large facility the imposed, in which case the yearly million. Using decision

r one year.

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