Danny ChenMGF 301Corporation FinanceSpring 2012ASSIGNMENT 5DUE: Monday, April 30th at 12:30pm in Jacobs 365You may in a group of up to 4 on this Assignment. Please indicate clearly on all submitted Assignments who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade. No late assignments will be accepted. You may hand in the assignment in person in Jacobs 365 (put it under the door if no one is there) or submit it by email to the link in UBLearns before the time it is due. All electronic submissions must be to the link in UBLearns ( Note: please follow all the Digital Submission rules (see Syllabus). Answer all of the following questions. For each answer, show your work.________________________________________________________________________________________________________1. The total book value of WTC’s equity is $20 million and book value per share outstanding is $8. The stock of WTC is currently selling for a price of $25 per share and the beta of WTC is .85. The bonds of WTC have a face value of $43 million and sell at a price of 95 percent of face value. The yield to maturity on the bonds is 7 percent and the firm’s tax rate is 35 percent. If the E(Rm) = 11% and Rf = 2%, calculate the WACC of WTC. Stock Book Value = $20,000,000$20,000,000/8$per share = 2,500,000 sharesStock Market Value = 2,500,000 shares x 25$per share = $62,500,000Bonds Book Value = $43,000,000Bonds Market Value = $43,000,000 x .95 = $40,850,000WACC = [d/v x (1 – TC) rdebt]+[e/v x requity]rdebt = YTM = 7% = .07requity = CAPM = rf +B (rm – rf) = .02 + .85(.11 - .02) = .0965v = $40,850,000 + $62,500,000 = $103,350,000WACC = [40,850,000/103,350,000 x (1 – .35) .07]+[ 62,500,000/103,350,000 x .0965] = 0.0763417997097242 = 7.63%2. Suppose the company in #1 is considering the following expansion projects. How would you calculate the required rate of return to use in the NPV analysis of the following: Explain.(a) The company is considering an expansion to double the production of its current product. The company can issue equity or it can issue debt yielding 7% topay for the expansion. The Company would calculate the required rate of return for issuing equity by using CAPM [rf +B (rm – rf)] and the required rate of return for bonds is given by the yield to maturity. The Beta ( B ) or risk should be found in their line of business to make CAPM calculations. (b) The company is considering adding a new product in a different line of business that is unrelated to their current product.The company should find the Beta ( risk ) of adding the new product in a different line of business and use CAPM to find the required rate of return. They could use industry figures or other companies in that line of business to estimate the Beta.3. One year ago, an American investor bought 200 shares of London Bridges at a price of £52 (or 52 UK pounds) per share when the exchange rate was $1.5/1£ (or $1.50 dollars = 1 pound). The investor also invested 20,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 85 Yen = $ 1 US. (a) Using current exchange rates, what is today’s value of the investor’s portfolio in U.S. dollars if the UK investment increased 10% (in local currency) and the Japan investment increased 2% (in local currency)?UK Investment200 shares x £52 = £10400£1/£10400 = 1.5$/x x = $ per £ 1.5(£10400) x =$15600UK investment worth $15600increase 10%£10400 x 1.10 = £11440Current exchange rate = £1:$1.6167£11440 x 1.6167 = $18495.05Japanese Investment85Y / 20,000 Y = $1 / xx = $235.29increase 2%20,000 Y x 1.02 = 20,400 YCurrent exchange rate = $1: 81.315Y20,400Y/ 81.315 = $250.88Total portfolio = $18495.05+$250.88= $18745.93(b) What is the overall rate of return on the portfolio over the last year?Overall rate of return = (18495.05 + 250.88 – 15835.29)/ 15835.29=.1838 = 18.38%4. An American firm is evaluating an investment in Mexico. The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $3.6 million. Once the project begins operations, it is expected to last for 7 years. Expected sales are $1,700,000 each year in the U.S. and the costs of the project are projected to be 10 million pesos each year for the 7 years. If taxes are 35%, the appropriate discount rate is 13% and you use the current exchange rate for pesos:(a) Calculate the NPV in U.S. dollars. (Show all calculations and ignore working capital)Exchange rate for USD to MXN is 1:13.15387 year annuity rate at 13% discount rate = 4.42261043272198 Cost of project each year = 10,000,000.00 peso / 13.1538 = $760,236.59 x 4.42261043272198 = $ 3,362,230.25 Profits per year = 1,700,000.00 x 4.42261043272198 x (1-.35) = $4,886,984.53 Total costs of project = $ 3,362,230.25 + 3,600,000.00 = $6,962,230.25 NPV of project = $-6,962,230.25 + $4,886,984.53 = $-2,075,245.73(b) Calculate the NPV in Mexican pesos. (Show all calculations and ignore working capital)Exchange rate for USD to MXN is 1:13.1538$-2,075,245.73 x 13.1538 = 27,297,367.24