UB MGF 401 - Assignment 5 (3 pages)

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Assignment 5



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Assignment 5

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Pages:
3
School:
University at Buffalo, The State University of New York
Course:
Mgf 401 - Financial Institutions
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Danny Chen MGF 301 Corporation Finance Spring 2012 ASSIGNMENT 5 DUE Monday April 30th at 12 30pm in Jacobs 365 You 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 shares Stock Market Value 2 500 000 shares x 25 per share 62 500 000 Bonds Book Value 43 000 000 Bonds Market Value 43 000 000 x 95 40 850 000 WACC d v x 1 TC rdebt e v x requity rdebt YTM 7 07 requity CAPM rf B rm rf 02 85 11 02 0965 v 40 850 000 62 500 000 103 350 000 WACC 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 to pay 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 Investment 200 shares x 52 10400 1 10400 1 5 x x per 1 5 10400 x 15600 UK investment worth 15600 increase 10 10400 x 1 10 11440 Current exchange rate 1 1 6167 11440 x 1 6167 18495 05 Japanese Investment 85Y 20 000 Y 1 x x 235 29 increase 2 20 000 Y x 1 02 20 400 Y Current exchange rate 1 81 315Y 20 400Y 81 315 250 88 Total 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 1538 7 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 Pesos


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