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UB MGF 301 - MGF301 Assignment 5 - Fall 2010

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ASSIGNMENT 5MGF 301Corporation FinanceSpring 2010DUE: Monday, April 26th at 12:30pm. You can turn in your assignment until 11am in Jacobs 365 or before 12:30 in Jacobs 106 before the final class starts.You may work 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 as noted above or submit it by email to the Digital Dropbox on UBLearns before the time it is due. All email submissions must be to the Digital Dropbox (go to Control Panel, Digital Dropbox and hit “Send file”). Note: Do not use the “#” symbol in your file name!________________________________________________________________________________________________________Answer all of the following questions. For each answer, show your work to get full points (stating the answer alone is not sufficient).1. The total book value of WTC’s equity is $60 million and book value per share outstanding is $5. 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 $36 million and sell at a price of 115 percent of face value. The yield to maturity on the bonds is 7.5 percent and the firm’s tax rate is 35 percent. If the E(Rm) = 9% and Rf = 1%, calculate the WACC of WTC. 2. Using the data in #1, answer the following:(a) The company is considering an expansion to double the production of its current product. The company's CEO argues that the WACC of the firm is the appropriate discount rate to use in the NPV analysis of the plant expansion. Is thisthe appropriate rate? Explain without doing any calculations. (b) The company is considering adding a new handheld computer tablet that is similar to the Ipad offered by Apple and the Kindle offered by Amazon. Calculate an appropriate discount rate using competitor companies that are publicly traded.3. One year ago, an American investor bought 1000 shares of London Bridges at a price of £42 (or 42 UK pounds) per share when the exchange rate was $1.75/1£ (or $1.75 dollars = 1 pound). The investor also invested 2,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 100 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 decreased 10% (in local currency) and the Japan investment increased 2% (in local currency)?(b) What is the overall rate of return on the portfolio over the last year?4. An American firm is evaluating an investment in Mexico. The project is expected to produce a cash flow of 250 million pesos each year for 8 years. If the appropriate discount rate is 11%, how much in U.S. dollars is the maximum the firm is willing to pay as the initial cost of the project? (Note: use the current exchange rate for pesos and do your calculation using an annuity factor to find


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UB MGF 301 - MGF301 Assignment 5 - Fall 2010

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