12 May WHAT IS THE SUBSCRIPTION PRICE?
1. Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year Cash Flow0 ?$ 1,320,0001 495,0002 560,0003 455,0004 410,000All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are ?blocked? and must be reinvested with the government for one year. The reinvestment rate for these funds is 3 percent.If Anderson uses a required return of 14 percent on this project, what are the NPV and IRR of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))NPV $IRR %2. You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.38 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1.48 million on an aftertax basis. In four years, the land could be sold for $1.58 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $123,000. An excerpt of the marketing report is as follows:The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,500, 5,100, and 4,000 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $630 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued.PUTZ believes that fixed costs for the project will be $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.30 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $390,000. Net working capital of $123,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 13 percent. Refer to Table 10.7.What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))3. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $850,000 and that variable costs should be $450 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $380,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $560 per ton. The engineering department estimates you will need an initial net working capital investment of $540,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project.a-1 What is the estimated OCF for this project?OCF $a-2 What is the estimated NPV for this project? (Round your answer to 2 decimal places. (e.g., 32.16))NPV $b.Suppose you believe that the accounting department?s initial cost and salvage value projections are accurate only to within ?15 percent; the marketing department?s price estimate is accurate only to within ?10 percent; and the engineering department?s net working capital estimate is accurate only to within ?5 percent. What is your worst-case and best-case scenario for this project? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))Worst-case $Best-case $4. Suppose the average return on an asset is 11.9 percent and the standard deviation is 21.5 percent. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel? to determine the probability that in any given year you will lose money by investing in this asset. (Round your answer to 2 decimal places. (e.g., 32.16))5. Consider the following information about Stocks I and II:Rate of Return if State OccursState of Probability ofEconomy State of Economy Stock I Stock IIRecession 0.20 0.05 ? 0.22Normal 0.55 0.20 0.09Irrational exuberance 0.25 0.08 0.42The market risk premium is 8 percent, and the risk-free rate is 6 percent. (Round your answers to 2 decimal places. (e.g., 32.16))The standard deviation on Stock I’s return is percent, and the Stock I beta is . The standard deviation on Stock II’s return is percent, and the Stock II beta is . Therefore, based on the stock’s systematic risk/beta, Stock (….?……) is “riskier”.6. Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt?equity ratio of 0.75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 2 percent to the cost of capital for such risky projects.What is the maximum initial cost the company would be willing to pay for the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)7. Keira Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $73. The current price is $85 per share, and there are 60 million shares outstanding. The rights offer would raise a total of $80 million.What is the subscription price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
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