FIN325BIB HOMEWORK 2 SPRING 2020 FIN325BIB HOMEWORK 2 DUE DATE: JUNE 11TH, 2020 ON MOODLE BEFORE 1PM NO OTHER FORMS OF SUBMISSION WILL BE ACCEPTED! THIS IS AN INDIVIDUAL ASSIGNEMNET PLEASE UPLOAD YOUR...

Please do the questionnaires with formulas.


FIN325BIB HOMEWORK 2 SPRING 2020 FIN325BIB HOMEWORK 2 DUE DATE: JUNE 11TH, 2020 ON MOODLE BEFORE 1PM NO OTHER FORMS OF SUBMISSION WILL BE ACCEPTED! THIS IS AN INDIVIDUAL ASSIGNEMNET PLEASE UPLOAD YOUR ANSWERS IN A NICE AND NEAT FORMAT ON MOODLE BEFORE DEADLINE MAX POINTS POSSIBLE = 38 POINTS PLEASE NOTE THAT I INTENTIONALLY MAKE THESE PROBLEMS MORE DIFFICULT THAN THE PROBLEMS YOU WILL GET ON THE FINAL EXAM BECAUSE IF YOU CAN DO THESE PROBLEMS THEN YOU WILL NOT HAVE ANY TROUBLE DOING PROBLEMS ON THE EXAM. PROBLEM 1 (4 points) Given the below adjusted closing stock prices for a firm, find arithmetic average annual rate of return, geometric average rate of return, variance and standard deviation of returns. Show your work! YEAR ADJUSTED CLOSING PRICE 2010 $40 2011 28 2012 35 2013 40 2014 45 PROBLEM 2 (3 point) A firm’s common stock has a beta of 1.3. Risk-free rate is equal to 1% and expected return on the market is equal to 6%. Cost of debt before taxes is equal to 8%. Tax rate is 35%. If the firm is financed with twice as much debt as equity, find its WACC. Show your work! PROBLEM 3 (12 points) XYZ Inc’s common stock is currently selling on the market for $85 per share. There are 100’000 shares outstanding. The firm has just paid a dividend of $2. Analysts project that XYZ will grow at a rate of 4% per year. The firm also has outstanding debt with total combined face value of $45’000’000, which is selling today for 90% of its face value, has an annual coupon interest rate of 5% and time to maturity of 15 years. Tax rate is equal to 25%. Required: 1) Find the required rate of return for XYZ’s equity. Show your work! 2) Find XYZ’s cost of debt before taxes. Show your work! 3) Find the proportion of equity financing. Show your work! 4) Find the after-tax cost of debt. Show your work! 5) Find the proportion of debt financing. Show your work! 6) Find the firm’s WACC. Show your work! PROBLEM 4 (14 points) XYZ Inc is considering investing in a new hydraulic press. The press will cost $130’000, has a useful life of 7 years, $30’000 salvage value and will be depreciated using the straight-line method. This project has a life of 3 years. At the end of the 3rd year, the press will be sold at an estimated value of $60’000. XYZ’s WACC is equal to 10% and tax rate is equal to 35%. Net working capital requirements for this project are $15’000, represent a necessary increase in spare parts inventory and will be constant throughout project’s life. This inventory of spare parts will be depleted by the end of year 3. If purchased, the hydraulic press will help increase cash revenue by $20’000 annually while increasing operating expenses by $2’000 at the same time. Required: 1) Compute operating cash flow for years 1, 2 and 3. Show your work! 2) Compute cash flow due to change in fixed assets for years 0 and 3. Show your work! 3) Compute cash flow due to change in NWC in years 0 and 3. Show your work! 4) Compute free cash flow for years 0, 1, 2, and 3. Show your work! PROBLEM 5 (THIS TOPIC WILL BE COVERED IN WEEK 10 ON THURSDAY, BUT YOU ARE WELCOME TO READ AHEAD) (2 points) Compute simple payback period for project from problem 4. Show your work! PROBLEM 6 (THIS TOPIC WILL BE COVERED IN WEEK 10 ON THURSDAY, BUT YOU ARE WELCOME TO READ AHEAD) (2 points) Compute NPV for project from problem 4. Show your work! PROBLEM 7 (THIS TOPIC WILL BE COVERED IN WEEK 10 ON THURSDAY, BUT YOU ARE WELCOME TO READ AHEAD) (1 point) Should the project from problem 4 be accepted? Explain your answer.