Question
1. Walton Enterprises, Inc. is considering a proposal for a joint venture that will require an initial investment of $13,000,000. At the end of the
1. Walton Enterprises, Inc. is considering a proposal for a joint venture that will require an initial investment of $13,000,000. At the end of the fifth year, Waltons joint venture partner will buy out Waltons interest for $10,000,000. Walton expects the project to generate cash flows of $3,000,000 during the investment holding period. Waltons CFO indicated that 12 per cent is the firms required rate of return. Required: a) Construct a discounted cash flow (DCF) model and calculate the proposals net present value (NPV) and internal rate of return. (b) Based on your calculations above, make a summary recommendation (in one sentence) to the CFO concerning whether Walton should enter into this joint venture. 2. TrinTec, Inc. a chip manufacturing company is planning to establish a new factory overseas. The project requires an initial investment of $15,000,000. Management intends to own the factory for 6 years then sell it to a local tech company. Management projects the first years cash flow of $4,000,000 will grow at approximately 3% per year over the holding period. Management also estimated an expected sales price of $5,000,000 at the end of the holding period. If TriniTecs required rate of return is 20%, how would you advise the Board to proceed? 3. Browser, Inc. bonds were recently upgraded to investment grade. Five years ago, Browser issued a twenty-year, $20 million coupon bond at par. The bond carried an initial coupon of 9%. As a bond portfolio manager, you are contemplating the purchase of this bond. If you plan to hold the bond to its maturity, how much should you pay for this bond today if the market interest rate is 10%.
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