King Fisher Aviation - Module 5: Scenario 2 Problems King Fisher Aviation - Scenario 2 Problems

Complete the five problems and prepare the spreadsheet template with your solutions. Consider each problem independently, without reference to the previous problem. The problems cover material from Modules 4 and 5. Each problem is worth 20 points, for a total of 100 points. Show your work, for the opportunity to receive partial credit in the case of an incorrect answer.

Scenario 2 - Spreadsheet Template

Go back to4.5 - King Fisher Aviation Project - Scenario 2

Problem 1

As the new Financial Manager, the CEO of King Fisher has asked you to review some bonds. What is the price of a 15 year, zero coupon bond, paying $1000 at maturity if the YTM is:

8%

10%

12%

Fill in the values in the spreadsheet.

Chapter 8

Question 1

Input area:

Years to maturity 15

Face value $1,000

a) Yield to maturity 8%

b) Yield to maturity 10%

c) Yield to maturity 12%

Output area:

a) Price

b) Price

c) Price

Problem 2

King Fisher has issued a bond with the following characteristics:

Par $1,000

Time to maturity: 15 years

Coupon rate: 7 percent

Semiannual payments

Calculate the price of the bond if the YTM is:

8%

10%

12%

Fill in the values in the spreadsheet.

Chapter 8

Question 2

Input area:

Settlement date 1/1/2000

Maturity date 1/1/2015

Annual coupon rate 7.00%

Coupons per year 2

a) Yield to maturity 8%

b) Yield to maturity 10%

c) Yield to maturity 12%

Output area:

a) Price

b) Price

c) Price

Problem 3

King Fisher Aviation is expected to pay the following dividends over the next four years:

$12.00

$5.00

$7.00

$3.00

Afterwards the company anticipates paying a constant 4%. If the required return on the stock is 15 percent, what is the current share price?

Fill in the values in the spreadsheet.

Input area:

Dividend one $12.00

Dividend two 5.00

Dividend three 7.00

Dividend four 3.00

Dividend growth rate 4%

Required return 15%

Output area:

Year 4 price

Share price

Problem 4

King Fisher Aviation is evaluating an investment project with the following case flows:

$6,000

$5,500

$7,000

$8,000

Discount rate 14 percent

What is the discounted payback period for these cash flows if the initial cost is 15,000? What if the initial cost is $12,000? What if the cost is $16,000?

Fill in the values in the spreadsheet.

Annual cash inflows:

Year 1 $6,000

Year 2 5,500

Year 3 7,000

Year 4 8,000

Discount rate 14%

Initial cost $15,000 .

Output area:

Discounted payments:

Year 1

Year 2

Year 3

Year 4

Payback period

Problem 5

King Fisher Aviation is considering an investment in a new technology for a drone project with a price of $16 million. Their current technology has a book value of $5 million and a market value of $5 million. The new technology is expected to have a five (5) year life, and the old technology has three (3) years left in which it can be expected to be used. If the firm replaces the old technology with the new technology it expects to save $5.7 million in operating costs each year over the next four years. If the firm purchases the new technology, it will also need an investment of $300,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 39 percent.

What are the NPV and IRR of the decision to replace the old technology?

Fill in the values in the spreadsheet.

Input area:

Cost of new machine $16,000,000

Old machine book value $5,000,000

Old machine market value $5,000,000

Years of operation 5

Saved operating costs $5,700,000

Net working capital $300,000

Required return 12%

Tax rate 39%

*Depreciation straight-line

Output area: Buy new machine Keep old machine Incremental

analysis

Initial cash outlay:

Purchase new machine

Net working capital

Sell (buy) old machine

Taxes on old machine

Total

Incremental cash flows

Operating expense

Depreciation

EBT

Taxes

Net income

OCF Year Cash flow Cash flow Cash flow

0

1

2

3

4

NPV

IRR