May i please have assistance with solving the following questions in Excel?

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 B C D Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 1. (10 points) The exercise price on a put option is $40 and the price of the underlying stock is also $40 . Th will expire in 55 days. The option is currently selling for $0.50. a. Calculate the option's exercise value? b. Calculate the value of the premium over and above the exercise value? Why is an investor willing to pay more th exercise value? c. Is this an out-of-the money, at-the-money, or in-the-money option? Why? d. What will happen to the market price of the option if the underlying stock price changes to $38? Will the exercise the time value change? Explain. e. Explain the difference between a covered call option and a naked call option. Which option entails greater risk to d. What will happen to the market price of the option if the underlying stock price changes to $38? Will the exercise the time value change? Explain. A 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 B C D e. Explain the difference between a covered call option and a naked call option. Which option entails greater risk to investor? E F 1 tion 2 3 4 5 6 7 price of the underlying stock is also $40 . The option 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ? Why is an investor willing to pay more than the 23 24 25 26 27 28 29 30 31 32 33 34 35 hy? 36 37 38 39 40 41 to $38? Will the exercise value or ock price changes 42 43 ption. Which option entails greater risk to the G ock price changes to $38? Will the exercise value or E F 44 45 46 47 ption. Which48 option entails greater risk to the 49 50 51 52 53 54 55 56 57 58 59 60 61 G Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 2. (15 points) The Marcus Company is evaluating the proposed acquisition of a new machine. The machine's price is $350,000, and it would cost another $125,000 to modify it for special use. The machine falls into the MACRS 3-y class, and it would be sold after 4 years for $40,000. The machine would require an increase in net working capital of $2 The machine would have no effect on revenues, but it is expected to save the firm $170,000 per year for 4 years in befo operating costs. . The company's marginal tax rate is 30 percent and its cost of capital is 10 percent. a. Calculate the cash outflow at time zero. b. Calculate the net operating cash flows for Years 1, 2, 3, and 4 MACRS 3 year class c. Calculate the non-operating terminal year cash flow. 0.3333 0.4445 0.1481 d. Calculate NPV. Should the machinery be purchased? Why or why not? on of a new machine. The machine's base The machine falls into the MACRS 3-year n increase in net working capital of $20,000. $170,000 per year for 4 years in before-tax ital is 10 percent. 0.0741 Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 3. (15 points) Jones Company stock trades at $60 a share. The company is contemplating a 3-for-2 stock split. Currently, the company has EPS of 63.00, DPS of $0.75, and 25 million shares of stock outstanding. Assuming that the s split will have no effect on the total market value of its equity, what will the company's stock price be after the split? a. How many shares of stock will be outstanding after the split? b. Calculate EPS after the split. c. Calculate DPS after the split. d. Calculate price per share after the split e. Calculate price after the split if the PE increases by 1 point (for example, if PE was 10 prior to split, it increases to 11 after the split) f. Why do companies split their stock? Why might a split cause the P/E to increase? plating a 3-for-2 stock split. nding. Assuming that the stock k price be after the split? Name______________________________________ Mid-term Examination FINC 5880 Session 5 Problem 4. (15 points) Shown below are exchange rates for several currencies. Spot rate 30-day forward rate 60-day forward rate US$ per 1 euro 1.21 1.19 1.15 US$ per 1 franc 1.03 1.06 1.07 Mexican peso per US$1 19.68 20.15 21.28 a. Is the euro appreciating or depreciating against the U.S. dollar? Explain. b. Is the Swiss franc appreciating or depreciating against the U.S. dollar? Why? c. Is the Mexican peso appreciating or depreciating against the U.S. dollar? Why? d. Using cross-rates, based on the spot rate, how many francs will the euro buy, how many pesos will the franc buy, an euro will the peso buy? e. A U.S. company purchases goods from several foreign companies with payment due in euros, francs, and pesos. Wo company be better off paying any of the suppliers now or should it wait 60 days? Why? y pesos will the franc buy, and how many euros, francs, and pesos. Would the Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 5. (15 points) The current market value of Tanus Corporation's equity is $90 million. The company has 25 mi outstanding shares and will issue 5 million new shares. The investment banker charges a 7% spread. a. What is the correctly valued offer price? b. How much cash will the company raise net of the spread? c What percentage of the company will new stockholders own? d. What are 3 reasons that explain why a firm wants to raise new equity capital? e. What are 3 reasons that explain why a firm would want to raise new capital through debt rather than equity? d. What are 3 reasons that explain why a firm wants to raise new equity capital? e. What are 3 reasons that explain why a firm would want to raise new capital through debt rather than equity? $90 million. The company has 25 million arges a 7% spread. ugh debt rather than equity? ugh debt rather than equity? Name______________________________________ Mid-term Examination FINC 5880 Session 5 The company appears to be carrying excess inventory and financing Question 6. (15 points) Angie Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 perc extensively with debt. Bank borrowings are italready high, and the4liquidity company purchases the equipment for $2,000,000 will depreciate it over years, using straight-line depreciation. No situation is poor. On the basis of these observations, the loan be per year, payable at the beginning is expected. If the company enters into a 4-year lease, the lease paymentshould is $600,000 and the treasurer should beitadvised to seek Ifdenied, the company purchases the equipment will borrow from permanent its bank at ancapital, interest rate of 10 percent. especially equity capital. a. Calculate the cost of purchasing the equipment. b. Calculate the cost of leasing the equipment. c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment? uipment. Its tax rate is 30 percent. If the straight-line depreciation. No salvage value r year, payable at the beginning of each year. of 10 percent. equipment? Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 7. (15 points) Marcal Corporation is considering a gold mining project would cost $15 million today and gene flows of $6 million a year at the end of each of the next 4 years. The project's cost of capital is 12%. a. Calculate the project's NPV if the company proceeds now. b. The company is fairly confident about its cash flow forecast, but expects to have better price information in 1 year. would be $18 million in 1 year. It estimates there is a 60% change CFs will be $9 million for 4 years and a 40% change C Should the company proceed with the project now or wait 1 year until it has better information? c. Apart from the calculations above, discuss 3 qualitative factors that the company should consider when making its d the new project. $15 million today and generate positive cash l is 12%. price information in 1 year. The company believes the cost 4 years and a 40% change CFs will be $5 million for 4 years. tion? consider when making its decision on accepting A 1 B C D E Name______________________________________ 2 FINC 5880 Session 5 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Question 1. (10 points) a. Calculate the option's exercise value? Exercise value = Max[Current stock price - Strike price,0] Exercise value of call optio 5 b. Calculate the value of the premium over and above the exercise value? Why is an investor willing to pay more than the exercise value? In this case, time value has to be determined. Time value = Option premium - Exercise value. Time value 0.75 The value of premium is over and above the exercise value. The investor is willing to pay for the option is because after 35 days the in c. Is this an out-of-the money, at-the-money, or in-the-money option? Why? Ans: It is in the money option, since the curernt stock price of the underlying asset is greater than the exercise price and by executing the call option immediately, the investor will earn profit. d. What will happen to the value of the option if the underlying stock price changes to $30? Why? Ans: If the underlying stock price is $30 equivalent to the strike price, then the option is at the money. In this case, the option payoff will be zero in other words, this will make no difference for the option holder and other investors as both of them can purchase the stock at the same price. Brigham 14e Page 1 of 28 02/10/2017 d. What will happen to the value of the option if the underlying stock price changes to $30? Why? 51 52 53 54 55 56 57 58 59 60 61 62 63 A C price, then the option D is at the money. In E this case, the option Ans: If the underlying stock price is $30Bequivalent to the strike payoff will be zero in other words, this will make no difference for the option holder and other investors as both of them can purchase the stock at the same price. e. Is this an example of a covered call option or a naked call option? Why? Ans: It is an example of naked call option. Naked options are those which are being sold without any back of the stocks. Brigham 14e Page 2 of 28 02/10/2017 F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 nvestor willing 26 to pay more than the 27 28 29 30 he option is because 31 after 35 days the investor expectes the stock price to increase more and this option will enable the investor to purchase the stock at th 32 33 34 35 36 37 38 39 40 than the exercise 41price and by 42 43 44 45 46 47 48 $30? Why? 49 e money. In this50case, the option er investors as both of them can Brigham 14e Page 3 of 28 02/10/2017 $30? Why? e money. In this case, the Foption 51 of them can er investors as both 52 53 54 55 56 57 58 59 60 hout any back of the stocks. 61 62 63 Brigham 14e G Page 4 of 28 02/10/2017 A 1 B C E Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 D Question 2. (15 points) The Marcus Company is evaluating the proposed acquisition of a new machine. The machine's base price is $350,000, and it would cost another $125,000 to modify it for special use. The machine falls into the MACRS 3year class, and it would be sold after 4 years for $40,000. The machine would require an increase in net working capital of $20,000. The machine would have no effect on revenues, but it is expected to save the firm $170,000 per year for 4 years in before-tax operating costs. . The company's marginal tax rate is 30 percent and its cost of capital is 10 percent. a. Calculate the cash outflow at time zero. Purchase cost Modification cost $ Increase in working capital $ Total $ $350,000 125,000 20,000 495,000 b. Calculate the net operating cash flows for Years 1, 2, 3, and 4 Amount saved before tax Taxe on amount saved After tax amount MACRS 3 year depreciation rate Annual depreciation Net operating cashflow Year 1 $ $ Year 2 Year 3 Year 4 170,000 ### $ 170,000 $ 51000 51000 51000 119,000 $ 119,000 $ 119,000 $ 170,000 51000 119,000 $ $ 0.3333 158,318 277,318 $ 0.074 35150 154,150 c. Calculate the non-operating terminal year cash flow. Year 4 Book value of asset Sale value Profit Tax on profit Net cash flow from sale Working capital recovery $ Non-operating terminal cash flow Brigham 14e 0.445 211375 330,375 $ 0.148 70300 189,300 $ $0 $40,000 $40,000 $12,000 $28,000 20,000 $48,000 Page 5 of 28 02/10/2017 A 51 52 53 54 55 56 57 58 59 60 61 62 63 64 B C D E d. Calculate NPV. Should the machinery be purchased? Why or why not? Year 0 Initial cash outflow $ Net operating cashflow Non-operating terminal cash flow Total cash flow $ NPV $ Year 1 Year 2 Year 3 (495,000) $ 277,318 $ 330,375 $ 189,300 (495,000) $ 310,439.07 277,318 $ 330,375 $ 189,300 NPV of the purchase is positive which indicates that company will get benefit od $310,439.07 by using this machine and thus this ma Brigham 14e Page 6 of 28 02/10/2017 F 1 2 3 4 5 6 new machine. 7The machine's machine falls into the MACRS 38 ncrease in net working capital of 9 for 4 years in $170,000 per year 10 capital is 10 percent. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Brigham 14e Page 7 of 28 02/10/2017 F 51 52 53 54 Year 4 55 154,150 56 $ $48,000 57 202,150 58 $ 59 60 using this machine 61 and thus this machine should be purchased. 62 63 64 Brigham 14e Page 8 of 28 02/10/2017 A 1 B D Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 C Question 3. (15 points) Company Z's stock trades at $45 a share. The company is contemplating a 3-for-2 stock split. Currently, the company has EPS of $3.00, DPS of $0.50, and 20 million shares of stock outstanding. Assuming that the stock split will have no effect on the total market value of its equity, what will be the company's stock price following the stock split? a. How many shares of stock will be outstanding after the split? Number of shares outstanding after split 30000000 b. Calculate EPS after the split. Net income before stock split EPS after stock split 60000000 2 c. Calculate DPS after the split. Dividends paid DPS after stock split $10,000,000 $0.33 d. Calculate price per share after the split Market capital before stock split Price per share after stock split 900000000 30 46 e. Calculate price after the split if the PE increases by 2 points (for example, if PE was 10 prior to split, it increases to 12 after the split) 15 47 PE before split 17 48 PE increaesd Brigham 14e Page 9 of 28 02/10/2017 A B C D 34 49 Market price after split 50 51 f. Why do companies split their stock? Why might a split cause the P/E to increase? 52 53 Ans: Company generally go for stock split when the stock price in the market is trading above the range that is when stock 54 price per share is very high. By splitting the stocks, company will increase the number of shares outstanding and this will 55 decrease the market price per share. Generally, when the company earns higher profit they tend to prodice higher return and 56 create higehr value to the shareholders which is the important reason for the stock price increase. Gernerally, high performing 57 company will prefer stock split the P/E ratio increases because, after the stock split the number of shares held by the shareholders will increase. Any future increase in the stock price will result in higher profit for the investors and thus has 58 positive impact. 59 60 61 Brigham 14e Page 10 of 28 02/10/2017 E F 1 2 3 4 5 6 7 contemplating a 3-for-2 stock split. 8 Assuming that the tock outstanding. 9 price following the he company's stock 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Brigham 14e Page 11 of 28 02/10/2017 E F 49 50 51 se? 52 53 that is when stock g above the range 54 of shares outstanding and this will hey tend to prodice 55 higher return and e increase. Gernerally, high performing 56 number of shares held by the 57 rofit for the investors and thus has 58 59 60 61 Brigham 14e Page 12 of 28 02/10/2017 A 1 B C D Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 E Problem 4. (15 points) Shown below are exchange rates for several currencies. Spot rate 30-day forward rate 60-day forward rate US$ per 1 euro 1.38 1.36 1.33 US$ per 1 franc 1.12 1.13 1.18 Mexican peso per US$1 12.9 13.1 13.9 a. Is the euro appreciating or depreciating against the U.S. dollar? Explain. Ans: Euro has depreciated over the period. Because, as per the current rate 1 euro equals $1.38, but 1euro in 60 day forward market equivalent to only $1.33, that is the value has decreased by $0.05 which is a depreciation. In other words, $1.38 is required to buy 1 as per spot market, where as only $1.36 and $1.33 is required to buy the same 1 euro using 30-day and 60-day forward rates. b. Is the Swiss franc appreciating or depreciating against the U.S. dollar? Why? Ans: Swiss franc has appreaciated over the period of time. The value of 1 Swiss franc in spot market is $1.12, but the value has incr in both 30-day forward and 60-day forward. According to 60-day forward rate 1 Swiss franc is equivalent to $1.18 thus the value ha increased from $1.12 to $1.18 which is an appreciation. . In other words, $1.12 is required to buy 1 Swiss franc as per spot market, $1.13 and $1.18 is required to buy the same 1 Swiss franc using 30-day and 60-day forward rates. c. Is the Mexican peso appreciating or depreciating against the U.S. dollar? Why? Ans: Mexican peso has depreciated over the period of time. Mexican peso 12.9 is equivalent to 1 USD according to spot market, bu requires Mexican peso 13.1 to buy 1 USD in 30-day forward market and 13.9 in 60-day forward market. Thus, the amount required purchase one USD has increased that is Mexican peso value has decreased over the time. d. Using cross-rates, based on the spot rate, how many francs will the euro buy, how many pesos will the franc buy, and how euro will the peso buy? Euro Spot rate Cross-rate: 1.38 Swiss Franc 1.12 Mexican Peso 12.90 euro- buys francs franc buys peso peso buys euro 0.812 14.448 0.056 e. A U.S. company purchases goods from several foreign companies with payment due in euros, francs, and pesos. Would th company be better off paying now or waiting for 60 days? Why? made13 using the 60-day rate as the currency is expected depreciate in its value agins BrighamAns: 14e The payment to be made in euro should bePage of 28 02/10/2017 USD so paying later will provide reduce the cost to company. Enter in to forward contract for 60 days which will cost less to the company. 51 52 53 54 55 56 57 58 59 60 61 e. A U.S.Acompany purchases goods from several foreign companies with D payment due in euros, B C E francs, and pesos. Would th company be better off paying now or waiting for 60 days? Why? Ans: The payment to be made in euro should be made using the 60-day rate as the currency is expected depreciate in its value agins USD so paying later will provide reduce the cost to company. Enter in to forward contract for 60 days which will cost less to the company. Payment to be made in Swiss franc has to be done today as the value against USD is expected to increase in the future which will increase the cost. Payment in Mexican peso has to be delayed to 60 days as the currency is expected to depreciate. Enter in to forward contract for 60 days which will cost less to the company. Brigham 14e Page 14 of 28 02/10/2017 F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 quals $1.38, but19 1euro in 60 day forward market is ation. In other words, $1.38 is required to buy 1 euro 20 o using 30-day and 60-day forward rates. 21 22 23 y? nc in spot market 24is $1.12, but the value has increased ss franc is equivalent to $1.18 thus the value has 25 quired to buy 126 Swiss franc as per spot market, But forward rates. 27 28 29 Why? quivalent to 1 USD 30 according to spot market, but one day forward market. 31 Thus, the amount required to ime. 32 33 34 will the franc buy, and how many , how many pesos 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 ent due in euros, 50francs, and pesos. Would the urrency is expected depreciate Brigham 14e in its value aginst ntract for 60 days which will cost less to the Page 15 of 28 02/10/2017 ent due in euros, francs, and F pesos. WouldGthe 51 52 depreciate in its value aginst urrency is expected 53which will cost less to the ntract for 60 days 54 55 expected to increase 56 in the future which will 57 58 depreciate. Enter in to forward contract for 60 59 60 61 Brigham 14e Page 16 of 28 02/10/2017 A 1 B C D F Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 E Question 5. (15 points) An investment banker enters into a best efforts arrangement to try and sell 10 million shares of stock at $12 per share for Pierre Imports. The investment banker incurs expenses of $2,000,000 in floating the issue and the company incurs expenses of $1,000,000. The investment banker will receive 8 percent of the proceeds of the offering. a. If the offering is successful and sells out at the expected price of $12, how much money will the company receive? Amount received from Total floating cost Total amount of receipt Banker commission Total amount after com 120000000 3,000,000 117,000,000 9,360,000 107,640,000 b. If the offering is successful and sells out at the expected price of $12, how much money will the investment banker receive? Commission to investm 9,360,000 c. If the offering is partially successful; all shares are sold, but at a price of $10. How much does the company receive? Amount received Amount after bankers 117000000 107640000 d If the offering is partially successful; all shares are sold, but at a price of $10. How much does the investment banker receive? Brigham 14e Page 17 of 28 02/10/2017 d If the offering is partially Bsuccessful; all shares $10. How much F does the investment A C are sold, butDat a price of E banker receive? 49 50 9360000 51 Amount received by in 52 53 e. Who bears more risk with a best efforts deal, the company or the investment banker? Why? 54 Ans: Investment banker bears more risk when compared to the company. Investment bankers will play a role like a 55 underwriter and is responsible for selling the shares in the market. Company will receive the amount after the floating charges 56 from the investment banker and the loss due to the difference will be brone by the investment banker. 57 58 59 60 61 Brigham 14e Page 18 of 28 02/10/2017 G 1 2 3 4 5 6 7 million to try and sell 10 expenses of $2,000,000 in 8 nker will receive 8 percent of 9 10 oney will the company 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 money will the 29 investment 30 31 32 33 34 35 36 37 38 39 40 w much does the 41company 42 43 44 45 46 47 w much does the 48investment Brigham 14e Page 19 of 28 02/10/2017 w much does the investment G 49 50 51 52 53 ker? Why? 54 kers will play a 55 role like a he amount after the floating charges 56 ment banker. 57 58 59 60 61 Brigham 14e Page 20 of 28 02/10/2017 A 1 B C D E Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 The company appears to be carrying excess inventory and financing Question 6. (15 points) Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent extensively with debt. Bank borrowings are already high, and the the company purchases the equipment for $1,500,000 it will depreciate it over 5 years, using straight-line depreciation. If the liquidityenters situation is poor. On basis of these observations, the at the beginning of each year. If the comp company into a 5-year lease, thethe lease payment is $350,000 per year, payable loan should be denied, and the treasurer should be advised to seek purchases the equipment it will borrow from its bank at an interest rate of 10 percent. permanent capital, especially equity capital. a. Calculate the cost of purchasing the equipment. Cost of equipment After tax discount rate Annual depreciation 1,500,000 7.00% 300,000 Year 0 Year 1 Year 2 Year 3 Interest -150000 -125430.377881 -98403.7935496552 Annual depreciation $ (300,000.00) ### $ (300,000.00) Total $ (450,000.00) $ (425,430.38) $ (398,403.79) Taxes $ (135,000.00) $ (127,629.11) $ (119,521.14) After tax cash flow $ (315,000.00) $ (297,801.26) $ (278,882.66) Annual loan repayment (245,696) (270,266) (297,292) Total (560,696) (568,067) (576,175) Present value (524,015) (496,172) (470,330) Total cost (2,361,041) Altenate method Year 0 Interest Annual depreciation Total Taxes After tax cash flow Loan repayment Total Present value Total cost Year 1 $ $ $ $ Year 2 Year 3 ($150,000) ($150,000) (300,000.00) $ (299,999.00) $ (450,000.00) $ (449,999.00) $ (135,000.00) $ (134,999.70) $ (315,000.00) $ (314,999.30) $ (315,000) (314,999) (294,393) (275,133) ($150,000) (299,998.00) (449,998.00) (134,999.40) (314,998.60) (314,999) (257,133) (2,361,036) b. Calculate the cost of leasing the equipment with debt. Brigham 14e Year 0 Year 1 Year 2 Page 21 of 28 Year 3 02/10/2017 A Annual lease payment Taxes After-tax cash flow Present value Total cost B ($350,000) ($105,000) ($245,000) (245,000) (1,074,867) C ($350,000) ($105,000) ($245,000) (228,972) D ($350,000) ($105,000) ($245,000) (213,992) E ($350,000) ($105,000) ($245,000) (199,993) 51 52 53 54 55 56 57 58 59 60 c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment? 61 62 63 1,286,175 64 NAL 1,286,169 65 NAL using alternative 66 67 Using both methods it is clear that leasing is preferred over purchases as the company can save more cost by leasing when compared t 68 Brigham 14e Page 22 of 28 02/10/2017 F G 1 2 3 4 5 6 7 or purchase equipment. Its tax rate is 30 percent. If er 5 years, using8 straight-line depreciation. If the 9 ayable at the beginning of each year. If the company 10 0 percent. 11 12 13 14 15 16 17 18 ($395,696.22) 19 Annual loan payment 20 21 Year 5 22 Year 4 -68674.5507854089 -35972.38374474 23 (300,000.00) ### 24 $ (368,674.55) $ (335,972.38) 25 $ (110,602.37) $ (100,791.72) 26 $ (258,072.19) $ (235,180.67) 27 $ (327,022) (359,724) 28 (585,094) (594,905) 29 (446,365) (424,159) 30 31 32 33 Year 5 34 Year 4 ($150,000) ($150,000) 35 (299,997.00) $ (299,996.00) 36 $ (449,997.00) $ (449,996.00) 37 $ (134,999.10) $ (134,998.80) 38 $ (314,997.90) $ (314,997.20) 39 $ (1,500,000) 40 (314,998) (1,814,997) 41 (240,310) (1,294,068) 42 43 44 45 46 47 48 49 Year 5 50 Year 4 Brigham 14e Page 23 of 28 02/10/2017 F ($350,000) ($105,000) ($245,000) (186,909) G 51 52 53 54 55 56 57 58 59 60 or lease the equipment? 61 62 63 64 65 66 any can save more 67 cost by leasing when compared to purchases. 68 Brigham 14e Page 24 of 28 02/10/2017 A 1 B C D F Name______________________________________ 3 0 FINC 5880 4 Session 5 2 5 6 7 8 9 10 11 12 13 E Question 7. (15 points) Kanga Resorts is interested in developing a new facility in Asia. The company estimates that the hotel would require an initial investment of $14 million. The company expects that the facility will produce positive cash flows of $2.6 million a year at the end of each of the next 10 years. The project's cost of capital is 11%. a. Calculate the expected net present value of the project. 14 15 Year Cash flow 16 0 ($14,000,000) 17 1 2,600,000 18 2 2,600,000 19 3 2,600,000 20 4 2,600,000 21 5 2,600,000 22 6 2,600,000 23 7 2,600,000 24 8 2,600,000 25 9 2,600,000 26 10 2,600,000 27 NPV $1,312,003.23 28 29 30 31 b. The company recognizes that the cash flows could, in fact, be much higher or lower than $2.6 million, depending 32 on whether the host government imposes a large facility tax. One year from now, the company will know whether 33 the tax will be imposed. There is a 40 percent chance that the tax will the imposed, in which case the yearly cash flows will be only $2 million. At the same time, there is a 60 percent chance that the tax will not be imposed, in 34 which case the yearly cash flows will be $3 million. The company is deciding whether to proceed with the facility 35 today or to wait 1 year to find out whether the tax will be imposed. If it waits year, the initial investment will remain 36 at $14 million, and incoming cash flows will be delayed 1 year. Assume that all cash flows are discounted at 11 percent. Using decision tree analysis, calculate the value of the real option to wait a year before deciding. 37 38 39 40 41 42 After one year 60% chances to get $3,000,000 43 Year 1 Year 2 Year 3 Year 4 Year 5 Brigham 14e Page 25 of 28 02/10/2017 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 A Iniital cost 60% chances Present value 40% chances Present value Real option NPV B -14000000 C D E F 3000000 3000000 3000000 3000000 -12612612.6126 2434867.3 2193574.1439029 1976192.92 1780353.9841757 2000000 2000000 2000000 2000000 -11362714.0654 1623244.866 1462382.7626019 1317461.95 1186902.6561171 1681944.30984 c. Discuss 2-3 factors other than the value of the real option that the company should consider in making its decision? Ans: Real option method is more preferable when compared to ordinary NPV as real option includes details about the probable future cash flow. Similalry, it determines the probability of cash flow occuring. This brings more details and logic to the analysis. Brigham 14e Page 26 of 28 02/10/2017 G 1 2 3 4 5 6 7 y in Asia. The company estimates 8 facility will produce expects that the . The project's9cost of capital is 11%. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31million, depending lower than $2.6 , the company32 will know whether d, in which case 33the yearly cash the tax will not be imposed, in 34 with the facility ether to proceed ar, the initial investment 35 will remain ash flows are discounted at 11 36 t a year before deciding. 37 38 39 40 41 42 43 Year 6 Brigham 14e Page 27 of 28 02/10/2017 G 44 3000000 45 46 1603922.508266 2000000 47 48 1069281.672178 49 50 51 52 53 hould consider in making its 54 option includes55 details about the 56 ng. 57 58 59 60 61 62 63 64 65 66 Brigham 14e Page 28 of 28 02/10/2017