Please see Attached Word Doc. Please help me show work and equations to find answers.

FIN 321 Final Exam

1. Page Industrial Systems (PIS) is thinking about expanding its facilities. In considering the expansion, PIS?s finance staff has obtained the following information:

The expansion will require the company to purchase today $5 million of equipment. The equipment will be depreciated over four years at the following rates:

33%

45%

15%

7%

The expansion will require the company to increase its inventories by $350,000 and its accounts payable will rise by $100,000. It is expected that the Net Working Capital (NWC) to increase by 10% throughout the life of the equipment.

The equipment is expected to have a salvage value of $100,000 at the end of four years.

The company?s operating costs, excluding depreciation, are expected to be 60 percent of the company?s annual sales.

The expansion will increase the company?s sales to $3 million in the first year and then the sales will increase by an increment of $0.5 million a year thereafter. The company?s tax rate is 40%.

The cost of capital is 10 percent.

What is the Net Investment outlay?

What are the cash flows over the life of equipment?

What is the project?s NPV?

Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has no debt in its but plans to borrow $6 million with interest rate of 8%. The risk-free rate is 6% and the market risk premium, (R_M - R_F), is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%.

Use the following information to answer questions a through d.

Market Values Current cap. Structure Proposed cap. Structure

Assets $15 million $15 million

Debt $0 $6 million

Equity $15 million $9 million

Share price $25.00

Shares outstanding 600,000 ???

Bond Interest rate N/A 8%

The company is expected to generate $3.5 million in revenue.

What is EPS under the current capital structure?

What is EPS for the proposed capital structure?

What is ROE for the proposed capital structure?

What would be Cartwright's estimated cost of equity if it were to change its capital structure?

How many shares are outstanding under the proposed capital structure?

What would its stock price be if it changes to the new capital structure?

On May 11, 2004, Yen Dollar, a portfolio manager at NewPoint, a mutual fund management firm, pored over analysts? write-ups of Global Traders Corp. Global Traders is an expanding conglomerate, is a manufacturing company whose product lines consist of lighting fixtures, videodiscs, electronic timing devices, travel agencies, and self-storage space. Dollar was considering buying some shares for the fund she managed, the NewPoint Large-Cap Fund with an emphasis on value investing. Global Traders Corp's analyst has projected the following cash flows for the next four years (in million of dollars):

	2005	2006	2007	2008
Growth Rate		0.2	0.15	0.1
Net sales	$120	$144	$166	$182
Cost of goods sold	-$78	-$94	-$108	-$118
Selling/administrative expense	-$20	-$24	-$28	-$30
Depreciation	-$10	-$12	-$15	-$18
EBIT	$12	$14	$15	$16
Interest	-$5	-$6	-$8	-$10
EBT	$7	$8	$7	$6
Taxes (40%)	-$3	-$3	-$3	-$2
Net income	$4	$5	$4	$4

All cash flows above are assumed to occur at end-of-year and it is expected to grow at rate of 5% after 2008. Global Traders currently has a market value capital structure of 20 percent debt with interest rate 10% and a beta of 2. Depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to 5 million Global Traders? shareholders. The risk-free rate is 6 percent and the market risk premium is 8 percent.

VALUATION MODELS

In theory, there are several valuation models. These models are Discounted Cash Flow based on WACC, Cash Flow to Equity (CFE), Adjusted Present Value (APV), Market/Book Value, and P/E ratio, which could be used to estimate the value of a firm.

What is the value of the Global Traders based on WACC model?

What is the value to shareholders?

4. The manager of Alpha Beta Funds is considering addition of the following stocks in his portfolio:

Stocks Standard Deviation Covariance Expected (R_i)

A 18% 0.012 20%

B 15% 0.0075 12%

C 10% 0.011 14%

D 20% 0.0175 16%

E 14% 0.016 15%

R_M 10% 1.0 14%

R_F 0 0.9 6%

Calculate the required rate of return for each stock.

Assume you are assistant to a portfolio manager, which stocks you recommend to be included in his portfolio?

FIN 321 Final Exam 1. Page Industrial Systems (PIS) is thinking about expanding its facilities. In considering the expansion, PIS's finance staff has obtained the following information: The expansion will require the company to purchase today $5 million of equipment. The equipment will be depreciated over four years at the following rates: 1. 33% 2. 45% 3. 15% 4. 7% The expansion will require the company to increase its inventories by $350,000 and its accounts payable will rise by $100,000. It is expected that the Net Working Capital (NWC) to increase by 10% throughout the life of the equipment. The equipment is expected to have a salvage value of $100,000 at the end of four years. The company's operating costs, excluding depreciation, are expected to be 60 percent of the company's annual sales. The expansion will increase the company's sales to $3 million in the first year and then the sales will increase by an increment of $0.5 million a year thereafter. The company's tax rate is 40%. The cost of capital is 10 percent. a. What is the Net Investment outlay? b. What are the cash flows over the life of equipment? c. What is the project's NPV? 2. Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Cartwright has no debt in its but plans to borrow $6 million with interest rate of 8%. The risk-free rate is 6% and the market risk premium, (RM - RF), is 5%. Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. Use the following information to answer questions a through d. Market Values Current cap. Structure Proposed cap. Structure Assets $15 million $15 million Debt $0 $6 million Equity $15 million $9 million Share price $25.00 Shares outstanding 600,000 ??? Bond Interest rate N/A 8% The company is expected to generate $3.5 million in revenue. a. What is EPS under the current capital structure? b. What is EPS for the proposed capital structure? c. What is ROE for the proposed capital structure? d. What would be Cartwright's estimated cost of equity if it were to change its capital structure? e. How many shares are outstanding under the proposed capital structure? f. What would its stock price be if it changes to the new capital structure? 3. On May 11, 2004, Yen Dollar, a portfolio manager at NewPoint, a mutual fund management firm, pored over analysts' write-ups of Global Traders Corp. Global Traders is an expanding conglomerate, is a manufacturing company whose product lines consist of lighting fixtures, videodiscs, electronic timing devices, travel agencies, and self-storage space. Dollar was considering buying some shares for the fund she managed, the NewPoint Large-Cap Fund with an emphasis on value investing. Global Traders Corp's analyst has projected the following cash flows for the next four years (in million of dollars): 2005 2006 0.2 2007 0.15 2008 0.1 $120 $144 $166 $182 -$78 -$94 -$108 -$118 -$20 -$24 -$28 -$30 -$10 -$12 -$15 -$18 $12 $14 $15 $16 -$5 -$6 -$8 -$10 Growth Rate Net sales Cost of goods sold Selling/administrative expense Depreciation EBIT Interest EBT Taxes (40%) Net income $7 $8 $7 $6 -$3 -$3 -$3 -$2 $4 $5 $4 $4 All cash flows above are assumed to occur at end-of-year and it is expected to grow at rate of 5% after 2008. Global Traders currently has a market value capital structure of 20 percent debt with interest rate 10% and a beta of 2. Depreciation-generated funds would be used to replace wornout equipment, so they would not be available to 5 million Global Traders' shareholders. The riskfree rate is 6 percent and the market risk premium is 8 percent. VALUATION MODELS In theory, there are several valuation models. These models are Discounted Cash Flow based on WACC, Cash Flow to Equity (CFE), Adjusted Present Value (APV), Market/Book Value, and P/E ratio, which could be used to estimate the value of a firm. 1. What is the value of the Global Traders based on WACC model? 2. What is the value to shareholders? 4. The manager of Alpha Beta Funds is considering addition of the following stocks in his portfolio: Stocks A B C D E RM Standard Deviation 18% 15% 10% 20% 14% 10% Covariance 0.012 0.0075 0.011 0.0175 0.016 1.0 Expected (Ri) 20% 12% 14% 16% 15% 14% RF 0 0.9 6% a. Calculate the required rate of return for each stock. b. Assume you are assistant to a portfolio manager, which stocks you recommend to be included in his portfolio