Question 3: CLO 5 Long-term Financing Choices / CLO 5 Short-term Financial Management (20 marks) a) Currently Nemonix is using a decentralized collection system whereby customers mail their cheques to one of the firm's eight regional locations. Its annual sales are $95 million. Cheques are deposited each business day in a local bank and the amount of the deposit is sent to the firm's concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds in Dallas to Nemonix, is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by 4 days. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Justify your response. Note: Assume that Nemonix can earn 8% on the funds released through this more efficient transfer. (8 marks) b) What is the inventory conversion period for O'Brian's if it has sales of $320,000, an average inventory of $5,333 and a cash conversion cycle of 20 days? Assume the cost of sales is 55% of sales. (4 marks) c) Calculate Bodacious Bodywear's weighted average cost of capital under the following conditions: *The firm has 30% debt, 10% preferred stock, and 60% equity *The cost of common equity is 14% and the cost of preferred stock is 9%. *The firm's debt has a before-tax cost of debt of 10% (including flotation costs). *The firm is in the 40% tax bracket. (8 marks) Question 2: CLO 4 Capital Investment Decisions (20 marks) a) Based upon the following cash flows, Using NPV should Chipper Nipper Cookie Company introduce a new product, Rolling In Dough Pies? The initial investment is $180,000, and the cost of capital is 11.5%. Years Cash Flows 1 $ 80,000 2 $ 95,000 3 $ 95,000 4 $110,000 5 $110,000 6 $110,000 (7 marks) 3 b) Based upon the following cash flows, Using IRR should Chipper Nipper Cookie Company introduce a new product, Rolling In Dough Pies? The initial investment is $180,000, and the cost of capital is 11.5% Years Cash Flows 1 SO 2 SO 2 3 3 SO 4 5 SO SO $110,000 (7 marks) 6 c) Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below: [10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%,3%). (6 marks) Question 1: CLO3 Valuation Principles (20 marks) a) Haulin' It Towing Company is selling a stock for $16. The stock just paid a dividend of $0.60, and this dividend is expected to grow by 15% per year for three years. After that, it will grow at a constant rate of 4%. The stock's beta is 1.7, the risk-free rate of interest is 1.75% and the market risk premium is 5.25%. Should you buy the stock? Explain your decision. (7 marks) b) Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay interest semi-annually, will mature in 15 years. If you require a pre-tax return of 9.5% on bonds of this risk, how much would you pay for one of these bonds after 4 years? (6 marks) c) An investor who believes the economy is slowing down wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62 What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.802 (7 marks)