Apparently, her calculation is wrong. To find the cost of debt, we should use the yield to maturity approach: PV=t=1Tc×FV(1+y)T+FV(1+y)T Nike’s bond with a current price of $95.60 will expire on 2021. If the NorthPoint Group decides to invest in 2001, interests will be paid semi-annually for 20 years at a rate of 6.75%. Thus we can calculate the current yield to maturity of the bond to represent the cost of debt before tax as following: 95.6=i=1406.75%×100(1+y)40+100(1+y)40 Question 4: What is your estimate of the debt cost of capital? According to
It is because of the reason that, 17.5 million gallons are being just an expected amount of fuel and in future the perfect hedge cannot be achieved. J&L should accurately estimate the future demand as the demand is decreasing due to the reason that in 2008 there was a recession that affects the fuel prices and it soften the demand.The percentage of the 210 million gallon would be hedged as J&L go for the future contracts with the suppliers at the fixed rate and the percentage they should hedge for the fuel prices should be around 25% it is because of the reason that for the first quarter of the year they should store the inventory for the future demand. This percentage is lower because of the lower demand. Question 2. What are the pros and cons of using NYMEX contracts versus using the risk management products offered by KCNB?
Putting price differences into the PPP equation we can calculate the expected spot rate for peso for 2005: St20 = (180/50)(140/70) St20 = 1.8 St = 36 PPP rate for peso in 2005 is 36/$. Because there is no data for consumer price levels for 2006, inflation rate differentials between two countries can be used to predict peso spot rate for 2006. PPP says that currencies with a high inflation rate should depreciate relative to currencies with a lower inflation rate (Shapiro, 2006). By March 2006 the inflation rate in Costaguana was two times higher that the inflation rate in the US. Assuming that inflation rates for the US and Costaguana are 5% and 10% respectively, 2006 spot rate for peso can be calculated as below: StSo = 1+Pcp1+P$ St36 = 1+0.11+0.05 St = 37.71 Even though PPP does not hold true in its pure sense, relative PPP has been widely used by banks and companies’ management to forecast future exchange rates, especially in the long-run.
Estimations for future vessel orders are not reliable and the daily rates it would receive are known to fluctuate and are considerably less than that of the contract size. We first constructed a capital budgeting (base case) model to generate the cash flows of Ocean Carriers’ new investment. Assuming that the U.S tax rate is 35%, cost of capital is 9%, and salvage value at year 25 is $1,000,000, we computed an NPV and IRR for year 15 at $(7,740,667.93) and 5.25% respectively (Exhibit 2). For year 25, we generated an NPV and IRR of $(7131855.74) and 5.92% respectively (Exhibit 3). The negative NPV in both years signaled that the company should not undertake the project.
We assume that the amount of debt has been constant over 2007. A better option to calculate cost of debt would be to use a synthesized rating based on the interest coverage ratio and use the corresponding default spread, but unfortunately we do not have data of these spreads for 2007. We use the market value of equity to estimate the weight of equity. The market capitalization of the firm was 128,2 million on 31-12-2007 (we assume that this is the date of the balance sheet, since this isn’t mentioned in the case). From this we can calculate the following ratio’s: debt/equity = 0,31 debt/(debt+equity) = 0,24 equity/(debt+equity) = 0,76 In calculating these ratio’s we use gross debt instead of net debt, because in our opinion the debt and cash of the firm
This shows us that discounting the machine will not bring positive cash flows to the buying company. This GRAPH shows us that even though they would’ve met their 5 years maximum plan this opportunity of an investment would not be good because the values we get from the Buyers DCF is less than the current cost of the investment. I would have to decline this bid. Year | Number of Plates | Old Price Per Plate | New Price Per Plate | Buyer Cash Flow | Buyer DCF | Seller Cash Flow | Seller DCF | 1 | 225 | 5.00 | $2.00 | ($5,325) | ($5,325) | $2,335 | $2,335 | 2 | 225 | 5.15 | $2.06 | $695 | $695 | $329 | $329 | 3 | 225 | 5.30 | $2.12 | $716 | $716 | $342 | $342 | 4 | 225 | 5.46 | $2.19 | $738 | $738 | $357 | $357 | 5 | 225 | 5.63 | $2.25 | $760 | $760 | $371 | $371 | Year | Number of Plates | Old Price Per Plate | New Price Per Plate | Buyer Cash Flow | Buyer DCF | Seller Cash Flow | Seller DCF | | | | Totals | $584 | $584 | $3,734 | $3,734 | Client-Specific Parameters | | | | | | | Salvage Value (new machine) | $3,000 | | Salvage value of a new
* Risk premium: using the geometric mean from 1926 to 1999 might be problematic, since the risk premium of recent decades is obviously lower than earlier (stated in the lecture). So we think a range of 3% to 5% is more reasonable. * Cost of Debt: Joanna’s calculation is based on the items on the income statement. However, when calculating cost of debt, we should consider the opportunity cost rather than the accounting cost. We should perceive the opportunity cost as the return investors will expect to earn somewhere else when accepting similar risk.
negative 2500 $.The company needs to raise about 40,000 $ as the ending cash balance for the month of July is negative 40,000 $. The Company can get a short term loan for 40,000 $ which can be repaid in October. 2. Even though the Company started with a Capital of 250,000 $ it still ends up with a zero bank balance. This is because the increase in the collections of Accounts Receivable from customers is not sufficient to recover the total disbursements (variable production cost and the fixed cost).
But the impact may not be very significant even if an average rate is taken. The effort required to estimate the inflation rate for each element may not justify the accuracy that may be obtained. If the understanding in the project is that sales and costs may increase by different values very different from the average inflation, then we may need to consider the inflation separately. Question 9 NPV $178,337 IRR 21.6% MIRR 17.6% ARR 28.5% Payback 2.56 years (The figures are from the attached file with Cell C38 = 4% and C39 =2% – sales inflation taken at 4% and cost inflation at 2%) Question 10 a. The NPV would decrease since the costs will be higher and the new NPV is $98,762 NPV $98,762 IRR 17.5% MIRR 15.2% ARR 22.2% Payback 2.76 years (The
11) A zero-coupon bond A. pays no interest B. pays interest at a rate less than the market rate C. is a junk bond D. is sold at a deep discount at less than the par value 12) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years? A. $3,525.62 B. $5,008.76 C. $3,408.88 D. $2,465.78 13) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? A.