Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the Apurchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 39,000 3. 42,000 4. 35,000 25,000 6 30,000 Advise whether the company should buy the equipment or not using the NPV and profitability 1. index 11. Why would you prefer the NPV method to other methods of project evaluation?

Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the Apurchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 39,000 3. 42,000 4. 35,000 25,000 6 30,000 Advise whether the company should buy the equipment or not using the NPV and profitability 1. index 11. Why would you prefer the NPV method to other methods of project evaluation?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Suppose that LilyMac Photography expects EBIT to be approximately $46,000 per year for the foreseeable future, and that it has 500 10-year, 5 percent annual coupon bonds outstanding. (Use Table 11.1.)What would the appropriate tax rate be for use in the calculation of the debt component of LilyMac’s WACC?
TV Azteca is a Mexican corporation listed on the NYSE and the BMV. This firm needs to finance an expansion of its cable TV network. The financing of the investment is intended to be made by an issue $100 million worth of corporate bonds, with a face value of $100,000. These The bonds will have a maturity of 3 years with a coupon rate of 5% with annual payments. The next table summarizes the yield to maturity (YTM) for coupon bonds by debt rating of moody's calificación Aaa Aa A Baa BaYTM 0.01 0.02 0.050 0.07 0.10 a. Assume that the initial bond rating is A. Estimate the bond price associated with each of the observed ratings. Assume that there is a risk of failure to pay the face value (FV). A payment of 95,000 is expected. The probability of default is estimated at 5% and Moody's lowers its rating to Ba. b. Estimate the risk premium c. Based on your answer in (b), what is the price of the bond? d. Based on your assessment in (c), what is the yield that would be observed in the market?
X Co. want to raise $100 million of 5-year debt in the Euro-market where interest is paid annually. It can obtain a 5-yr floating rate note with an interest rate of 1-year LIBOR + 2%. The 1-year LIBOR rate is currently 5%. To hedge the interest rate risk X Co. plans to enter into a collar with a cap rate of 6% and a floor rate of 4%. The notional principal of both the cap and floor is $100 million. The cap premium is 1.4% of the notional principal and the floor premium is 0.5% of the notional premium. What is the worst case all-in-rate that X Co. will pay in total? Answer options: 5.8% 5.2% 9.2% 8.2% 7.2%
Given the expected increase in USD interest on the market, the Asset and Liability Committee of XYZ Bank has launched a fixed deposit campaign to raise cheap liability. The fixed deposit guarantees a single payment of USD160, 000,000 at maturity in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the fixed deposit to be USD 145,700,000. This is the amount they intend to invest today to immunize the new fixed deposit of the bank. The current duration of the deposit is estimated at 4. XYZ Bank already holds the U.S. government bonds shown in Exhibit 1. Existing Portfolio Bonds Bond Market Price (USD) Total Market Value (USD) Total Dollar Duration Bond A 102.32 49,113,600 954,278 Bond B 94.9 59,630,000 4,209,878 XYZ must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Market Price (USD)…
After extensive project appraisal analysis, McCoy Plc has decided to go ahead with the launch of a new gaming platform. The new project will cost £400m and McCoy Plc has decided to raise half of this by issuing bonds. The new bonds were issued today and have a maturity of 6 year, a face value of £100 and a coupon rate of 6%. a) If the bonds were issued at a fair price and the yield to maturity on the bonds is 7.5%, how many bonds did McCoy Plc have to issue? b) What was the duration of the bonds on the day they were launched? c) What does the duration of a bond measure? d) Assume one year after issue, the price of each bond is £85. What would the annual return be then?
Roo-Fus Inc is considering financing its international expansions by borrowing in the international debt markets. The current annualized 30-day LIBOR rate is 4.4%. Roo-Fus Inc expects that the next period's 30-day LIBOR is 9.6%. Roo-Fus Inc's credit rating implies that it will face a 1.4% premium over LIBOR. What are Roo-Fus Ine's (annualized) borrowing costs? a. This period: 5.8%. Next period: 11.0% b. This period: 5.8%. Next period: 5.8% c. This period: 11.0%. Next period: 11.0% d. This period: 4.4%. Next period: 9.6% e. This period: 4.4%. Next period: 4.4%
MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Existing Portfolio Bonds Bond Market Price (USD) Total Market Value (USD) Total Dollar Duration Bond A 102.32 49,113,600 954,278 Bond B 94.9 59,630,000 4,209,878 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Yield to Maturity 3.52% Modified Duration Market Price (USD) 99.97 Bond Bond X 1.333 Bond Y 99.36 3.89% 2.154 Bond Z…
A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.
A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. What is the total capital amount the FI needs to hold against these exposures? (Assume data obtained from 2020 FI records) Select one: A. $5.04 million B. $9.87 million C. $8.4 million D. $7.52 million
The question has two parts. Show all calculations. a. Fury Ltd's equity has beta of 1.3. If the expected market return is 12% and the risk-free rate is 4%. Calculate the cost of eqwuity of Fury Limited. ( Show answer as a percentage correct to 1 decimal place). b. Ironbark Ltd has a new factory under consideration, which is expected to generate before tax cash flows of $2,500,000 forever. Ironbark Ltd is currently operating at its target debt-to-equity ratio of 0.25. The new factory is expected to cost $10,000. The company tax rate is 30%. The company wishes to raise the fund for the new project by a new issue of 20-year bonds with a yield to maturity of 9% p.a. (the flotation costs of the new debt would be 4% of the amount raised) and a new issue of ordinary shares with a required return of 16% p.a.(the flotation costs of the new share issue would be 14% of the amount raised). Calculate the net present value (NPV) of the new project. Explain if the company should accept this project…
After extensive project appraisal analysis, McCoy Plc has decided to go ahead with the launch of a new gaming platform. The new project will cost £400m and McCoy Plc has decided to raise half of this by issuing bonds. The new bonds were issued today and have a maturity of 6 year, a face value of £100 and a coupon rate of 6%. c) What does the duration of a bond measure? d) Assume one year after issue, the price of each bond is £85. What would the annual return be then?

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