Concept explainers
As a finance intern at Pork Products, Jennifer Wainwright’s assignment is to come up with fresh insights concerning the firm’s cost of capital. Site decides that this would be a good opportunity to try out the new material on the APT that she learned last semester. As such, she decides that three promising factors would be (i) the return on a broad-based index such as the S&P 500; (ii) the level of interest rates, as represented by the yield to maturity on 10-year Treasury bonds; and (iii) the price of hogs, which are particularly important to her firm. Her plan is to find the beta of Pork Products agains each of these factors and to estimate the risk premium associated with exposure to each factor. Comment on Jennifer’s choice of factors. Which are most promising with respect to the likely impact on her firm’s cost of capital? Can you suggest improvements to her specification? (LO 7-3)
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
Essentials Of Investments
- As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company. 1. Determine the weighted average cost of capital (WACC) for Vigour Pharmaceuticals. (Formula to be used is attached)arrow_forwardSVR Clinical Research, LLC Mrs. Seaver, a microbiologist and pharmacist, has developed a drug therapy to treat dysphagia (swallowing problems). She discovered that a combination of existing drugs should address problems with swallowing that have only marginal treatments available to date. Since the therapy is using currently approved drugs, safety of the treatment is expected. It should allow the drug to enter Phase 2 clinical trials very soon after the firm raises its first $3 million in seed capital. Startup investors recognize that they are investing in firms with no history and with significant risk. They evaluate investment opportunities using required returns in the range of 10x5 (That is, the investors want to have their investment return to be 10 times great than the initial investment at the end of 5 years.) Mrs. Seaver's team has developed a clinical trial plan using major research medical centers such as the Vanderbilt University Medical Center and the Cleveland Clinic. The…arrow_forwardBarnard Manufacturing is considering three capital investment proposals. At this time, Barnard only has funds available to pursue one of the three investments. |(Click the icon to review the proposals.) Which investment should Barnard pursue at this time? Why? Since each investment requires a different initial investment and presents a positive NPV, Barnard Manufacturing should use the profitability index to compare the profitability of each investment. Select the labels for the evaluation measure you determined above. Enter the amounts into the formula, beginning with Equipment A, and calculate the amount you will use to evaluate each investment. (Enter all amounts as positive numbers. Round the evaluation measure to two decimal places, X.XX.) - X Data Table Equipment A Equipment B Equipment C Present value of net cash inflows 1,832,478 S 1,865,471 $ 2,169,724 (1,650,881) (1,516,643) (1,749,777) Initial Investment 181,597 S 348,828 S 419,947 NPV Print Donearrow_forward
- the information given. Assume the business's expected return on investment is 12 percent. Which option would you recommend? The rate of return on option A is |||. (Round to the nearest whole number as needed.) The rate of return on option B is %. (Round to the nearest whole number as needed.) should be recommended to the business because Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help it make a decision Option "A" requires an immediate cost of $25,000 along with "upgrade costs of $5,000 in year 3 and $7,500 in year 6. The returns from these investments begin in year 2 and are estimated to be $3,000 per year for 3 years, $4,000 per year for the next 3 years, and then $7,000 in years 8 and 9, respectively. The only return in year 10 is a residual value of $4,000 Option "B" requires a cost today and in years 1 and 2 of $7,000 and has estimated returns beginning in year 4 and ending in year 10 of $5,000 per year. There will…arrow_forwardLana is thinking about making an iventment in a new venture called BluePearl - after performing an analysis of similar firms, she discovered several other firms (3) with the following Enterprise Value to FCF ratios: Firm 1: 5.9 Firm 2: 7.6 Firm 3: 9.1 The cashflows for BluePearl this year are expected to be $1,300,000. If BluePearl doesn't have any debt or cash currently, and 700,000 shares outstanding - what is the Price Per Share for BluePearl?arrow_forwardYou are a senior financial analyst of a firm based in Sydney. You have been assigned with the task of training interns who recently joined your firm on how to use the free cash flow model to estimate the value of a company. You have collected data on the following data: Year 2020 2021 2022 2023 2024 Long-term Debt ($M) 56000 57,000 57,000 58,000 60,000 Profits (SM, after tax) 22,000 28,000 26,000 32,000 35,000 Interest ($M, after tax) 1,900 1,950 2,050 2,150 2,275 Working Cap (SM) 20,000 19,000 22,000 30,000 28,000 Depreciation (SM) 36,000 37,000 38,000 38,000 40,000 Cap Spending ($M) 35,150 37,000 41,000 45,000 Cost of equity 0.10 0.11 0.09 0.11 WACC 0.12 0.13 0.13 0.12 Number of equity shares (Million) 3,000 Terminal growth rate 0.06 Using the information you have collected above, perform calculations to explain to interns as to how the following are calculated: i. Free cash flow to firm ii. Free cash to equity iii. method Value of the firm according to the free cash flow to firm…arrow_forward
- Bagi Ventures, a leading manufacturer of quality car batteries has recently identified a positive net present value project. As a financial advisor of the company, you think the best place Bagi can raise the needed money to execute the project is the stock market. Concisely and unambiguously, discuss the steps and processes the company has to go through to get listed on the Ghana Stock Exchange.arrow_forwardJill needs to determine a beta for a private company for its valuation. She found a public comparable with a beta of 1.2. As of the valuation date, the public comparable has 40% of debt and 60% equity. The private company is 20% funded by debt and 80% funded by equity. Assume both companies' debt is high quality. In your written response, please start with question numbers such as a) or b) before showing your work and answer to the question. a) What is the unlevered or asset beta for the public company? b) What is the levered beta or the estimated beta of the private company?arrow_forwardE) You are an ángel investor, and 4 entrepreneurs have approached you to build some innovative folding tables, and the proposals are as follows. Project A, an investment of 499189 and annual cash flows respectively of 216982, 46543, 237780 and 531707. Project B, an investment of 455199 and annual cash flows respectively of 332309, 50801, 58123 and 322548. Project C, an investment of 508746 and annual cash flows respectively of 158321, 494359, 240543 and 98899. Project D, an investment of 557203 and annual cash flows respectively of 238377, 112884, 332960 and 311611. If the rate expected by you is 13.33% per year of compound interest. Which project is more profitable according to the NPV (Net Present Value)? OPTIONS: A B C Darrow_forward
- During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm’s tax rate is 40%. The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new…arrow_forwardDuring the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm’s tax rate is 40%. The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new…arrow_forwardDuring the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana's cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: ● The firm's tax rate is 25%. ●The current price of Jana's 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. There are 70,000 bonds. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. ● The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual pre-ferred stock is $116.95. There are 200,000 outstanding shares.…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education