Corp Finance - Homework

In: Business and Management

Submitted By ctm277
Words 537
Pages 3
Peter DeVito
Ed Travaglianti
Cameron McNeil
Corporate Finance
Homework #1

1. 6 month | 1 year | Investment | C1 = 10,000 | C2 = 20,000 | 26,000 | r1 = 0.03 | r2 = spot rate = s | |

100 = 31+0.03+ 1031+s where 3 is the coupon payment based on a 6% yield

s= 6.09%

NPV = -C0+ C1(1+r1)+ C2(1+r2)

NPV = -26,000+ 10,000(1+0.03)+ 20,000(1+0.0609)

NPV = 2560.66 with positive NPV, YES, we should invest

2. Based on the Annuity Formula and assuming the same 9%, 30 year, with time t=0 (10 years ago)
Monthly Payments = 4,023.11 Mortgage = 500,000
AC, r, t= Cr 1-1(1+r)t

500,000= 4,023.11(0.0912) 1-1(1+(0.0912))12(30)

500,000= 4,023.11(0.0912) 1-1(1+(0.0912))360

r≠ 0.09 r= 0.09*0.9122=0.0821 or 8.21%

New formula then becomes:
500,000= 4,023.11(0.082112) 1-1(1+(0.082112))12t

t= 23.2 years

3. Year | 0 | 1 | 2 | ∞ | Sales | | 100 | 110 | Cr-g=1100.05-0.03=5500 | Profit | | 20 | 22 | C∞= 1100 | Depreciation | | -10 | -10 | | ∆ NWC | | -10 | -1 | -55 | CAPX | | -11 | -12 | | Taxes (40%)(Gross Profit) | | -8 | -8.8 | -440 | Net Cash Flows | | -9 | 0.2 | 660 |

CF=Gross Profit-Taxes-CAPX- ∆NWC
R1 year: The 1 year rate should be equal to investing in four 3 month rates.
FV3 month@ t=1 year
FV=1 1+0.0344=1.03034
FVPV=1+r 1.030341= 1+r1 year
NPV=0= -C0-91+0.0303+0.21+0.042+ 660 already accounted for r
C0=651.5
4. pE=18 g=18% pE=1r-g

r=1(pE)+ g= 118+ 0.18=23.6%

PV=FV1+r=30.51+0.236=24.68

Yes, his pricing is consistent with the required rate of return on equity implicit in his estimates.
Paying $22 is good, paying $28 is not.
His indifference price should be $24.68

5. The analysis is incorrect for several reasons: * $20k for software is a sunk cost and should be ignored as part this calculation * The…...

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