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1. The following is the balance sheet for Crown-well Inc. for the period ending December 2011: Crown-well Inc. Balance Sheet (2011) Cash $ 24,000 Current Liabilities $ 30,000 Other current assets 51,000 Long-Term Notes payable 33,000 Total current assets 75,000 Bonds 40,000 Investments 40,000 Common Stock 150,000 Fixed Assets(Net) 125,000 Retained Earnings 49,000 Land 62,000 $ 302,000 $ 302,000 The following transactions occurred during 2012: i. $20,000, sale on some of its investments ii. $12,000, additional land for expansion iii. $10,000, bonds payment iv. $20,000, issuance of common stock v. $5,000, dividend payment to stockholders vi. $42,000, Net Income for 2012 vii. $18,000, depreciation viii. $10,050, taxes ix. $10,000, Interest expense x. $18,000, purchase of second piece of land, using $12,000 in bonds and $6,000 in longterm notes payable. Required: a) Prepare a balance Sheet for Crown-well Inc. as at period ending 2012. (5 POINTS) b) Compute the firm’s free cash flows for 2012. (Hint: In computing FCF, please consider changes in investments and changes in Land as separate items from the Net Fixed Asset in the balance sheet) (5 POINTS) 2. Differentiate between current yield, Yield to Maturity, and Yield to Call. (2 POINTS) 3. Consider three bonds, A, B, and C, each paying 7% semiannual coupons, and with face value of USD 1,000. Maturity for each bond is 30 years, 15 years and 5 years respectively. a. For each bond, calculate the price (i) when the YTM is 10% and (ii) when the YTM is 15%. (3 POINTS) b. What can you conclude about (i) the bond price yield relationship and (ii) the bond price maturity relationship of the three bonds? (3 POINTS) 4. Consider the following cases: Case Amount of Initial Deposit ($) Stated Annual Rate, r (%) Compounding Frequency, m (times/year) Deposit Period (years) A 2,500 6 2 5 B 50,000 12 6 3 C 1,000 5 1 10 D 20,000 16 4 6 a. Calculate the future value at the end of the specified deposit period. (2 POINTS) b. Determine the effective annual rate (EAR). (2 POINTS) c. Compare the stated annual rate (r) to the effective annual rate (EAR). What relationship exists between compounding frequency and the stated and effective annual rates?(1 POINT) 5. Mighty Mike is planning to save up for a trip to Europe in three years. He will need $7,500 when he is ready to make the trip. He plans to invest the same amount at the end of each of the next three years in an account paying 6 percent. What is the amount the he will have to save every year to reach his goal of $7,500 in three years? (5 POINTS) 6. Consider the preferred stocks for two Utility Companies.  LUCELEC Limited selling at $120 and pays $17.50 in dividends.  GRENLEC Limited selling at $95, and pays $15.00 in dividends. a. What is the expected rate of return on each of the stocks? (3 POINTS) b. What is a reasonable price you should pay for each stock considering your required return is 14%? Which of the two stocks should you buy AND why? (3 POINTS) 7. In capital budgeting analysis, why is cash flow used instead of net income? (2 POINTS) 8. You have determined in your mind that you would like to have a business of your own, although your father runs a family restaurant in your local city. You have therefore, decided to have a medium size snack and cocktails bar which will accommodate the cruise ship passengers who visit your city. You plan to keep the business for five years after which you will sell it off to your brother John for $2,000,000 and go off to do your Master’s Degree in the UK. Since you will be occupying the establishment from your grandmother for free, you have decided that you need to make some improvements to the property which will cost you $1,500,000. Additionally you will spend $275,000 in bar stools, tables and decorations. The Leasing of such a space in the area would cost $75,000 per year. You will depreciate the assets over 7 years using MACRS. You have determined that you would need an average cash balance of $15,000 and inventory of $20,000 while Accounts payable should average $10,000. You plan to borrow the money from a local bank and pay interest at a rate of 15 percent. To increase your chances of success at the business you plan to have your cousin Johnathan to conduct a market survey which will cost you $100,000. Your new venture will decrease the revenue your family business will earn by $15,000 per year and you have agreed to allow your father to take this amount from your allowance as a shareholder of the family restaurant. Revenues are projected to be $500,000 the first year and is expected to increase by 20% the second year, 15% the third year and to continue to increase at 10% thereafter. Fixed annual operating costs are expected to be salaries of $110,000, Utilities $75,000, Food and Liquor License is 15% of revenues and Taxes are 40% of net revenues. Required: A. Calculate the initial outlay of the project. (1 POINTS) B. Calculate the annual after-tax operating cash flow for Years 1 -5. (3 POINTS) C. Determine the terminal year (in year 5) after-tax non-operating cash flow. (2 POINTS) D. What is the project NPV? (2 POINTS) E. What is the estimated Internal Rate of Return (IRR) of the project? Should the project be accepted based on the IRR criterion? Why? (2 POINTS) 9. Reference is made to the 2015 Balance Sheet of Southwest limited. Southwest Limited Balance Sheet 2015 Cash 1,000,000.00 Accounts Payable 8,000,000.00 Acc. Receivable 12,000,000.00 Notes Payable 8,500,000.00 Marketable securities 3,000,000.00 Long-term Debt 20,000,000.00 Inventories 7,500,000.00 Common stock 7,500,000.00 Fixed Assets 26,500,000.00 Preferred Stock 6,000,000.00 Total Assets 50,000,000.00 Total Liabilities and Equity 50,000,000.00 Additional Information: i. The Long-Term debt consists of 8% annual coupon bonds, with 15 years to maturity and are currently selling for 95% of par. ii. The company’s common shares which have a book value of $20 per share are currently selling at $25 per share. iii. Preferred shares have a book value of $100 per share. These shares are currently selling at $120 per share and pays dividends of 6% per annum. iv. The dividend growth rate is expected to be 3%, and dividend for 2016 is projected to be $5.00 per share. v. The Company’s Tax rate is 30%. Required: Determine the following for Southwest Limited: (a) Total Market value of the firm’s capital structure (3 POINTS) (b) After-tax Cost of Debt (2 POINTS) (c) Cost of Common Stock (2 POINTS (d) Cost of Preferred Stock (1 POINT) (e) WACC (2 POINTS) 10. In no more than 150 words, explain (i) why the use of the after-tax cost of debt and not the actual cost of debt and (ii) why firms should use the WACC compared to the cost of a single component source of financing? (4 POINTS)

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