1. Based on your team company and its latest 2015 financial statements calculate its IRR, Sustainable Growth Rate, and its EFN if it decided to double its sales in three years keeping its asset to sales ratio constant.
You have your choice of 3 investments. Investment A is a 15-year annuity that features end of month $2500 payments and has an interest rate of 6.5% compounded monthly. Investment B is a 6 percent continuously compounded lump sum investment also for 15 years. How much would you need to invest in B today for it to be worth as much as investment A in 15 years from now? If you invested the same amount as in B in a consol or perpetuity [C] and it paid 6% what would it pay annually?
. The following annual cash flows beginning at the end of year 1 [$95, $170, $235, $295, $275] are the basis for the following questions: a) If the interest rate on deposits is 4.5% what is the present value of the payments. b) If the payment of $95 begins on the first day instead of after one year, what is the future value of the account at the end of five years at a 5% deposit rate? c) If it cost $950 to buy this cash flow would you invest? d) What is the internal rate of return on this cash flow if the first and second amounts are negative and the $95 first payment is paid out immediately? e) If this is the cash flow from an investment in a new piece of machinery costing $700 what is the payback period?
Evaluate a project that costs $1.75 million has a 10-year life and no salvage value. Assume depreciation is straight line over the life of the project. Sales are projected at 155K units every year over the life of the project. Price per unit is $85, variable costs are $50 per unit, and fixed costs are $1,250,000 per year. The tax rate is 30% and the required rate of return is 15% after tax. Calculate: the accounting break-even point; the operating leverage at this break-even point; the base-case cash flow and its NPV. Also compute the impact of a 10% decrease in expected sales.
Strategies evaluate the following Strategic Financing Problem. Your firm has a 20% market share in a high growth market [35% annual growth] where the major competitor [50% market share] is pursuing a conservative policy of only growing as fast the market. Your firm on the other hand has unlimited access to external debt funding at 5%. Assume the major competitor sets the price at $25 and that your firm decides to price below the lead competitor at $22 so you can grow twice as fast as the market.
Market Growth [Units]: 35% Initial Market Size [units]: 350K Initial Market Size [$]: $8.75 million [price set by lead competitor is $25 per unit] Elasticity Demand: elastic Elasticity Supply: elastic Industry
Accumulated Experience at beginning year one: 350K units
Cost Reduction Each Doubling Experience: 20% Initial Annual Production Of Lead Firm: 175K Market Share [units]: 50% Firm’s Initial Market Share and production is 20% or 70 units
Based on this information indicate Firm’s Competitive Position? Dog, $, ?, *
Competitive Strategy [Grow, Maintain or Divest]? Pricing Strategy? Market Share at end of 1st and 2d years?
Gain In Market Share at the end of one year, year two? Percentage reduction in cost per unit at end of 1, year 2? Assuming a one to one sales to assets ratio and that the firm finances the required increase in assets using debt how much debt will it add in year 1, year 2 and what are interest costs?
1. What is a consol and why do changes in market interest rates have a larger impact on its value than 10-year bonds?
2. How are discount bonds currently taxed by the IRS and how does this impact the market for these bonds?
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