mod 4 assist

Module 4

Trident University

FIN301: Principles of Finance

Module 4: SLP Template

FILL IN ALL CELLS THAT ARE HIGHLIGHTED IN YELLOW

Please remember to save this file with your last name in the file name. For example: FIN301 Module 4 SLP Template, Doe

Name:

QUESTION 1: Sell all of your interest in at least one stock that pays a dividend.

STOCK 1: SELL ALL OF YOUR INTEREST IN THIS STOCK

Company Name:

Ticker Symbol:

52-week High:

52-week Low:

Dividend Yield

QUESTION 2: Assume you bought the stock mentioned in 1. above at the 52-week low and sold it at the 52-week high. What would the rate of return be for this stock? (Hint: be sure to include the dividend yield).

RATE OF RETURN FOR STOCK 1

QUESTION 3: Choose the stock with the most price volatility over the project. Attempt to explain why this fluctuation occurred using information about the company, the industry, and/or the macroeconomy

Which stock had the most price volatility?

Explanation for fluctuation in price:

2

>Question

1 Trident University FIN

3 0

1: Principles of Finance Module

4

: Case Template FILL IN ALL CELLS THAT ARE HIGHLIGHTED IN YELLOW Please remember to save this file with your last name in the file name. For example: FIN301 Module 4 Case Template, Doe Name: QUESTION 1: The table below gives the initial investment (the negative numbers at “

Year

0”) for two projects. Compute the payback period, the NPV, and the IRR using Excel. Then rank the two projects based on each of these three criteria, and discuss which projects should be funded based on your computations. Firm Cost of Capital: 11% Year

Project A Project B 0

-100,000 -1

5

0,000 1

25,000 30,000 2
25,000
30,000
3
25,000

90,000 4
25,000

20,000 5
25,000
20,000
6

25,000
20,000
PAYBACK PERIOD = NPV = IRR = RANK THE TWO PROJECTS BASED ON THESE THREE CRITERIA. RANK BASED ON PAYBACK PERIOD PROJECT A PROJECT B RANK BASED ON NPV

PROJECT A

PROJECT B
RANK BASED ON IRR

PROJECT A

PROJECT B

WHICH PROJECTS SHOULD BE FUNDED BASED ON YOUR CALCULATIONS? ANSWER: DISCUSS YOUR REASONING FOR YOUR ANSWER ABOVE. WHY SHOULD THE PROJECT(S) BE FUNDED?

ANSWER:

NOTE: YOU CAN USE THE EXCEL FORMULA FOR NPV. HELP IN USING THIS FORMULA IS IN THE MODULE 2 CASE TEMPLATE. THE TAB IS LABELED “Help for Multiple Cash Flows Q3.”

NOTE: YOU CAN USE THE EXCEL FORMULA FOR IRR. HELP IN USING THIS FORMULA IS IN THE TAB LABELED “

Help for IRR Q1

” IN THIS WORKBOOK.

PROJECT A
PROJECT B

1st

1st

2nd

2nd
1st
1st
2nd
2nd
1st
1st
2nd
2nd

Question 2

a. Calculate the NPV for both factories and for both scenarios (rainy versus sunny). What is the range of NPV for each factory based on your scenario analysis?

FACTORY A

NPV FOR FACTORY A IF SUNNY = NPV FOR FACTORY A IF RAINY =

FACTORY B

NPV FOR FACTORY B IF SUNNY = NPV FOR FACTORY B IF RAINY = THE RANGE FOR FACTOR A IS =

0

AND

0
THE RANGE FOR FACTOR B IS =

0
AND
0
b1. Based on your answer to a) above, do you think ACME should use the same discount rate of 9% for each factory?

ANSWER:

b2. Should they use a risk-adjusted discount rate (RADR)?

ANSWER:

b3. If you answered YES above, which factory should have a higher RADR?

ANSWER:

b4. Explain your answer to b2 and b3. Use references from the background readings.

ANSWER:

QUESTION 2: The ACME Umbrella Company is deciding between two different umbrella factories. Both factories will cost $500,000 to get started. However, the cash flows for each factory will depend on whether the next five years are rainier than average or sunnier than average. Factory A will have cash flows of $130,000 per year for the next five years if the weather is sunnier than average. But if it is rainier than average the cash flows will be $150,000 per year for the next five years. Factory B will have cash flows of $100,000 per year for the next five years if it is sunnier than average, but if it is rainier than average it will have cash flows of $200,000 per year. ACME has a cost of capital of 9%. Based on this information, answer the following:

NOTE: USE THE EXCEL FORMULA FOR NPV. HELP IN USING THIS FORMULA IS IN THE MODULE 2 CASE TEMPLATE. THE TAB IS LABELED “Help for Multiple Cash Flows Q3.”

NOTE: THESE RANGES WILL AUTOFILL BASED ON YOUR ANSWERS TO THE NPV QUESTIONS.

YES, USE THE SAME RATE

NO, DO NOT USE THE SAME RATE

YES, USE A RADR

NO, DO NOT USE A RADR

FACTORY A
FACTORY B

Questions 3 and 4

ANSWER:

ANSWER:

QUESTION 3. The Carpet Company’s shareholders require an 11% return on their investment, and stock comprises 50% of the company’s capital structure. The other half of the company’s capital structure is comprised of debt. The interest rate on this debt is 7%. Assume the corporate tax rate is 21%. What is carpet company’s WACC?

QUESTION 4. Assume the Carpet Company’s corporate tax rate falls to 0%. The company borrows money to buy back and retire half of its outstanding common stock. What happens to the company’s WACC?

Help for IRR Q1

TO COMPUTE THE IRR FOR MULTIPLE CASH FLOWS IN EXCEL:

STEP 1: INSERT THE INTERNAL RATE OF RETURN (IRR) FORMULA. CHOOSE THE FORMULA TAB – FINANCIAL – IRR (SEE BELOW). YOU CAN ALSO INSERT THE FORMULA BY TYPING =IRR IN ANY CELL.

STEP 2: FILL OUT EACH OF THE FIELDS IN THE IRR WINDOW

VALUES = THE CASH FLOWS (POPULATE THIS FIELD BY CLICKING ON IT AND THEN HIGHLIGHTING THE CASH FLOWS)

GUESS = THIS IS THE RATE YOU THINK THE IRR IS CLOSE TO; EITHER LEAVE BLANK OR INPUT THE COST OF CAPITAL

FOR THE SAMPLE WINDOW BELOW, THE CELLS WITH THE CASH FLOWS ARE IN THE ‘VALUES’ FIELD AND THE COST OF CAPITAL IS LEFT BLANK. THE IRR FOR THIS PROJECT IS 8.8% OR ABOUT 9%.

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Case Assignment

Please download the

Case

4

Template

. You will type your answers into this document. Save the document with your last name and submit to the dropbox. Note that you will get partial credit if you show your work even if the answers are incorrect.

1

. The table below gives the initial investment (the negative numbers at “

Year

0

”) for two projects. Compute the payback period, the NPV, and the IRR using Excel. Then rank the two projects based on each of these three criteria, and discuss which projects should be funded based on your computations.

25,000

30,000

25,000

25,000

25,000

20,000

25,000

20,000

Firm Cost of Capital:	11%
Year	Project A	Project B
0	-100,000	-1 5 0,000
1						2 5,000		3 0,000
2
3	90,000
4			20,000
5
6

2. The ACME Umbrella Company is deciding between two different umbrella factories. Both factories will cost $500,000 to get started. However, the cash flows for each factory will depend on whether the next five years are rainier than average or sunnier than average. Factory A will have cash flows of $130,000 per year for the next five years if the weather is sunnier than average. But if it is rainier than average the cash flows will be $150,000 per year for the next five years. Factory B will have cash flows of $100,000 per year for the next five years if it is sunnier than average, but if it is rainier than average it will have cash flows of $200,000 per year. ACME has a cost of capital of 9%. Based on this information, calculate the following:

a. Calculate the NPV for both factories and for both scenarios (rainy versus sunny). What is the range of NPV for each factory based on your scenario analysis?

b. Based on your answer to a) above, do you think ACME should use the same discount rate of 9% for each factory? Or should they use a risk-adjusted discount rate (RADR)? If so, which factory should have a higher RADR? Explain your answer with references to the background readings.

3. The Carpet Company’s shareholders require an 11% return on their investment, and stock makes up 50% of the company’s capital structure. The other half of the company’s capital structure consists of debt. The interest rate on this debt is 7%. Assume the corporate tax rate is 21%. What is carpet company’s WACC?

4. Assume the Carpet Company’s corporate tax rate falls to 0%. The company borrows money to buy back and retire half of its outstanding common stock. What happens to the company’s WACC?

Assignment Expectations

·  Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.

· For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations.

Capital Budgeting and Capital Structure

Virtual Stock Exchange Project

Module 4 SLP Assignment

· Sell stock, calculate return, and explain price volatility

Please download the

Module 4 SLP Template

. You will type your answer into this Excel workbook. When finished with the SLP assignment, please save the document with your last name and submit to the dropbox.

1. Sell all of your interest in at least one company that pays a dividend and include the following information in the Excel template:

· Company Name

· Ticker Symbol

· 52-week High

· 52-week Low

· Dividend Yield

2. Assume you bought the stock mentioned in 1. above at the 52-week low and sold it at the 52-week high. What would the rate of return be for this stock? (Hint: be sure to include the dividend yield).

3. Choose the stock with the most price volatility over the project. Attempt to explain why this fluctuation occurred using information about the company, the industry, and/or the macroeconomy.

SLP Assignment Expectations

Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.