Attached is an excel sheet that has 6 questions to be answered.
Question 1 Consider the following data - A machine costs $950 today (year 0). Assume this investment is fully tax-deductible, as stipulated by the new US corporate tax code of 2018. - This company has current pre-tax profits from other projects that are greater than $950, so it can take full advantage of the investment tax break above in year 0. - The machine will generate operating profits before depreciation (EBITDA) of $520 per year for 5 years. The first cash flow happens one year after the machine is put in place (year 1). - Depreciation is not tax-deductible. Notice that you do not need to calculate depreciation at all to solve this problem since it has no effect on taxes. - The tax rate is 21% - There is no salvage value at the end of the five years (the machine is worthless), and no required working capital investment. Compute the NPV of the project if the discount rate is 8%. Please show your work below, not just the final answer (15 points) NPV = NOTE - The answer cell must remain in B10. Please lay out all your work below (show the live formula), not just the final answer, to receive credit. Question 2 An investment requires $9,000 today, and produces the first cash flow of $300 in two years (year 2). Cash flow is expected to grow at 3% a year after year 2. a) What is the NPV of this investment if the discount rate is 7% ? (8 points) NPV = b) What is the rate of return of this investment? (8 points) Rate of return = NOTE - The answer cells must remain in B4 and B6. Please lay out all your work below (show the live formula), not just the final answer, to receive credit. Question 3 You are the CFO of a drug company, and you must decide whether to invest 15M dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 4% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 400 million dollars. The drug will likely generate annual profits of 100 million for 10 years, until the patent expires. After that, it will generate a cash flow equal to 10 million a year in perpetuity (no growth) . The discount rate is 7%. a) If the research is successful, what is the net present value of the drug cash flows ? (10 points) NPV if successful = Million Dollars b) If you invest in R&D, you estimate that it will take 2 years to know whether the drug is successful or not. What is the NPV of the R&D investment? (10 points) NPVR&D = Million Dollars NOTE - The answer cell must remain in B3 and B5. Please lay out all your work below (show the live formula), not just the final answer, to receive credit. Question 4 Describe in words the hedging strategy that the company should take in each of these cases. Remember that a possible answer is that the company should not be hedging at all. (1 paragraph maximum for each) a) A Japanese manufacturer would like to hedge against the risk that the Yen will appreciate against the Euro, since the manufacturer has significant revenues in Euros. (5 points) b) A US company expects to make a one-time payment of 100 million Mexican Pesos in about 12 months, and would like to hedge against the risk that exchange rates may change during the year. (5 points) c) A CFO from an oil company believes that oil prices will decrease and wants to profit from this belief by investing in futures. (5 points) d) A CFO from a technology firm is concerned that interest rates will increase, affecting the cost of equity for the company in the next few years. (5 points) NOTE - The answer cells must remain in A3, A5, A7 and A9. Question 5 There has been a rumor that Company Z may become a takeover target for another company in the industry, or even for a private equity fund in a leveraged buy-out (LBO). Here is the updated data on Company Z: Current Capitalization (Millions of EUR) Currency Million EUR Shares Price$ 47.0 Shares Outstanding357.0 Market Capitalization16,779.0 - Cash & Short Term Investments1,125.0 + Total Debt4,287.0 + Pref. Equity- 0 + Total Minority Interest- 0 =Total Enterprise Value (TEV)19,941.0 Book Value of Common Equity1,357.0 + Pref. Equity- 0 + Total Minority Interest- + Total Debt4,287.0 Total book capital5,644.0 a) Given the data above, what is your guess for the value of the offer that an acquirer would have to make in order to buy Company Z? (7 points) Offer = Million Euros b) Discuss the following statement: this company is not a great candidate for an LBO, because its book leverage ratio is very high. (7 points) NOTE - The answer cells must remain in B21 and A23. Please lay out all your work below (show the live formula) for a), not just the final answer, to receive credit. Question 6 Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin three years from now, and grow at 2.5% a year. In addition the analyst is assuming an after-tax integration cost of 0.25 billion, and taxes of 20%. Assume that the integration cost of 0.25 billion happens one year after the merger is completed (year 1). The analyst is using a cost of capital of 9% to value the synergies. Company B’s equity is trading at 5.3 B dollars (market value of equity). Company A is planning to pay a 29% premium for company B. a) Compute the value of the synergy as estimated by the analyst. Please show your calculations. (10 points) Synergy =million dollars b) Does the estimate of synergies in a) justify the premium that company A offered to company B? (1 paragraph at most) (10 points) NOTE - The answer cells must remain in B4 and A6. Please lay out all your work below (show the live formula), not just the final answer, to receive credit.