Complete the practice questions below using Microsoft Excel Spread sheet. For each problem or problem part use separate tab for each.HIGHLIGHT THE ANSWERS CLEARLY IN COLOR.
Microsoft Word - MIDTERM EXAM FIN 647 SPRING 20221.docx Complete the practice questions below using Microsoft Excel Spread sheet. For each problem or problem part use separate tab for each. HIGHLIGHT THE ANSWERS CLEARLY IN COLOR. 1) Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12.4%to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars): 25 pts. Year 0 1-10 11 Revenues 95 95 Manufacturing Expenses (other than depreciation) 33.9 33.9 Marketing Expenses 10.4 10.4 Depreciation 15 15 Taxes at 20% 7.94 7.94 Additions to Net Working Capital 4.6 4.6 Capital Expenditures 150 Continuation Value 12.5 A. For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks? 10 pts. B. Based on input from the marketing department, Bauer is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10% higher than forecast? 5 pts. C. Rather than assuming that cash flows for this project are constant, management would like to explore the sensitivity of its base case analysis to possible growth in revenues and operating expenses. Specifically, management would like to assume that revenues, manufacturing expenses, and marketing expenses are as given in the table for year 1 and grow by 2 % per year every year starting in year 2. Management also plans to assume that the initial capital expenditures (and therefore depreciation), additions to working capital, and continuation value remain as initially specified in the table. What is the NPV of this project under these alternative assumptions? 10 pts. 2) The Stick Corporation is considering investing in a new $30 million cane manufacturing machine that has an estimated life of three years for book depreciation purposes but falls into 5 year MACRS. The cane manufacturing machine will result in sales of 250,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Stick will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Stick Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket. 25 pts. A. Compute the free cash flows through year 3. 10 pts. B. You have determined that Stick’s beta is 1.5. The yield on the US 10 year T-note is 2.6%. Assume that the market risk premium is 5.0%. What is the required rate of return on this stock? 5 pts C. Assume that the Stick is financed with debt-equity ratio of 35%. According to the terms that it has with its lenders, it borrows at 5%. Using this information, compute the WACC. 5 pts D. Assume that free cash flows will grow at a rate of 3% per annum forever after year 3. What is the NPV and IRR of Stick’s project? 5 pts 3) Machine A costs $6,000 and increases profits by $3,000 per year. The machine lasts for four years (at which time it breaks down and is no longer usable). Machine B costs $2,950 and increases profits by $2,500 per year. This machine is expected to last for 2 years. Assume that the discount rate is 10%. 10 pts A. What is the NPV from investing in machine A vs. B over its useful life? 5 pts B. Using the equivalent annual cost method, which machine is better? 5 pts 4) Remember to enable iterative calculations in Excel. Use up to 4 decimals for data input calculations and 2 decimals in answers. Moonlight Restaurants has the following information: 25 pts Financial Information Earnings before interest, taxes $7,681.40 Depreciation and Amortization: $1,419.20 Capital Spending: $2,321.80 Interest expense on debt: $1,208.20 Tax rate on ordinary income: 34.60% Current Rating on debt (if available): A- Interest rate based upon rating: 3.12% Market Information Number of shares outstanding: 1032 Market price per share: $117.66 Unlevered Beta of the stock: 1.3 Market value Debt/Equity ratio that already reflects capitalized leases: 11.6088% Current long-term (LT) government bond rate: 2.10% Risk premium (for use in the CAPM) 5.50% A. What is the current and optimal value for each of D/E, estimated cost of debt financing, cost of equity and WACC? 25 pts 5) Please answer the DCF calculations in part A and B below, and the concept question part C in a brief presentation bullet point format inserted into your spreadsheet. Points will be deducted if you don’t answer briefly. PressDigital Inc. (“PD”) is an Ireland multinational company that develops and manufactures high-tech biometric devices that recognize finger “digits” when pressed on their patented device reader; hence the company name. PD has developed a new device that is expected to make the company even more successful, as its products continue to replace traditional password protection on all types of devices. You are employed as a financial manager in the company’s oldest Irish plant, adjacent to the company headquarters, and have been asked to perform a financial analysis of a plant modernization program that would allow the Irish plant to produce the new device and continue operating. The Irish facility has surplus capacity since the company has been shifting production to a newer plant in Singapore in past years. The Singapore plant is not only more modern with a lower cost structure but also benefits from a 15 year tax-free holiday compared to Ireland’s 12.5% tax rate. If the Irish project is deemed unprofitable, the Irish plant will be closed and you will lose your job. The job market is expected to remain very bad in Ireland for another 2-3 years, you have no savings and your wife just gave birth to a second child. You have prepared a preliminary analysis based only on the small amount of incremental new capital investment of $100m needed to modernize the idle Irish equipment that will yield a free cash flow improvement of $300m a year over the next 5 years with a cost of capital of 10%. You are friendly with and have been mentoring a junior finance analyst friend that works in the Singapore plant who has told you informally that the Singapore plant will need to buy new replacement equipment in four years for $500m to maintain its profit on other products. The idle Irish equipment could be redeployed to Singapore today with the same $100m incremental capex to satisfy projected sales of the new device, achieve additional annual cash flows of $20m in Singapore due to its lower costs and taxes net of Irish plant closure costs, maintain Singapore’s existing profit base and avoid a future new Singapore equipment investment. However, the Singapore plant operates in its own divisional silo with very little communication and interaction with HQ and HQ will not know of their needed investment until a proposal is made in three years’ time. 15 pts. A. Estimate the expected NPV of just the incremental Irish investment. 3 pts B. What are the alternative NPVs if you consider the Singapore situation? 3 pts C. What are your action recommendations for the plant upgrade? Explain the ethical corporate political reasoning behind your recommendations with a focus on both firm and personal impact. 9 pts