Finance Answers

Question 1

Under the tax rate of 40%, an unlevered firm Pacific Company’s WACC is currently 15 percent. The company can borrow at 6 percent. 

a.  What is Pacific Company’s cost of equity? 

b.  If the firm converts to 30 percent debt, what will its cost of equity be? 

c.  If the firm converts to 55 percent debt, what will its cost of equity be? 

d.  What is Pacific Company’s WACC in part (b)? In part (c)?  

Q 2

Smart Toys, currently has no debt, expects an EBIT of $45,000 every year forever. Its cost of equity is 16 percent. The corporate tax rate is 30 percent. The company can borrow at 8 percent.

a.​What is the current value of the company? 

b.​What will the value of the firm be if the company takes on debt equal to 20 percent of its unlevered value? What if it takes on debt equal to 60 percent of its unlevered value? 

c. ​What will the value of the firm be if the company takes on debt equal to 55 percent of its levered value? What if the company takes on debt equal to 40 percent of its levered value?  

Ford Motor, an auto manufacturer, is debating whether to convert its all-equity capital structure to one that is 40 percent debt. Currently there are 8,000 shares outstanding and the price per share is $60. EBIT is expected to remain at $64,000 per year forever. The interest rate on new debt is 5.5 percent, and there are no taxes. 

a. If the firm has a 100% dividend payout rate, what is the cash flow under the current capital structure to David who owns 160 shares of Ford Motor stock? 

b. Assume David keeps all 160 of his shares. What will his cash flow be under the proposed capital structure of the firm? 

c. Suppose David prefers the current all-equity capital structure, but Ford Motor does convert. Show how he could unlever his shares of stock to recreate the original capital structure. 

d. Using your answer to part (c), is Ford Motor’s choice of capital structure relevant? Explain.  

In its first year, “Helen Trading” had the following experience:

Unit selling price birr 100 Sales 50,000 units

Total fixed cost birr 400,000 TVC birr 3,000,000

Required:

a) Develop TR, TC and profit functions for the company in terms of quantity

b) Find the breakeven point in terms of quantity and sales volume.

c) If profit had been br. 500,000 what would have been the sales volume (Revenue) and quantity of sales.

d) What would have been the profit if sales are br. 2,000,000

e) Draw Breakeven chart and discuss about it

The utility function for a consumer utility is U=30Q1^½Q2^½. if the price per unit of Q1 is ksh 10 and ksh 5 per unit of Q2, determine quantities Q1 and Q2 that the consumer should have ti maximize utility if the consumer budgeted kdh 350

The following transactions are extracted from MNP Ltd. for the year ended on June 30, 2020: (i) Plant assets sold at Tk. 5,300 which was purchased 6 years before for Tk. 20,000. The plant assets were depreciated on a straight-line basis assuming useful life of 10 years with no residual value. (ii) Issued 10,000 shares of Tk. 10 each at a price of Tk. 43 per share. (iii) Issued shares for a 70% interest in ABC Co. for Tk. 9,00,000. (iv) Patent amortization for the year was Tk. 20,000. (v) The company’s net loss for the year Tk. 50,000. Depreciation charged Tk. 22,000 and realized a gain of Tk. 9,000 on the sale of a land for Tk. 39,000. (vi) A 3-months Govt. Treasury Bill of Tk. 1,00, 000 was purchased. Requirement: State the treatment of the above transactions in the Cash Flow Statement of MNP for the year ended on June 30, 2020

Question - Risk and Risk Avoidance

Prompt: In investments, higher risk may provide higher returns. It is interesting how people have different comfort levels taking risk. Please consider your own comfort with taking risks; are you a person who is willing to take a risk in order to earn a higher level of return on an investment? 

Context Link: https://saylordotorg.github.io/text_personal-finance/s08-evaluating-choices-time-risk-a.html

Instructions: Make sure to use proper grammar and punctuation in this college-level course in all correspondence. Please avoid “text” or “twitter speak” when corresponding.

Extra Directions: Answer "Are you a person who is willing to take a risk in order to earn a higher level of return on an investment?" as if you were a sixteen-year-old student in high school.

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

Madison Inc. has bought 51 000 USD worth of calculators (inventory) on account for resale in the local market. Freight expenses were 2 000 USD. Payment terms was 4/10 n/40. The company had 3 000 USD allowances because some calculators were broken while shipping to the company. The company paid for the inventory on the 5^th day of the contract (within the discount period). Considering this information alone calculate the balance in the inventory account for this transaction and show your work.

Marcus has a pension plan with an annuity that is guaranteed to earn 13% interest compounded semi-annually. He plans to work for 10 years before retiring and would then like to be able to draw an income of $110,000.00 per annum for 18 years. How much should he deposit annually into his retirement fund to accomplish this?

What are the ten sources of banking law in Zambia? 7marks