24. We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each will be: Accounts payable weight = .15/1.15 = .13 Long-term debt weight = 1/1.15 = .87 Since the accounts payable has the same cost as the overall WACC, we can write the equation for the WACC as: WACC = (1/1.8)(.14) + (0.8/1.8)[(.15/1.15)WACC + (1/1.15)(.08)(1 – .35)] Solving for WACC, we find: WACC = .0778 + .4444[(.15/1.15)WACC + .0452] WACC = .0778 + (.05797)WACC + .0201 (.9420)WACC = .0979 WACC = .1039, or 10.39%

We will use basically the same equation to calculate the weighted average flotation cost, except we will use the flotation cost for each form of financing. Doing so, we get: Flotation costs = (1/1.8)(.08) + (0.8/1.8)[(.15/1.15)(0) + (1/1.15)(.04)] = .0599, or 5.99% The total amount we need to raise to fund the new equipment will be: Amount raised cost = $50,000,000/(1 – .0599) Amount raised = $53,186,023 Since the cash flows go to perpetuity, we can calculate the present value using the equation for the PV of a perpetuity. The NPV is: NPV = –$53,186,023 + ($6,200,000/.1039) NPV = $6,488,212

...1. Refer to the following information:
Stock | E(r) | | Correlation Coefficients |
1 | 0.06 | 0.20 | 1 with 2: -0.10 |
2 | 0.08 | 0.10 | 1 with 3: +0.60 |
3 | 0.15 | 0.15 | 2 with 3: +0.05 |
A portfolio is formed as follows: sell short $1,000 of Stock 1; buy $1,500 of Stock 2; buy $1,500 of Stock 3. The investor uses $1,000 of his own equity, with the remaining amount borrowed at a risk-free interest rate of 4% (with continuous compounding).
(a) Assuming that there are no restrictions on the use of short-sale proceeds, what is this investors expected rate of return?
(b) What are some of the issues associated with short-selling, and what impact could these issues have on the expected return calculated in part (a).
ANSWER
(a) w1 = -1; w2 = 1.5; w3 = 1.5; wr = -1
E(r) = -1*0.06 + 1.5*0.08 + 1.5*0.15 + (-1)*0.04 = 24.5%
(b) short selling is restricted; unable to use proceeds from the short sale; fee for short selling reduces return. All of these restrictions could fundamentally change the return to the portfolio.
2. Consider a European call option on a stock. The stock price is $70, the time to maturity is 12 months, the risk free rate of interest is 10% per annum (with continuous compounding), the exercise price is $65, and the volatility is 32%. A dividend of $1 is expected in six months time. Determine the price of the option using the binomial method with 6-month steps.
ANSWER
3. The current price of silver is $9 per...

...T he Sisyphean Corporation
The Sisyphean Corporation is considering investing in a new cane manufacturing
machine that has an estimated life of three years. The cost of the machine is
$30,000 and the machine will be depreciated straight line over its three-year life to a
residual value of $0.
The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales
are estimated to grow by 10% per year each year through year three. The price per
cane that Sisyphean 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
Sisyphean 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 5% of its annual
sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of
capital of 10%.
Calculate the total Free Cash Flows for each of the three years for the Sisyphean
Corporation's new project.
I ncremental Earnings
F orecast
Y ear
Units
Sales (units × $18)
Cost of Good Sold (units × $9)
Gross Profit
Depreciation ($30,000 / 3)
EBIT
Income tax at 35%
Unlevered net income
Add back Depreciation
Cash Flows from Operations
1
2,000
36,000
18,000
18,000
10,000
8,000
2,800
5,200
10,000...

...
CorporateFinance Case Study:
Volkswagen
Volkswagen (VW)
Volkswagen (VW) is a German automobile manufacturer which was originally founded in 1937. Now VW Group is one of world’s leading automobile manufacturers and the largest carmaker in Europe, with its recent headquarter in Wolfsburg. VW is one of the ten brands under VW Group. (Volkswagen Homepage, 2011)
2011 VW’s revenue is 159,337 million EUR; net income is 15,409 million EUR, with a profit margin of 9.6707%. (Bloomberg, 2012) The increase from 2010 to 2011 is illustrated obviously in the following chart. (Bloomberg, 2012)
Income Statement for Volkswagen AG (VOW) 2010-2011, Bloomberg, 2012
Volkswagen stock (VOW: GR)
The current share price, close (Apr 13, 2012) is 119.3 EUR, its 52-week range is 82.350 - 138.800 EUR, and its 1-year return is 14.26%, as well as, market capitalization is 56,601.00 million EUR. (Bloomberg, 2012)
Interactive One-year Stock Chart for Volkswagen AG (VOW), Bloomberg, 2011-2012
VOW’s Earning Per Share (ttm) is 33.1 EUR, current P/E Ratio (ttm) is 3.5408, and Dividend Per Share (yield annualized) is 1.8771 EUR. (Bloomberg, 2012)
SWOT Analysis
In order to draw a conclusion for VW’s stock rating, SWOT analysis is conducted in this part.
Strengths
High product quality
Strong brand equity
VW group’s brand portfolio includes Audi, Bentley, Bugatti, Lamborghini, SEAT, 49.9% of Porsche, Giugiaro, Škoda marques and the truck...

...1. Calculate TRUST’s company after-tax WACC. The risk-free rate was 4.21%, the market risk premium was 6% and the company tax rate was 30%. The WACC should be rounded to four decimal places.
After-tax WACC = rD (1-Tc) D/V + rE E/V
rE = rf + βequity(rm – rf)
rE = 0.0421 + 0.81(0.06)
rE = 0.0907
E = number of outstanding shares x current share price
E = 60 million x $3.43
E = $205.8 million
D = $44 million bank loans + $1.2 million short-term hire purchase commitments
D = $45.2 million
V = $205.8 million + $45.2 million
V = $251 million
After-tax WACC = (1-0.3)(0.0348 x 44/251 + 0.0618 x 1.2/251) + 0.0907 x 205.8/251
After-tax WACC = 0.0789
Calculate the RV Division WACC using Stephens’s method in paragraph 20.
rE = rf + βequity(rm – rf)
rE = 0.0421 + 2.1(0.06)
rE = 0.1681
Using TRUST’s debt-to-equity mix of 21%:
Pre-tax divisional WACC = 0.1442 = (rD x 0.21) + (0.1681 x 0.79)
From above:
rD = 0.0543
After-tax divisional WACC = (1-0.3)(0.0543 x 0.21) + (0.1681 x 0.79)
After-tax divisional WACC = 0.1408
What could be deduced about the relative business risk of the RV Division compared to its industry competitors if the industry equity beta was 2.10?
Using industry equity beta to determine the cost of equity suggests that the RV Division’s equity risk is the same as that of the industry. This indicates that the difference in business risk between the RV Division and its industry competitors will stem from TRUST’s choice of...

...one of the most secure and low-return investments in the world).
Corporate bonds (debt issues by companies to pay for usually new things the company wants to do - build a factory, expand stores, etc.) these are not as safe, and pay a rate of return based on the risk you are taking. They get basically a letter grade, and you get paid more interest the LOWER the grade.
10. Describe two examples of equity investments. (1-2 sentences. 1.0 points)
A stock or any other security representing an ownership interest.On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage.In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocaon planning to structure a desired risk and return profile for an investor's portfolio. Investopedia explains Equity
The term's meaning depends very much on the context. In finance, in general, you can think of...

...
3210AFE
ADVANCE CORPORATEFINANCE
Financial Analysis Report
New Hope Coal Corporation
(4780 words)
STUDENT NAME: Member 1: S2704148 zhiqi Liu
Member 2: S2682143 Sai Tie
Member 3: S2730145 Lingfeng Zhan
Member 4: S2594576 Xindan Chen
Member 5: S2700906 Yinghui Huang
TABLES
Executive summary............................................................................................3
Introduction........................................................................................................6
Firm structure and corporate governance.......................................................6
Remuneration….................................................................................................8
Capital structure.................................................................................................9
CAPM BETA AND FACTOR MODEL ANALYSIS……………………….9
WACC Analysis..................................................................................................11
Firm Estimation by FCF and PE ratio.............................................................12
Growth project analysis.....................................................................................13
Mergers and Acquisitions Targets Analysis…………………………………16
Cost of Debt & Equity Funding........................................................................19
Risk...

...it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the bond-holders wanted to block this transaction? What argument can you make for and against the bondholders’ case?
The bond-holders suffer because they don’t have an opportunity to share in the higher returns earned by the company taking over after the transaction has increased the risk. The unexpected increase in the financial risk caused the value of the bonds to decline. An argument for the bondholders is their rights were violated that are supposed to be protected under the bond covenants. An argument against the bondholders is they accepted the default risk by becoming a creditor.
8. Under pressure from outside investors including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this action was immediately positive, with the stock price of USX increasing $2.37 to close at $31.25 on the day of the announcement. Why do you think this action by USX was so well received by the stock market?
The company is doing well and the stock price is expensive for investors to acquire ownership. By splitting the number of shares and the price now being half of what it was the liquidity is increased. This promotes trade which in turn promotes an increase in price.
9. How can the adherence to high standards of ethical...

...Solutions to Practice Problems
by Kyung Hwan Shim University of New South Wales Australian School of Business School of Banking & Finance for FINS 3625 S1 2010 May 23, 2010
∗
These notes are preliminary and under development. They are made available for FINS 3625 S1 2010 students only and may not be distributed or used without the author’s written consent.
∗
1
Solution for Question 1
Summary Table of Cash Flows t=0 I II CF from Machinery ignoring depreciation Working Capital Level in Working Capital CFs from Working Capital III Revenues Variable Costs Fixed Costs Pre Tax Proﬁt Taxes at 34% After Tax Operating CF’s ignoring Deprec. -245,000 160,000 160,000 -160,000 0 0 0 0 0 0 t=1 0 180,000 20,000 -20,000 800,000 450,000 100,000 250,000 85,000 165,000 t=2 0 212,000 32,000 -32,000 900,000 506,250 100,000 293,750 99,875 193,875 t=3 55,000 0 -212,000 +212,000 1,060,000 596,250 100,000 363,750 123,675 240,075
PV of CFs from Tax Shield Gains =
C × d × TC 1 S × d × TC − × n r+d (1 + r) r+d 1 55, 000 × 25% × 34% 245, 000 × .25 × .24 − × = 9% + 25% (1 + .09)3 9% + 25%
= 50, 632.50 20, 000 32, 000 212, 000 − + = −41, 579.50 1.09 1.092 1.093 165, 000 193, 875 240, 075 + + = 499, 939 PV of CFs from Oper. Excl. Dep. = 1.09 1.092 1.093 55, 000 PV of CFs from Invest. & Salvage = −245, 000 + = −202, 530 1.093 1 PV of CFs from Terminal Loss = TC (C(1 − d)n − S) × (1 + r)n 1 = .34(245, 000(1 − .25)3 − 55, 000) × = 12,...