Prepared For:
Dr. Doina Chichernea
BUAD 6200
SPRING 2011
The University of Toledo

APRIL 21, 2011
Executive Summary

USEC is the world’s leading supplier of enriched Uranium to nuclear power plants. Due to the expiration of long term energy cost savings contracts, USEC is examining the possibility of taking on a new project called the American Centrifuge Project. This project will utilize a different process for Uranium enrichment, which is the core business process of USEC. The new technology process uses much less energy, which will reduce manufacturing costs and keep USEC on the leading edge of technology in the enrichment market space. As with any major energy industry project, the ACP project comes with a huge price tag of around $1.7 billion. Investment of this size cannot be made without due analysis. We have taken in to account all the details given while calculating key statistics for this project. A thorough analysis is in the best interests of USEC as the project will provide them with the freedom to implement new technologies in the uranium enrichment process in their own plant. Without this, USEC is constrained to lease the government owned plants which usually comes with its own restrictions.

We will be calculating the individual cash flows of its existing Paducah operations and the ACP project it is planning to invest in. Our decision will be based on the incremental NPV and IRR. This report will walk us through all the important aspects of our analysis and ultimately to our final decision of whether accepting or rejecting the project.

Background

USEC is pursuing ACP for several reasons, most of which can be attributed to an increasing gain by its competitors in the market space. USEC’s long term contract for a lower cost power supply for their current process had expired. This left USEC with much higher costs for electricity, which is heavily used in the current process for Uranium enrichment,...

...se | 2010 |
| BUSI 640
Leigh Healey Alex Lutz
November 30th |
[Marriott Case Study] |
Professor Triantis |
1. What is the weighted average cost of capital (WACC) for Marriott Corporation based on its target debt-equity ratio? Use a 34% tax rate.
WACC = [(E/D+E) * Re] + [(D/D+E) * Rd(1-Tc)]
Be = [1 + (1-Tc) d/e]*Ba
1.11 = [1+(1-.34}.41/.59]*Ba
Ba = .76098
Using statistics from page four of the assigned case study:
Risk Free rate (Rf) = 8.72 % (10yr rate)
Rd = Rf + spread
Spread = Debt rate premium above gov (1.3%)
Rd = .0872 + .013 = .1002 = 10.02%
Re = Rf + Be (Exp mark rate – Rf) Exp. Market Rate = .0872 + (1.11*.013)
Re = .0872 + 1.11(.10163 - .0872) = .10163
Re = .103
WACC = (.4 * .103) + [.6*.1002(.66)] = .0808792
2. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?
If Marriott uses a single discount rate for all departments, Marriott will undertake riskier ventures and invest into more risky stock. The more risky ventures are more likely to meet that rate. When Marriott invests in those risky ventures, they aren’t accounting for the risk, only for the return. This can lead to problems because the outcomes can be financially negative – resulting in false NPVs.
A false decision like this can increase operating risk in the long run and affect the...

...Mini Case Report – The Dilemma at Day-Pro
1) PayBack Period for Synthetic Resin and Epoxy Resin:
Synthetic Resin PBP = 2 + 250/200 = 2.5 years
Epoxy Resin PBP = 1 + 200/400 = 1.5 years
To show that using the Payback Period to evaluate the projects is flawed, Tim can argue that the PayBack Period ignores the time value of money, requires an arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development, and new projects (Corporate Finance page 238).
2) Discounted payback Period (DPP) using 10% discount rate:
Synthetic Resin DPP:
{1,000,000 – [(350,000)/(1 + 0.1)^1 + (400,000)/(1+0.1)^2]} x 100 = 35,124,100/375,657 = 93.5% of year 3
1 + 1 +0.935 =2.935
Epoxy Resin DPP:
{800,000 – [(600,000)/(1 + 0.1)^1]} x 100 = (800,000 – 545,454.5) x 100 = 25,454,550/330,578.5 = 77% of year 2.
1 +0.77= 1.77
Tim should not ask the Board to use DPP as the deciding factor because DPP does not provide a concrete decision criterion that can indicate whether the investment will increase the firm's value, it requires an estimate of the cost of capital in order to calculate the payback, and it ignores cash flows beyond the discounted payback period.
4) Synthetic Resin IRR = 37%
Epoxy Resin IRR = 43%
IRR calculated using Excel
Tim can convince the board that IRR measure can be misleading by explaining that it may result in multiple answers with...

...Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method.
Capital budgeting techniques are usually used only for projects with large cash outlays.
2. Payback period is the number of time periods it will take before the cash inflows of a proposed project equal the amount of the initial project investment (a cash outflow). The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
3. Net present value is the dollar amount of the change in the value of the firm as a result of undertaking the project.
With non-mutually exclusive projects, the net present value and the internal rate of return methods will accept or reject the same project.
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the firm's weighted average cost of capital.
The net present value assumes returns are reinvested at the cost of capital.
If an...

...currently paying dividends
* Not applicable if dividends aren’t growing at a reasonably constant rate
* Extremely sensitive to the estimated growth rate – an increase in g of 1% increases the cost of equity by 1%
* Does not explicitly consider risk
SECURITIES MARKET LINE OR CAPM
Advantages
* Explicitly adjusts for systematic risk
* Applicable to all companies, as long as we can compute beta
Disadvantages
* Have to estimate the expected market risk premium, which does vary over time
* Have to estimate beta, which also varies over time
* We are relying on the past to predict the future, which is not always reliable
WACC
* The WACC for a firm reflects the risk and the target capital structure to finance the firm’s existing assets as a whole.
* WACC is the return that the firm must earn on its existing assets to maintain the value of its shares.
* WACC is the appropriate discount rate to use for cash flows that are similar in risk to the firm.
LECTURE 9: FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY
MM 1958
ASSUMPTIONS
• Homogeneous Expectations
• Homogeneous Business Risk Classes
• Perpetual Cash Flows
• Perfect Capital Markets:
– Perfect competition
– Firms and investors can borrow/lend at the same rate
– Equal access to all relevant information
– No transaction costs
– No taxes
IMPLICATION:
Proposition I – Capital structure do not affect the value of...

...Finance Practice Assessment
1. Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
A. No external financing is required.
B. $100,000
C. $200,000
D. $300,000
2. Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of returns?
A. $28,800
B. $4,000
C. $4,800
D. $35,200
3. Riley Co. is considering a short-term or long-term financing plan for $6,000,000 in assets. They expect the following 1 year rates over the next 3 years: 7%, 9%, and 12%. Their long-term interest rate will be 9% for the 3 years. Assuming the rates follow their expectations, what will be the difference in interest costs over the 3 years?
A. Long-term interest will be $60,000 more than short-term interest
B. Long-term interest will be $60,000 less than short-term interest
C. Long-term interest will be $1,140,00 less than short-term interest
D. None of these
4. Average daily remittances are $5 million, and "extended disbursement float" adds 3 days to the disbursement schedule, how much should the firm be willing to pay for a cash...

...UBFF2013 BUSINESS FINANCE
Question:
1.
(a)
Frodo Baggins has RM1,500 to invest. His investment counselor suggests an investment that pays no stated interest but will return RM2,000 at the end of 3 years. (i) (ii) What annual rate of return will Frodo earn with this investment? Frodo is considering another investment, of equal risk, that earns an annual return of 8%. Which investment should he make and why?
(b)
Samwise Gamgee was seriously injured in an industrial accident. He sued the responsible parties and was awarded a judgment of RM2,000,000. Today, he and his attorney are attending a settlement conference with the defendants. The defendants have made an initial offer of RM156,000 per year for 25 years. Samwise plans to counteroffer at RM255,000 per year for 25 years. Both the offer and the counteroffer have a present value of RM2,000,000. Assume both payments are at the end of each year. (i) (ii) (iii) What interest rate assumption have the defendants used in their offer (rounded to the nearest whole percent)? What interest rate assumption have Samwise and his lawyer used in their counteroffer (rounded to the nearest whole percent)? Samwise is willing to settle for an annuity that carries an interest rate assumption of 9%. What annual payment would be acceptable to him?
2.
Gandalf Enterprise must consider several investment projects, A through E using the capital asset pricing model (CAPM) and its graphical representation, the...

... Shanell Turner
Business Finance
9/14/14
Course Project – Part I
Introduction
The Course Project is an opportunity for you to apply concepts learned to a real-life simulation experience. Throughout the Course Project, you will assume that you work as a financial analyst for AirJet Best Parts, Inc. The Course Project is provided in two parts as follows:
Part I – In Part I, you work with AirJet Best Parts, Inc. staff to identify the best loan options, as well as to valuate stocks and bonds.
Part II – In Part II, you will provide the company with a recommendation for purchasing a new machine. You will base your recommendation on the Net Present Value (NPV) of the capital investment project using the cost of capital (WACC) as your discount rate.
About AirJet Best Parts, Inc.
AirJet Best Parts, Inc. is a company dedicated to the design and manufacturing of aviation and airplane technologies and parts. The company has commercial and military clients worldwide.
Task 1: Assessing loan options for AirJet Best Parts, Inc.
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the...

...know from the case that:
Tc = 35%
Rf = 0.85%
Wdebt = 44646/129686= 0.344%
Wequity = 85040/129686= 0.656%
From Exhibit 11, rd is calculated as below which is 5.335%
|Debt amount |Price |Market value |YTM |Weighted YTM |
|202 |106.175 |214.474 |3.911% |0.167% |
|298 |105.593 |314.667 |3.393% |0.213% |
|249 |110.614 |275.429 |3.475% |0.191% |
|175 |112.650 |197.138 |4.049% |0.159% |
|349 |129.424 |451.690 |5.470% |0.492% |
|597 |103.590 |618.432 |4.657% |0.573% |
|398 |127.000 |505.460 |6.239% |0.628% |
|300 |126.951 |380.853 |5.732% |0.435% |
|247 |114.506 |282.830 |6.047% |0.341% |
|249 |131.000 |326.190 |6.337% |0.412% |
|173 |138.974 |240.425 |5.805% |0.278% |
|393 |103.826 |408.036 |5.850% |0.475% |
|300 |106.715 |320.145 |6.153% |0.392% |
|100 |119.486 |119.486 |6.173% |0.147% |
|173 |132.520 |229.260 |5.777% |0.264% |
|125 |110.084 |137.605 |6.191% |0.170% |
|Total: |5022.119 | |5.335%
Next we have to find the beta of Boeing. We run into a slight problem due to the fact that Boeing is made up of two separate business components. We are going to use the 60 day NYSE beta estimates given to us in exhibit 10. According to...