Corporate Finance Tute-2 1. You are contemplating buying a pension policy. Your financial advisor tells you that to buy the pension policy, you have to pay (or contribute to) the pension fund an amount that is constant in real terms every year, starting 1 year from now, for the next 30 years (i.e. until and including the year 2039). In return, the pension fund provider shall pay an annual pension to you for the subsequent 30 years (i.e. starting in the year 2040) that is constant in real terms. Assume a long-term nominal interest rate of 6% per year. With your current standard of living (which you would want to retain once you retire), you expect that you would need Rs. 240,000 per year in real terms as pension. Assume that the …show more content…
Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is 0.5% of portfolio value and is calculated at the end of each year. Assume that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? How would the contract value change if you invested in stocks with a 4% yield?
5. Phoenix Co. Faltered in the recent recession but has recovered since. EPS and dividends ahve grown rapidly since 2017. | 2017 | 2018 | 2019 | 2020 | 2021 | EPS | Rs 0.75 | 2.00 | 2.50 | 2.60 | 2.65 | Dividends | Rs 0.00 | 1.00 | 2.00 | 2.30 | 2.65 | Dividend growth | ---- | ---- | 100% | 15% | 15% |
The figures of 2020 and 2021 are of course forecasts. Phoenix’s stock price today in 2019 is Rs 21.75. Phoenix’s recovery will be complete in 2021, and there will be no further growth in EPS or dividends. A security analyst forecast next year’s rate of return on Phoenix stock as follows: r=DIVP+g=2.3021.75+.15=.256, about 25.6%
What’s wrong with the security analyst’s forecast? What is the actual expected rate of return over the next year?
6. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.
The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
A company purchases equipment costing $50 000, which it expects to last for 12 years and to have
7. The company uses the straight line method of depreciation for all its assets. The buildings have an estimated useful life of 20 years with zero
In addition, the rate of return since Dec 9 1998, after CC distributed 7.32 million UBID shares to its shareholder, is 5.72% calculated as following:
The company is cutting back on profits earned but not losing value for its investors with price to earnings being favorable at 19.18 (www.hoovers.com).
Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.
This calculation for the proposal of the new project is done over a time period of 10 years. The return in this case the negative return of the life of the factory includes the $14 million in expected return from selling the factory. The present value formula which considers time and value was also included in the expected recovery.
b. What is Q’s stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?
5-28. Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years.
The outlook for growth is risky considering this company is very volatile, but if corrections are made to better the industry (i.e. expand
5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.
After a low record of P/E ratio of 11.2% in Y2014, we can saw the ratio was high in Y2015 since the stock price dropped to $4.54 at the end of financial year. Earnings per share jumped around $10 in Y2016 while the share price went up as well to reach $6.19. This generated a lower ratio than the previous year. The ratio dropped again in Y2017 with extreme earnings per share level that reached $90.9 and a stock price of $6.16. The ratio reached as low as 7,17% in by the end of Y2017. That means that investors are willing to pay $7.17 for every dollar of earning per share that Bega Cheese Ltd
There are several things that can be determined from the information obtained through our review. The first is in relation to the P/E ratio. The market price is $21.69, with an EPS of $.0.51. This leads to a P/E Ratio of 42.51. This is significantly higher than the P/E ratio of 5.76 based off the fundamental value. Since the share price of $2.94 is significantly lower, the P/E ratio is also