Valles Global University (VGU) has decided to build a dormitory on campus for 1000 students that includes a spa and cafeteria for students at their urban New Jerseycampus. VGU has estimated construction costs of $75 million. A wealthy alumna offers to kick in 25 million dollars and VGU will sell bonds to raise the rest. The VGUbonds are five-year bonds and have a par value of $1000 and pay 6% compounded semi-annually. Assume the VGU bonds are all sold. VGU uses an investment rateof 4% per year.1. Develop a revenue plan that will allow VGU to pay the interest and principal of the bonds. (How much revenue do they need per period to pay the interest andthe $50,000,000 back?)2. Suppose similar bonds are currently paying 10% in the bond market. How much would VGU receive per bond? Will they be able to build their dormitory with thisbond sale? Explain your answer.

Bond valuation refers to a method which is used to compute the current value or present value (PV)…

1. Develop a revenue plan that will allow VGU to pay the interest and principal of the bonds. (How much revenue do they need per period to pay the interest and the $50,000,000 back?) 2. Suppose similar bonds are currently paying 10% in the bond market. How much would VGU receive per bond? Will they be able to build their dormitory with this bond sale? Explain your answer.

1. Develop a revenue plan that will allow VGU to pay the interest and principal of the bonds. (How much revenue do they need per period to pay the interest and the $50,000,000 back?) 2. Suppose similar bonds are currently paying 10% in the bond market. How much would VGU receive per bond? Will they be able to build their dormitory with this bond sale? Explain your answer.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1fM

See similar textbooks

Similar questions

Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
A group of private investors borrowed $30 million to build 300 new luxury apartments near a large university. The money was borrowed at 6% annualinterest, and the loan is to be repaid in equal annual amounts (principal and interest) over a 40-year period. Annual operating, maintenance, and insurance expenses are estimated to be $4,000 per apartment, and theseexpenses are incurred independently of the occupancy rate for the apartments. The rental fee for each apartment will be $12,000 per year, and the worst-case occupancy rate is projected to be 80%. Solve, a. How much profit (or loss) will the investors make each year with 80% occupancy? b. Repeat Part (a) when the occupancy rate is 95%.
Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufacturing sites. The machines cost $1.73 million each, and the supplier agreed to the following payment terms, 40% upfront, and the remainder to be paid over 4 years at an annual rate of 12%.b) Critically discuss the effect of increasing the amount paid upfront when corporations make capital purchases, focusing on the benefits and drawbacks
Boisjoly Enterprises is considering buying a vacant lot that sells for$1.4 million. If the property is purchased, the company’s plan is to spend another $6 milliontoday (t=0) to build a hotel on the property. The cash flows from the hotel will dependcritically on whether the state imposes a tourism tax in this year’s legislative session. If thetax is imposed, the hotel is expected to produce cash flows of $500,000 at the end of each ofthe next 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of$1,200,000 at the end of each of the next 15 years. The project has a 12% WACC. Assume atthe outset that the company does not have the option to delay the project.a. What is the project’s expected NPV if the tax is imposed?b. What is the project’s expected NPV if the tax is not imposed?c. Given that there is a 45% chance that the tax will be imposed, what is the project’sexpected NPV if management proceeds with it today?d. Although the company does not have an…
Elaine is the CEO of Vandelay Industries and wants to create a sinking fund to make a purchase of new technology in three years. She anticipates this capital expense will be $20,000. If the sinking fund earns at an annual rate of 5% compunded quarterly, determine the quarterly installment that should be deposited into the fund.
Bold’s Gym, a health club chain, is consider-ing expanding into a new location: the initial investment would be $1 million in equipment, renovation, and a 6-year lease, andits annual upkeep and expenses would be $75,000 (paid at thebeginning of the year). Its planning horizon is 6 years out, andat the end, it can sell the equipment for $50,000. Club capacityis 500 members who would pay an annual fee of $600. Bold’sexpects to have no problems filling membership slots. Assumethat the interest rate is 10%. (See Table S7.2 .)a) What is the present value profit/loss of the deal? b) The club is considering offering a special deal to the mem-bers in the first year. For $3,000 upfront they get a full 6-year membership (i.e., 1 year free). Would it make financial sense tooffer this deal?
Boisjoly Enterprises is considering buying a vacant lot that sells for $1.4 million. If the property is purchased, the company’s plan is to spend another $6 million todayto build a hotel on the property. The cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year’s legislative session. If the tax is imposed, the hotel is expected to produce cash flows of $500,000 at the end of each of the next 15 years. If the tax is not imposed, the hotel is expected to produce cash flows of $1,200,000 at the end of each of the next 15 years. The project has a 12% WACC. Assume at the outset that the company does not have the option to delay the project. 1.What is the project’s expected NPV if the tax is imposed? 2.What is the project’s expected NPV if the tax is not imposed? 3.Given that there is a 45% chance that the tax will be imposed, what is the project’s expected NPV if management proceeds with it today? 4.Although the company does not have an…
Utah Enterprises is considering buying a vacant lot that sells for $1.1 million. If the property is purchased, the company's plan is to spend another $5 million today (t = 0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative session. If the tax is imposed, the hotel is expected to produce after-tax cash inflows of $550,000 at the end of each of the next 15 years, versus $1,100,000 if the tax is not imposed. The project has a 13% cost of capital. Assume at the outset that the company does not have the option to delay the project. Use decision-tree analysis to answer the following questions. What is the project's expected NPV if the tax is imposed? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places. Negative value, if any,…