1. Strozzi Company is considering a new equipment for their factory in Torin. The equipment costs $500,000 today and it will be depreciated on a straight-line basis over five years.  In addition, the company’s inventory will increase by $73,000 and accounts payable will rise by $42,000. All other operating working capital components will stay the same. The change in net working capital will be recovered at the end of third year at which time the company sells the equipment at an expected market value of $200,000. Mr. Giglioli, the financial manager of the company, has estimated that the equipment will generate revenues of $1,000,000 in year 1, $1,200,000 in year 2, and $1,500,000 in year 3. Mr. Giglioli has also estimated the operating costs, excluding depreciation, to be equal 75 percent of revenue of each year. The project’s cost of capital is 14.45 percent and the company’s tax rate is 40 percent. What is NPV and MIRR of the project?  2. Cita Company’s target capital structure is 40 percent debt, 50 percent common stock, and 10 percent preferred stock. Information regarding the company’s cost of capital can be summarized as follows:     Company sold a non-callable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,025, and has a par value of $1,000.   The company’s preferred stock currently sells for $81.88 per share, and it pays an $8.10 annual dividend.  The company is expected to pay $1.45 dividend per share at the end of this year. Financial analysts believe that the company is expected to grow at a constant rea of 6.50 percent in future years. The stock of the company is currently selling for $21.50  The company’s tax rate is 40%           What is the Cita Company’s weighed average cost of capital (WACC)?  3. a) Suppose in December 2018, we have $1.2693/£ (where£ is symbol of British pound) and in December 2019 we have $1.4495/£. Starting with $1 million, convert $1 million into British pound at December 2018 exchange rate, and then convert that amount of British pound back into US dollar at the December 2019 exchange rate.  What is the difference between the initial $1 million in December 2018 and US dollar amount in December 2019? b) Suppose dollar per one British pound is $1.51 and US dollar per one Canadian dollar is $0.97. What is the value of one British pound in Canadian dollar and what is the value of one Canadian dollar in British pound?

Question

1. Strozzi Company is considering a new equipment for their factory in Torin. The equipment costs $500,000 today and it will be depreciated on a straight-line basis over five years.  In addition, the company’s inventory will increase by $73,000 and accounts payable will rise by $42,000. All other operating working capital components will stay the same. The change in net working capital will be recovered at the end of third year at which time the company sells the equipment at an expected market value of $200,000. Mr. Giglioli, the financial manager of the company, has estimated that the equipment will generate revenues of $1,000,000 in year 1, $1,200,000 in year 2, and $1,500,000 in year 3. Mr. Giglioli has also estimated the operating costs, excluding depreciation, to be equal 75 percent of revenue of each year. The project’s cost of capital is 14.45 percent and the company’s tax rate is 40 percent. What is NPV and MIRR of the project? 

2. Cita Company’s target capital structure is 40 percent debt, 50 percent common stock, and 10 percent preferred stock. Information regarding the company’s cost of capital can be summarized as follows: 

  

  • Company sold a non-callable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,025, and has a par value of $1,000.  
  • The company’s preferred stock currently sells for $81.88 per share, and it pays an $8.10 annual dividend. 
  • The company is expected to pay $1.45 dividend per share at the end of this year. Financial analysts believe that the company is expected to grow at a constant rea of 6.50 percent in future years.
  • The stock of the company is currently selling for $21.50 
  • The company’s tax rate is 40% 

         What is the Cita Company’s weighed average cost of capital (WACC)? 

3. a) Suppose in December 2018, we have $1.2693/£ (where£ is symbol of British pound) and in December 2019 we have $1.4495/£. Starting with $1 million, convert $1 million into British pound at December 2018 exchange rate, and then convert that amount of British pound back into US dollar at the December 2019 exchange rate.  What is the difference between the initial $1 million in December 2018 and US dollar amount in December 2019?

b) Suppose dollar per one British pound is $1.51 and US dollar per one Canadian dollar is $0.97. What is the value of one British pound in Canadian dollar and what is the value of one Canadian dollar in British pound?

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