NCC 556 Final Solutions

NCC 556 Final Solutions - NCC-556 MANAGERIAL FINANCE Fall...

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Unformatted text preview: NCC-556 MANAGERIAL FINANCE ' Fall 2006 FINAL EXAM SOLUTIONS 1 Wu Portfolio Restructuring (a) Eirp} .=. (4)013) + (6)011)? --118 ‘ - up = [(4)2(30)2 +. (6)2(20)2 + (2)(.4)(.6)('.30)(.20)(25)]“2 = .1897 (b) If Wu is moderately risk-averse, he would prefer the 40/60 portfolio to the 100/0 . portfolio; he is giving up a small (120 basis points) arnéunt of'expected return in exchange for a substantial reduction in risk (30% standard deviation to 19%). 2.. ' EVA at the Trane Division of American Standard (a) RE :RF + (B .x MERP) = 0.05 + (1.25 x 0.04) = 0.10 or 10% _ (b) AftersTax Cost ofDebt '=. RD(1-Tc) =-0.08(1 —- 0.4) = 0.048 or 4.8% (c) Market Capitalization * Shares Outstanding x Price/Share =, 60 million x $50 = $3,000 million or $3 billion . ((1) Debt Ratio = Debt/Total Capital) = 2.0/(20 + 3 .0) = 2/5 = 40% (e) WACC = RD(1—Tc)(D+E) + RE(D+E) = (0.048 x 0.4) + (0.10 x 0.6) = 00792 (f) EVA = OpInc(1 - Tc) — (WACC x Net Assets) = [500 x (1'- 0.4)] 4— [.0792 x 2400] = $109.9 million $3. Feenix RiverAir‘ Project (a) WACC = RD(1-Tc)['D/(D+E)l + Rafi/(9+5)?! = [(0-07)(1--r4‘5)(0-8)] t [01312 X 02] =00548 or 5.48% ‘ ‘ ' (b) Annual depreciation = $300/30 = $10 million per year Annual ATCF _= (Cash Income —. Depreciation) x'( 1-- Tc) + Depreciation '= (35-.-,~- -10)(1 —: 0.45) + 10 = $23.75 million- ‘ ' - (c) NPV = - Initial Cost + PV (Annual ATCFs) —- PV(AT Removal Cost) = -300 + 34594 -- 20.18 = $25.76 million, Where PMT=23.75, N=30, FV=0, R=5..48 -) PV = -345.94 and 100/(1 .0548)"30=20 .18 (d) Using comparable transactions, market value ofproperty when available = 9 x 35 = $315 million ' (e) We have two NPV values: DCF -) $23.75 & Comp Trans. -) $315 — 300 = $15; which is more indicative ofvalue depends on which you place more confidence. The Comparable transaction might not fully reflect unique terminal costs ofthis preject. Thus the promoters should earn 20% oi’the $15 to $24 million Feenix of value it is expected to generate for its shareholders. 4. Valuing Puts and Calls (a) The call option is out of'the money (X = .30 and market price of'the. stock is 20) (b) Using Put-Call Parity Theorem, P = C+PV(x)--S = 3 + 30/(1.015)"2 — 20 = 12-12 (c) The put option is in the money (X = 30 and the market price of'the stock is 20) 5. Tootsie Roll Financial Restructuring (a). RE =.RF + (B x MERP) = 005+. (1.25 x 0.04) =. 0.10 or 10% (b) Same as (a) because Tootsie Roll currently has Virtually no debt. ' (c) VL = VU + DTC = (50 x $.30) + $750(0..4) = 1500 + 300 = $1,800 million (d) Shares Repurchased = Debt/Price = $750/36 = 20.833 million shares (e) Price After = EanI/Shares = (1800-750)/(50-20.833) = 1050/2916? = $36 _ (1) RE — RU + (RU— RD)(D/E)(1- -Tc)— = .095 + ( 095 0’7)(750/1050)(l .4) = 0.1057 (g) WACC= RD(1- Taxrate)(D/V) + RE(E/V)= 0-07(1-4)(750/1800) + (0 1.057)(105_—0/1800) — .0792 . (11) Fully diluted data indicates family holds lots of stock options -— stock repurchase increases stock price and value of' options while cash dividend does not; repurchase also defers tax payment for those who hold rather than sell. (1) The proposal adds significant amount of'debt (42% ofcapital structure), an amount that could reduce Tootsie Roll’s credit rating, there by increasing the cost of debt and signaling that the firm may be subject to “financial distress” costs if. its operating income were to significantly decline. Final Exam and Course Grading Statistics Final Exam Course Grade (GPA) Median ' 90/100 4 1 3.7 ' Mean . 865/100 3. 6 Standard Deviation 11.3 ' 0. 4 I WAS VERY PLEASED WITH THE OVERALL PER-P ORMANCE ON THE FINAL EXAM. BEST WISHES FOR THE HOLIDAY SEASON AND YOUR FUTURE! ' '- Professor Hass ...
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