Assignment questions:(marks: 15)
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Assignment Questions:(Marks: 15)
1. AAA is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company’s growth accelerated, and management expects to grow the business at a rate of 40 percent for the next fouryears before growth slows to a more stable rate of 10percent. In the third year, the company has forecasted a dividend payment of $1.10. Dividends will grow with the company thereafter. Calculate the value of the company’s stock at the end of its rapid growth period (i.e., at the end of four years). The required rate of return for such stocks is 15percent. What is the current value of this stock? (3 Marks) 2. Premium Manufacturing Company is evaluating twosystems to use in its plant that produces the towers for a windmill power farm. The costs and the cash flows from these systems are shown below. If the company uses a 10percent discount rate for all projects, determine which forklift system should be purchased using the net present value (NPV) approach. Also, Compute the IRR and Payback Period for each of the two systems. (3 Marks)
Year 0
Year 1
Year 2
Year 3
System 1
-$4,123,450
$1,979,225
$1,358,886
$2,111,497
System 2
-$5,137,410 $1,875,236 $1,765,225 $2,865,110
3. You are considering opening another restaurant in the Pizzachain. The new restaurant will have annual revenue of $200,000 and operating expenses of $80,000. Th e annual depreciation and amortization for the assets used in the restaurant will equal $20,000. An annual capital expenditure of $10,000 will be required to offset wear and tear on the assets used in the restaurant, but no additions to working capital will be required. Th e marginal tax rate will be 30 percent. Calculate the incremental annual after-tax free cash flow for the project. (3 Marks)
4. The XXX Co. currently has debt with a market value of $300 million outstanding. The debt consists of Bank loan with 4.5% refinancing interest rate. The firm also has an issue of 2 million preferred shares outstanding with a market price of $11.00 per share. The preferred shares pay an annual dividend of $1.10. Imaginary also has 14 million shares of common stock outstanding with a price of $25.00 per share. The firm is expected to pay a $3 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm’s weighted average cost of capital? (3 Marks)
5. Since venture capital only invest in startup business, very high-risk investments, explain how venture capital minimize their level of risk? (3 Marks)
