Maryland water Co. (NJWC) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that

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1.   Johnson company Inc. is considering a project that has the following cash flow and WACC is 12.00%

Year                                       0                              1                              2                              3                     4      

Cash flows                   -$1,200                   $400                          $425                      $450                  $475

a.       Calculate payback period?

b.       Calculate discounted payback period?

c.        Calculate NPV?

d.       Calculate IRR?

e.        Calculate MIRR?

f.        Calculate MNPV (if reinvestment rate is 14%)?

2.  Maryland water Co. (NJWC) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14 percent bonds over the 30-year life of that issue. MDWC’s investment bankers have indicated that the company could sell a new 25-year issue at an interest rate of 11.67 percent in today’s market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. MDWC’s marginal tax rate is 40 percent. The new bonds would be issued at the same time the old bonds were called.

a.       What is the relevant refunding investment outlay?

b.       What are the relevant annual interest saving for MDWC if refunding takes place?

c.        What are the relevant annual flotation cost tax effects for MDWC if refunding takes place?

d.       What is the MDWC bond refunding’s NPV?

3. The following data apply to Johnson Corporation’s convertible bonds:

    Maturity:                                           10                           Stock price:                           $30.00

    Par value:                                          $1,000.00             Conversion price:                 $35.00

    Annual coupon:                               5.00%                    Straight-debt yield               8.00%

a.       What is the bond’s conversion ratio?

b.       What is the bond’s conversion value?

c.        What is the bond’s straight-debt value?

d.       Based on your answers to the three preceding questions, what is the minimum price (or “floor” price) at which the Johnson’s bonds should sell?

4.  SYCOM Inc. is considering a leasing arrangement to finance some manufacturing equipments that it needs for the next 3 years. The equipments will be obsolete and worthless after 3 years. The firm will depreciate the cost of the equipments on a straight line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the equipments, or it can make 3 equal end of year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm’s tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases.

What is the net advantage to leasing (NAL)?

5.  Walker Hardware, a national hardware chain, is considering purchasing a smaller chain, Dell Hardware.  Walker’s analysts project that the merger will result in incremental free flows and interest tax saving with a combined present value of $75.52 million, and they have determined that the appropriate discount rate for valuing Dell is 16%. Dell has 4 million shares outstanding and 5 million debt. Dell’s current price is $15.25. What is the maximum price per share that Walker should offer?

6. Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

7.  If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

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