Business Finance Homework Help

1.You are deciding between two mutually exclusive investment
opportunities. Both require the same initial investment of $10 million.
Investment A will generate $2 million per year (starting at the end of the
first year) in perpetuity. Investment B will generate $1.5 million at the end
of the first year and its revenues will grow at 2% per year for every year
after that.

• a. Which
  investment has the higher IRR?
  • b. Which
    investment has the higher NPV when the cost of capital is 7%?

  Substituting r = 0.07 into the NPV formulas derived in part (a) gives
  NPVA = $18.5714 million, NPVB = $20 million. So the NPV says take B.

  • c. In
    this case, for what values of the cost of capital does picking the higher
    IRR give the correct answer as to which investment is the best
    opportunity?

  2. Pisa Pizza, a seller of frozen pizza, is considering
  introducing a healthier version of its pizza that will be low in cholesterol
  and contain no trans fats. The firm expects that sales of the new pizza will be
  $20 million per year. While many of these sales will be to new customers, Pisa
  Pizza estimates that 40% will come from customers who switch to the new,
  healthier pizza instead of buying the original version.

  a. Assume customers will spend
  the same amount on either version. What level of incremental sales is
  associated with introducing the new pizza?

  b. Suppose that 50% of the
  customers who will switch from Pisa Pizza’s original pizza to its healthier
  pizza will switch to another brand if Pisa Pizza does not introduce a healthier
  pizza. What level of incremental sales is associated with introducing the new
  pizza in this case?

  3. Cellular Access, Inc. is a cellular telephone service
  provider that reported net income of $250 million for the most recent fiscal
  year. The firm had depreciation expenses of $100 million, capital expenditures
  of $200 million, and no interest expenses. Working capital increased by $10
  million. Calculate the free cash flow for Cellular Access for the most recent
  fiscal year.

  4. A bicycle manufacturer currently produces 300,000 units a
  year and expects output levels to remain steady in the future. It buys chains
  from an outside supplier at a price of $2 a chain. The plant manager believes
  that it would be cheaper to make these chains rather than buy them. Direct
  in-house production costs are estimated to be only $1.50 per chain. The
  necessary machinery would cost $250,000 and would be obsolete after 10 years.
  This investment could be depreciated to zero for tax purposes using a 10-year
  straight-line depreciation schedule. The plant manager estimates that the
  operation would require $50,000 of inventory and other working capital upfront
  (year 0), but argues that this sum can be ignored because it is recoverable at
  the end of the 10 years. Expected proceeds from scrapping the machinery after
  10 years are $20,000.

  If the company pays tax at a rate of 35% and the opportunity
  cost of capital is 15%, what is the net present value of the decision to
  produce the chains in-house instead of purchasing them from the supplier?

5. Find some bonds with differing yields to maturity (YTM). How do you explain the difference? Both the lecture and the textbook discuss some factors that may lead to this difference.

6. Calculate Apple inc.’s per share value using the DDM or another method discussed in Chapter 9. Then find the current market value of a share of the stock. Compare that two. Can you explain the similarity or difference?