Q1
JTM is considering purchasing a new 3-D printer costing $365,000. The manufacturer is offering a payment plan in which JTM pays 10% down and finances the rest over 24 months at $15,000/month. What is the implicit financing rate? If JTM's WACC is 7.0%, should it accept the financing offer? Price Implicit cost of credit
Cash price
Down payment
Monthly payment
Cash Flows
Cash price minus down payment
Mo. 1
Mo. 2
Mo. 3
Mo. 4
Mo. 5
Mo. 6
Mo. 7
Mo. 8
Mo. 9
Mo. 10
Mo. 11
Mo. 12
Mo. 13
Mo. 14
Mo. 15
Mo. 16
Mo. 17
Mo. 18
Mo. 19
Mo. 20
Mo. 21
Mo. 22
Mo. 23
Mo. 24
Q2
ABC Inc. is looking to buy another firm in its industry. It is being offered an established business whose owner wants to sell. ABC's CFO gave you the numbers and asked you to calculate its price. The CFO asks that you use a 6.5% discount rate and a 2.5% growth rate for year 6 and on. What should ABC consider paying?
Valuation
Yrs. 1-5 TV
Revenue growth 3.5% 2.5% Cash Flows (in '000 $)
Costs (% of revenue): 1 2 3 4 5 TV
Wages and benefits 45% Sales 324.1
Aircraft and fuel costs 35% Expenses:
General and administrative 6% Wages and benefits
Rates: Aircraft and fuel costs
Tax 21.0% General and administrative
Discount 6.5% Operating Income
Taxes
Results Net Income after Tax
PV of NCF (incl. TV) Cash flow adjustments:
+ Cash 5.0 Working Capital (1.1) (1.1) (1.1) (1.1) (1.1)
- Debt 8.0 Capital Expenditures (13.2) (13.3) (13.5) (13.6) (13.7)
Value of equity Net Cash Flows
Q3
Given the coupons, par values, market rates and market prices below, please calculate the prices for bonds A-D and the yields for bonds D-G.
A B C D D E F G
Coupon 2.0% 3.3% 4.4% 0.0% Coupon 2.80% 3.55% 2.06% 0.00%
Par value 1,000 Par Value 1,000
Market rate 2.1% 2.8% 5.0% 2.9% Cash flows:
Cash flows: Market price (983) (751) (772) (430)
0.5 0.5
1.0 1.0
1.5 1.5
2.0 2.0
2.5 2.5
3.0 3.0
3.5 3.5
4.0 4.0
4.5 4.5
5.0 5.0
5.5 5.5
6.0 6.0
6.5 6.5
7.0 7.0
7.5 7.5
8.0 8.0
Price Yield
Q4
JTM pays its C-suite officers with stock options. Treasury asked you to price them. JTM's stock trades at $6.50/share; U.S. Treasurys, aka the risk-free rate, yield 1.40% and stock's volatility is 25%. The details of the stock option offers are below. What are the prices of the options? JTM's treasury unit bought jet fuel futures to hedge its expenses. It uses 29.5M gallon/yr. Each contract runs 42,000 gallons. The contract price locked JTM at $3.6313/gal. At maturity, JTM found that the spot price was
$3.6210/gal. In effect, had they not taken the futures, they'd have paid less. What was the profit/(loss) on the contract?
C. JTM's can its $150M in bonds - maturing in 7 years and paying a fixed 3.45% - for the same amount paying a floating rate of the Bloomberg Short Term Bank Yield Index + 1.40%. You are asked to show the cash flows for the fixed and floating scenarios and the net difference each year plus the net overall difference undiscounted and discounted using a 4% discount rate. Show all fixed and floating payments as negative cash flows. Net benefits use the formula: floating payments minus fixed payments. State whether the swap is better or worse in the space provided.
a. Option Pricing b. Futures Prices c. Interest Rate Swap
CEO CFO CIO Cash Flows
Exercise price 29.00 28.00 27.00 Gallons Bond outstanding 150 Fixed Floating Net
Maturity 11.0 8.0 8.0 Gallons/contract Maturity (yrs.) 7 Year 1
Stock price # of contracts Fixed rate 3.5% Year 2
Risk free rate Contract price Spread over BSTBY 1.40% Year 3
Volatility Spot price BSTBY: Year 4
BS calculations: Profit/(Loss) Years 1-2 1.5% Year 5
d1 ERROR:#NUM! ERROR:#NUM! ERROR:#NUM! Years 3-4 2.1% Year 6
N(d1) ERROR:#NUM! ERROR:#NUM! ERROR:#NUM! Years 5-7 2.5% Year 7
d2 ERROR:#NUM! ERROR:#NUM! ERROR:#NUM! Undiscounted Net
N(d2) ERROR:#NUM! ERROR:#NUM! ERROR:#NUM! Discounted Net
Price of call ERROR:#NUM! ERROR:#NUM! ERROR:#NUM!
v. MAR 22
No Content. Intentionally left blank.
Final Exam Introduction
This video introduces a final exam, final exam consists of four parts. Three of which you already covered in the course, part four includes futures and the swap interest rates. That is new from week nine of a coverage. So, you're not totally alone when you're doing final exam. Part one, we're looking at a 3D printer costing sixty-five thousand dollars. It's a discounted cash flow calculation, which on one. The cash flows for the payments, basically, what are you going to be doing is you're offering a payment plan, which is 10 percent down and the rest is financed over twenty-four months or fifteen thousand dollars a month. So, your cash prize is the total price, the down payment is ten percent of the cash price, monthly payments? Fifteen thousand dollars. So, the cash price minus the down payment is basically the loan that the up the 3D printer to give you a positive cash. And then after that, the twenty-four months of cash flows are negative payments, negative cash flows, because we're paying them to run. They function to make sure that you analyze it, multiply it by 12 and then you calculate what is implicit cost of credit. You have to compare that implicit cost of credit to the seven percent cost of capital for him and decide whether or not it's worth taking this payment. Part 2, we are doing the valuation of another company. OK, and basically what we're doing is something very similar to what we already did earlier in the course, we have to gin up sales forecast. We have to put in the expenses on these costs, which are a percentage of revenue for the then you take and sales minus some of these expenses, you get operating income. So that's a matter of wages and benefits, aircraft and fuel costs, all administrative and operating income. I'm not operating income; you pay twenty one percent in taxes. Then operating income minus taxes, you see that income after tax, you're. Then you make the cashflow adjustments. Having a change in working capital and capex to get the net cash flows then are going to wonder coming about using the perpetuities formula with a six-point five percent to 70 percent long term growth rate. Then you're going to run those press conferences in the present value function, npv function add cash, subtract that the value of the. That's. Let's do the job for Part 2. Part three, we're looking at some bonds, you're given Coupon's, our value and the market discount rate for the bonds, and then you end up on one payment as cash flows and you're going to use npv function to calculate the price. This is for Bonds ABC. Bond D, F, and G, you're given the coupons, you are given the par value and you're given the prices, so you're going to run the IRR function on the cash flows, which are the coupon payments. So, you come back into the yield. Remember that all the payments are semiannual. So, you have to make adjustments to the discount rate for the price to make it semiannual. For the yields IRR has to be semiannual Finally in, part four, we're using the option pricing model, which you already use when we did real options. So, you have to put in stock price risk for your volatility and the numbers will solve some of that. So, the true new parts are here in the section on futures. So, you're going to have to calculate how many gallons, gallons per contract number of contracts. Then you're going to have a contract price and a spot price. The profit or loss is going to be the spot price minus a contract price times the number of gallons. That should do it. But c, it's a swap and what you're doing is you're going from fixed on 150 million or seven years, paying a fixed rate of three and a half percent, which you're going to put here. These are all fixed payments to floating in which are going to be paying a spread of one point four percent over these forecast rates for the short term yield, so these numbers will be here and you'll compare that to using the formula you're going to add them all up as undiscounted net and then you are going to run the NPV function and discount these nets to show the discounted net, and then you're going to determine whether or not you should take that floating rate option.