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
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