Assignment

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1.??The total book value of WTC???s equity is $40 million and book value per share outstanding is $10.??The stock of WTC is currently selling for a price of $75 per share and the beta of WTC is 1.05.??The bonds of WTC have a face value of $42 million and sell at a price of 110 percent of face value.??The yield to maturity on the bonds is 4.5 percent and the firm???s tax rate is 35 percent.??If the E(Rm) = 8% and Rf = 1%, calculate the WACC of WTC.

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2.??Suppose the company in #1 is considering the following expansion projects.??How would you calculate the??required rate of return??to use in the NPV analysis of the following:??Explain.

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(a)??The company is considering an expansion to double the production of its current product.??The company will issue either equity or debt (but not both) to pay for the expansion.

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??????????????????????(b)??The company is considering adding a new product in a different line of ????????business that is unrelated to their current product.

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3.??One year ago, an American investor bought 1000 shares of London Bridges at a price of ??34 (or 34 UK pounds)??per share??when the exchange rate was $1.3/1?? (or $1.30 dollars = 1 pound).??The investor also invested 3,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 110 Yen = $ 1 US. ??

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(a) Using??current exchange rates, what is today???s value of the investor???s portfolio in U.S. dollars if the UK investment decreased 10% (in local currency) and the ??Japan investment increased 2% (in local currency)?

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??????????????????????(b) What is the overall rate of return on the portfolio over the last year?

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4.??An American firm is evaluating an investment in Mexico.??The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $3.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $1,900,000 each year in the U.S. and the costs of the project are projected to be 6??million pesos??each year for the 5 years.??If taxes are 35%, the appropriate discount rate is 8% and you use the??current exchange rate for pesos:

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(a) Calculate the NPV in U.S. dollars. (Show all calculations and ignore working capital)

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(b) Calculate the NPV in Mexican pesos. (Show all calculations and ignore working capital)

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