Shares to be sold/lease vs buy

Extracted Content from Question Files:

20-2

The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock.
Underwriters have informed the firm’s management that they must price the new issue to the public at
$22 per share because of the signaling effects. The underwriters’ compensation will be 5% of the issue
price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000.

How many shares must the firm sell to net $20 million after underwriting and flotation expenses?

18-2

Consider data in problem 18-1 (see below). Assume that Reynolds tax rate is 40% and that the
equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease,
the payment would be $110 at the beginning of each year. If Reynolds borrowed and bought, the bank
would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and
will be discarded.

Should Reynolds lease or buy the equipment?

Data from 18-1

Current Assets - $300 Debt - $400

Net fixed assets - $500 Equity - $400

Total Assets - $800 Total Claims - $800

Unit 4 Problem Submission Template:

CHAPTER 18: Problem 2

Given Data:
40%
Tax Rate:
$100
Depreciation per year:
($110)
Lease Payment each year:
10%
Bank Loan Rate:

Step 1: calculate the cost of owning: (Note: You will use the NPV formula in Excel)

RATE (Discount Rate) (Note: this discount rate is the after-tax discount rate so you will m
Year 0 (This is the amount that they would borrow to buy the equipment
Year 1 (Note: This amount is the Depreciation amount per year multiplie
Year 2 (Note: This amount is the Depreciation amount per year multiplie
NPV (ANSWER)

Step 2: calculate the cost of leasing: (Note: You will use the NPV formula in Excel)

RATE (Discount Rate) (Note: this discount rate is the after-tax discount rate so you will m
Year 0 (Note: this amount is the Lease Payment each year multiplied by
Year 1 (Note: this amount is the Lease Payment each year multiplied by
NPV (ANSWER)

Should Reynolds Lease or Buy?

Include an explanation of the pros and cons to leasing over ownership of an asset:

CHAPTER 20: Problem 2

Given Data:
25
Stock Price:
20000000
Amount needed to raise:
22
Price of new issue:
5.00%
Underwriters compensation:
20.90
Beranek net per share:
150000
Beranek expenses:

(Note: input the correct data and use the appropriate formula in the answer cell)
Include an explanation of a specific item, for example, interest, floatation costs, call premium, of how to use refunding
r-tax discount rate so you will multiply the bank loan rate by (1 - Tax Rate)
ld borrow to buy the equipment)
iation amount per year multiplied by the Tax Rate)
iation amount per year multiplied by the Tax Rate)

r-tax discount rate so you will multiply the bank loan rate by (1 - Tax Rate)
ayment each year multiplied by (1 - Tax Rate)
ayment each year multiplied by (1 - Tax Rate)
ium, of how to use refunding tools and techniques to minimize the cost of capital:

EXCEL EXAMPLES

EXAMPLE #1: NET PRESENT VALUE
Discount Rate: 12%
Year 0 -65
Year 1 10
Year 2 20
Year 3 40
Year 4 65
Year 5 -20
ANSWER: NPV (cash flows occur at the BEGINNING of each period) $18.30
In the NPV example, you don't include the year 0 cash flow of -$65 (cell B6) inside the parenthesis because the payments occur at the BEGINNING of the first period. So the answer is $18.30.

EXAMPLE #2: INTERNAL RATE OF RETURN (IRR)
Year 0 -65
Year 1 10
Year 2 20
Year 3 40
Year 4 65
Year 5 -20
22.41%
ANSWER 22.41%

EXAMPLE #3: MODIFIED INTERNAL RATE OF RETURN (MIRR)
(Note: Use the yearly data from Example #2) 12% Finance Rate
15% Reinvestment Rate
18.12%

EXAMPLE #4: PRESENT VALUE
Year 0 (Discount $100 back 5 years at a 12% discount rate)
Year 1 12% Discount Rate:
Year 2 5 # Periods (or years) being discounted:
Year 3 100 FV
Year 4
Year 5
ANSWER $56.74

EXAMPLE #5: FUTURE VALUE
Year 0 (Compound $100 up 5 years at a 12% discount rate)
Year 1 12% Discount Rate:
Year 2 5 # Periods (or years) being compounded:
Year 3 100 PV
Year 4
Year 5
ANSWER $176.23

EXAMPLE #6: FINDING N (NPER) NUMBER OF PERIODS (OR YEARS)
Present Value = $50 How long would it take to compound $50 up to $100 using a 12% discount rate?
Future Value = $100
Discount Rate = 12%
(Or 6.12 years. Note that you have to make either the FV or PV input negative for the formula to work)
ANSWER 6.12

How long would it take to discount $100 down to $25 using a 12% discount rate?
Present Value = $100
Future Value = $25
Discount Rate = 12%
(Or 12.23 years. Note that years can not be negative. You have to make either the FV or PV input negative for the formula to work)
ANSWER -12.23

If you start with $100 and end with $200 after 5 years, what was the annual interest rate earned?
EXAMPLE #7: FINDING I (INTEREST RATE)
Present Value = $100
Future Value = $200
N (Nper) 5
(or 14.87%. You must keep either the Present Value number or Future Value number negative.)
ANSWER 14.87%

Payment (PMT) $100 If you receive payments of $100 each year for 5 years and end up with $750 after 5 years, what was the annual interest rate earned?
Future Value = $750
N (Nper) 5
(or 20.40%. Note that the Payment input or Future Value input must be negative for the formula to work)
ANSWER 20.40%

EXAMPLE #8: FINDING THE PAYMENT AMOUNT (PMT) OR ANNUITY AMOUNT
Present Value = $0 What would have to be the annual payment amount (or annuity amount) to have $100,000 after 20 years with a 12% discount rate?
Future Value = $100,000
N (Nper) 20
Interest Rate 12%
(Note: you want the FV input to be negative so your answer comes out positive.)
ANSWER $1,387.88

EXAMPLE #9: SUM, AVERAGE, VARIANCE, STANDARD DEVIATION & CORRELATION

0.12 0.09
0.15 0.11
0.08 0.15
0.06 0.03
0.08 -0.12
SUM 0.4900
AVERAGE 0.0980
VARIANCE 0.0013
STANDARD DEVIATION 0.0363
CORRELATION 0.3928

EXAMPLE #10: CALCULATING A BONDS PRICE
Suppose we have a bond with 22 years to maturity, a coupon rate of 8 percent, and a yield to
maturity of 9 percent. If the bond makes semiannual payments, what is its price today?

Settlement 1/1/00 (Think of Settlement as the beginning of the duration of the bond)
Maturity 1/1/22 (Think of Maturity as the end of the duration of the bond)
Rate 0.08 (Coupon Rate)
YTM 0.09 (Yield to Maturity or Required Rate fo Return)
Redemption 100 (Bonds Face Value, Par Value, or Fair Price; Note that is is $100, not $1,000. You make the adjustments by multiplying the answer by 10.)
Frequency 2 (Coupon payments are semiannul, so you put in a 2. If they are annual, then you input a 1)
Basis 0 (Always leave it blank)
(The answer. But you need to multiply it by 10 to get the actual bond price.)
Bond price (% of par): 90.49
(Microsoft gives the bond price in 2 digits like in cell B111. You need to multiply it by 10 to get the actual bond price)
Multiply by 10 904.91
(ANSWER = 904.91)

EXAMPLE #11: CALCULATING A BONDS YIELD TO MATURITY
Suppose we have a bond with 22 years to maturity, a coupon rate of 8 percent and a price of
$960.17. If the bond make semiannual payments, what is its yield to maturity?

Settlement 1/1/00 (Think of Settlement as the beginning of the duration of the bond)
Maturity 1/1/22 (Think of Maturity as the end of the duration of the bond)
Rate 0.08 (Coupon Rate)
Pr 96.017 (The bonds price per $100 face value)
Redemption 100 (Bonds Face Value, Par Value, or Fair Price; Note that is is $100, not $1,000.)
Frequency 2 (Coupon payments are semiannul, so you put in a 2. If they are annual, then you input a 1)
Basis: 0 (Always leave it blank)
Yield to Maturity: 8.40% (ANSWER = 8.40%)

EXAMPLE #12: CALCULATING THE EFFECTIVE ANNUAL INTEREST RATE
Supose you have a Nominal Interest Rate of 5.25% that is compounded quarterly (4 times) during the year. What is the Effective Annual Interest Rate?

Nominal Interest Rate: 5.25%
Npery (Number of compounding periods per year) 4
Effective Annual Interest Rate: 5.3543% (ANSWER = 5.35%)

(Note: The EAR is always higher than the Nominal Rate as long as there is more than 1 compounding period per year. If you increase the compounding periods per year, the Effective Annual Rate will increase, but at a decreasing rate).

EXAMPLE #13: CALCULATING THE ANNUAL NOMINAL INTEREST RATE
Supose you have an Effective Annual Interest Rate of 5.35% that is compounded quarterly (4 times) during the year. What is the Nominal Annual Interest Rate?

Effective Annual Interest Rate: 5.35%
Npery (Number of compounding periods per year) 4
Nominal Annual Interest Rate: 5.2459% (ANSWER = 5.25%)

EXAMPLE #14: CALCULATING THE INTEREST RATE PER PERIOD OF A LOAN OR AN INVESTMENT
If you make monthly payments of 200 on an $8000 loan over 4 years, what is the Annual Interest Rate of the loan?
4 Years of the Loan
-200 Monthly Payment
8000 Amount of the loan
Monthly Interest Rate of the Loan 0.77% (ANSWER = .77%)
Annual Interest Rate of the Loan 9.24% (ANSWER = 9.24%)
Note: Multiply the years of the loan by 12 months for the monthly rate
Note: Multiply the Monthly Interest Rate by 12 to get the annual rate.

EXAMPLE #15: CALCULATING THE GEOMETRIC AVERAGE RETURN (OR MEAN)
A stock has produced returns of 14.6 percent, 5.3 percent, 17.6 percent, and -4.7 percent over the past four years, respectively. What is the geometric average return?
Year 1 1.146 Add 1 to all positive returns
Year 2 1.053 Add 1 to all positive returns
Year 3 1.176 Add 1 to all positive returns
0.953 For negative returns, subtract it from 1. You have to do this to keep all data positive.
7.84% (ANSWER = 7.84%; Note: Place a minus 1 after the formula to get rid of the whole number)

EXAMPLE #16: SIMPLE MATH CALCULATIONS
2
6
5
Adding cell B169 to cell B170: 8
Subtracting cell B169 from cell B170 4
Multiplying cell B169 by cell B170 12
Dividing cell B170 by cell B169 3
Using Parenthesis: Multiplying cell B169 by (cell B170 + cell B171) 22
Calculating cell B169 to the power of cell B170 64
Calculating the Square Root of cell B177: 8
Calculating the Natural Logarithm of cell B177 4.1589