Your Probationary Period At Cosmo K Manufacturing Gro 736926

Your Probationary Period At The Cosmo K Manufacturing Group Continues

Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance. This week, Gerry has asked you to evaluate several investment opportunities available to the company. Your instructions are to consider each situation independently of the others, unless otherwise indicated. Evaluating Investment Opportunities Consider the following situations and answer the related questions: Your company has the opportunity to make an investment that promises to pay $24,000 after 6 years. If your company has a required return of 8.5% on this type of investment, what is the maximum amount that the company should pay for the investment? Explain your answer. In the previous scenario, assume that your company negotiated a deal where it would pay $12,000 for the investment and receive a payment of $24,000 at the end of 7 years. What is the IRR on this investment? Should the company make the investment? Explain your answer. Another investment opportunity available to your company involves the purchase of some common stock from Zorp Corporation. The company has asked you to evaluate the stock, which paid a dividend of $4.25 last year and is currently selling for $36 per share. If your company decides to buy the stock, the stock will be held for 5 years and then sold. The growth rate on the stock is constant at 3% per year, and your company's required return on the stock would be 11%. What is the maximum price per share that your company should pay for the stock? Zorp Corporation also has some bonds for sale that your company is considering. These bonds have a $1,000 par value and will mature in 16 years. The coupon rate on the bonds is 5% paid annually, and they are currently selling for $987 each. The bonds are call protected for the next 4 years, and after this period, they are callable at 105. On the basis of this information, answer the following questions: What is the YTM on these bonds? If the bonds are called immediately after the call protection period, what would be the yield to call (YTC)? If the bonds paid interest semiannually instead of annually, would the YTC, the YTM, or both change? Explain your answers. Submission Details: Show the data used and the calculations for each question in a Microsoft Excel sheet and write the analyses in a Microsoft Word document.

Paper For Above instruction

The evaluation of various investment opportunities is a critical component of corporate financial decision-making. In this analysis, several scenarios are presented that require the application of fundamental financial concepts such as present value calculations, internal rate of return (IRR), dividend discount models, and bond yield computations. Each scenario is examined independently to determine the optimal decision aligned with the company's financial goals and required return thresholds.

1. Maximum Investment Price Based on Present Value

The first scenario involves an investment promising a payout of $24,000 after 6 years, with the company’s required return set at 8.5%. To ascertain the maximum amount the company should pay today, the present value (PV) calculation is employed using the formula:

PV = Future Value / (1 + r)^n

Where:

• Future Value = $24,000
• r = 8.5% or 0.085
• n = 6 years

Calculating:

PV = 24,000 / (1 + 0.085)^6 ≈ 24,000 / 1.677 ≈ $14,319

Thus, the company should not pay more than approximately $14,319 for this investment, as paying above this amount would yield a return less than the required 8.5%. This ensures the investment aligns with the company’s minimum acceptable return threshold.

2. IRR Calculation for Negotiated Investment

In the negotiated deal, the company invests $12,000 today and receives $24,000 after 7 years. The IRR is the discount rate that equates the initial investment to the future payout:

0 = -$12,000 + $24,000 / (1 + IRR)^7

Rearranged to solve for IRR:

(1 + IRR)^7 = $24,000 / $12,000 = 2

IRR = (2)^(1/7) - 1 ≈ 1.1041 - 1 ≈ 0.1041 or 10.41%

The IRR of this investment is approximately 10.41%. Since this exceeds the company’s required return of 8.5%, the company should proceed with the investment as it promises a return higher than the minimum threshold.

3. Stock Valuation and Maximum Purchase Price

The second investment involves purchasing stock in Zorp Corporation, which paid a dividend of $4.25 last year, with current trading at $36 per share. Assuming constant growth at 3%, the projected dividend for the next year (D1) is:

D1 = D0 × (1 + g) = 4.25 × 1.03 ≈ $4.3775

Using the Dividend Discount Model (DDM) for a stock with a constant growth rate, the valuation is:

P = D1 / (r - g) = 4.3775 / (0.11 - 0.03) ≈ 4.3775 / 0.08 ≈ $54.72

This suggests that the intrinsic value of the stock based on the required return and growth expectations is approximately $54.72. Therefore, the maximum price the company should pay for the stock is around $54.72, significantly higher than the current price of $36, indicating the stock is undervalued and a potentially attractive buy.

4. Bond Yield Calculations

The bonds under consideration have a $1,000 par value, a 5% coupon rate, and are selling at $987. Their maturity is in 16 years, with call protection for 4 years, after which they can be called at 105% of par.

a. Yield to Maturity (YTM):

YTM is the internal rate of return for the bond’s cash flows, solving the equation:

987 = Σ (Coupon Payment / (1 + YTM)^t) + Par Value / (1 + YTM)^16

Using trial, approximation, or financial calculator methods, YTM is approximately 5.1%.

b. Yield to Call (YTC):

If called immediately after the call protection period (after 4 years at 105%), the bondholder receives:

Call Price = $1,000 × 1.05 = $1,050

YTC is computed considering the 4-year cash flows and the call price. The approximate YTC would be marginally higher than the YTM, around 5.3%, reflecting the shorter period and the call premium.

c. Effect of Semiannual Payments:

If interest payments are semiannual, both YTM and YTC would be affected. Specifically, the periodic coupon payments double, and the number of periods doubles, resulting in more frequent compounding. This generally increases the yield calculations' precision, and both yields (YTM and YTC) would need recalculations to reflect semiannual compounding, likely increasing their values slightly due to the higher frequency of payments.

Conclusion

Each investment decision hinges on fundamental valuation methods tailored to specific asset classes. The present value calculation helps determine the maximum price for fixed income investments, while IRR offers insight into potential returns relative to initial outlays. Stock valuation through dividend discount models guides purchase decisions when growth and required returns are established, and bond yields inform risk and return trade-offs. Accurate calculations and judicious analysis are essential for making sound financial decisions that align with corporate objectives.

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