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Assignment Description

Corporate Finance

MBA 530

Term II – Spring 2017

Dr. Bart Brock


Assignment 1



Respond to the following problems utilizing the Excel formulas and schedules that we have reviewed in class.  Please submit as an Excel file with separate tabs for each problem.  It is important that you use formulas/functions within Excel to calculate results rather than keying in values – I will not accept submissions that do not include Excel formulas or functions to calculate results.     While you are free to work with others to understand and complete the assignment, it is critical that you develop your own understanding - you must submit your own individual work. 


1.       A superstar CEO just signed a $30 million contract based on her goal of managing a company turnaround.  She will receive an immediate sign-on bonus of $5 million on her first day of employment, $5 million at the end of her first year of employment, $8 million at the end of her second year of employment, and $12 million at the end of her third year of employment.  Assuming she is successful in the turnaround and remains at the company through the entire contract, what is the contract value assuming a 10% discount rate?  (10 points)


2.       A company is trying to determine whether to purchase a new machine that will help it increase revenues and cash profits. The machine costs $500,000 (payable immediately), and the company expects net cash inflows (before maintenance costs) of $150,000 at the end of each year for 5 years.  Maintenance costs are expected to be $20,000 at the beginning of each year, and the company expects to sell the machine at the end of 5 years for $100,000.  Assuming a 10% cost of capital (discount rate), should the company buy the machine? (30 points)


3.       Diversity, Inc. expects to generate $100,000 of net cash flows next year, $120,000 the following year, and $150,000 for each of the next three years.  The company believes it could be sold to an investment group for $500,000 at the end of the five year period.  The owners of Diversity would like to retire now and so they prefer to sell the firm now rather than in 5 years.  Assuming a 10% discount rate (return rate), what is the minimum price that the owners should accept in order to maintain the P.V. of their future projections? (20 points)










MBA 530: Corporate Finance

Term II – Spring 2017

Dr. Bart Brock


4.       Modern Manufacturing Company needs to decide between two different machines when updating its facilities.  The information for each machine (A and B) are listed below.  Based on an 8% cost of capital, an assumption that each machine produces the same amount of cash earnings each year, and the annuity-equivalent cost of each model (hint:  use the Excel PMT function), which machine should the company buy? (30 points)





Purchase Price



Useful Life

4 years

6 years

Annual Operating Costs




5.       California Company has outstanding bonds that mature in 12 years.  The bonds currently trade at 110 percent of par value.  The bonds pay $80 per year on a $1,000 face value.  What is California Company’s cost of debt based on its current market position? (20 points)


6.       Milwaukee Plastics share price is $50 and its beta is 1.09.  Assuming a risk free rate of 4% and a market risk premium of 5%, use CAPM to determine the company’s cost of equity. (20 points)


7.       Fresh Start Company has established its target capital structure as 60% equity and 40% debt.  Cost of equity is estimated at 10% and debt cost is estimated at 6%.  The company has a 35% tax rate.  What is Fresh Start’s WACC? (30 points)


8.       You have been contracted to estimate the cost of capital for Activity Brands Company (ABC).  The company has 4 million shares and 125,000 bonds of par value $1,000 outstanding.  It also has $20 million in short-term bank debt.  ABC’s target capital structure is 55% equity, 40% longterm debt, and 5% short-term debt although its current capital structure is not currently at the target ratio.

The company’s shares trade at $50 with a beta of 1.03 and the book value of the shares is $16.  The annual coupon rate of the bonds is 9%, they trade at 108 percent of par, and they will mature in ten years.  The short-term debt interest is 3.5%.  Assuming the current yield on Government bonds is 5.2%, market risk premium is 5%, and the corporate tax rate is 35%, what is the WACC for ABC?  (40 points)






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