Hello,i need a quote for the following questions please. 1. What characteristics of a market suggest that it is efficient and why is market efficiency important in the context of valuation of financial securities? (4 marks) 2. In evaluating international projects what adjustments would be made in capital budgeting analysis? Identify the reasons (3 marks) 3. JA Son Ltd. has convertible bonds with a coupon rate of 4% maturing in 10 years [payable semiannually, with a $1,000 maturity value]. The convertible bonds conversion price is $20 and the current market price of a JA Son’s common share is $32. Current yields are 6% for pure bonds. a. What are the two minimum values for this convertible bond [conversion value and pure bond value] (4 marks) b. At what price would you expect this convertible to trade at in the market and why? (2 marks) 4. Super Savings is providing existing shareholders with a rights offering. The current share price [rights-on] is $45 and the subscription price is $36. Eight rights will be required to subscribe for each new share. What is the expected ex-rights price? [2 marks] 5. Why would a firm’s dividend policy be considered irrelevant for firm value [as Modligliani and Miller for example have suggested]? (2 marks) 6. Your company has bid on a contract [yet to be decided] which will require the acquisition of a price volatile commodity [nickel, corn, foreign currency] in about 3 months. a. What are the ways to handle this risk [3 marks] b. Which alternative would you recommend and why? [2 marks] 7. Why is the NPV method of capital budgeting analysis considered superior to [do not use the same answer more than once]: a. IRR [2marks] b. Payback [1 mark] c. AAR [1mark] Longer problems [35 marks] I. Weighted Average Cost of Capital (WACC) (15 marks) Recall that Ke = Kj. The CAPM will determine yield and can be used to establish a common share price, which is not given in this problem. Happy Trails Tours financial statements report the following capital structure: Bonds $55,000,000 Preferreds 15,000,000 Common stock 25,000,000 Retained earnings 20,000,000 $115,000,000 The bonds have a rating of A (not high, not low), have an annual coupon payable at the rate of 7.5% and mature in 10 years. Any new issue of bonds will be purchased by the underwriter at $975 each. Current yields on A rated bonds are 6%. The preferreds with a dividend rate of 6% have 600,000 outstanding are priced at $30. Flotation expenses on a new issue will be 4%. There are currently 5.0 million common shares outstanding. The somewhat risky shares have a beta of 1.47. The overnight rate represents the risk free rate at 0.99%. The market portfolio will have a return of 7.00%. Happy Trail Tours will pay an annual dividend of $0.35 in the next year. Five (5) years ago the dividend was $0.285 [six years of growth]. Shares are priced efficiently based on the CAPM reflecting investor expectations regarding yield. Any new issue of common shares will require flotation expenses of 5%. At the current time Happy Trail Tours’ cash flow from its operations is adequate for any capital projects. Happy Trail Tours’ tax rate is 25 percent. Happy Trails’ current capital projects under consideration entail retooling an existing product line. Calculate the Happy Trail Tours’ WACC based on market values. a. Calculate the Happy Trails’ WACC. (12 marks) b. Discuss whether or not WACC is an appropriate discount rate to use for the currently intended capital budgeting decisions? (3 marks) II. Capital Budgeting Decision (14 Marks) Byron Bobsleds Ltd. has just refurbished its track at a cost of $500,000. The company is considering 15 new and improved sleds to capture increased interest in this activity. The new bobsleds will cost $21,000 each and have a useful life of 8 years at which time they can be salvaged for an expected $6,000 each. Five  old bobsleds will be retired immediately and salvaged for $2,500 each. The new bobsleds will create the excitement to generate an additional 825 rides annually at $125 each. The additional runs down the track will create an incremental annual maintenance cost of $25,000. The inventory and accounts receivable investment will total 5% of sales. Byron has a CCA rate of 20% and a tax rate of 28%. Annual interest charges on debt to finance this project will be $10,560. The current capital structure is 40% debt, 60% equity and this will be maintained. The debt is at 8%. The current overall cost of capital is 12%. a. Compute the NPV of this investment decision. Should the bobsleds be purchased [12 marks] b. How should you adjust for inflation in your analysis [2 marks] III. Lease versus borrow to purchase (6 marks) Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $170,000. This amount can be borrowed from a local bank at 6% interest with annual payments amortized over 4 years. Payments would be at the end of the year. The CCA rate on this equipment would be 30%, and the expected salvage at the end of 4 years is $25,000. Alternatively, lease payments of $48,000 could be made each year for 4 years, with the first payment due immediately. Sanders’ cost of capital is 11%, and its tax rate is 30%. Required: Should Sanders lease or borrow to purchase?
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