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1. Go to: http://tobsefin.swlearning.com and calculate Sara Lee Corporation’s (ticker symbol, TSN) cash flows for the last four years, using the formula: Cash flow = Net income + Depreciation. Determine if the figures match Sara Lee’s net cash flow from operating activities. If not, list specific reasons why they are different and ways the corporation can ensure this does not occur again in the future.
2. Determine the role par value plays in the pricing and sale of common stock by the issuing corporation.
(Use the following for questions 3 and 4.) MarCher Industries is considering undertaking a new project with a one-year life. The following table shows each project’s expected return under two economic scenarios.
_____________________High-Risk Project_____Low-Risk Project
Cash flow (boom) $1,500,000 $1,000,000
Cash flow (bust) $ 400,000 % 500,000
The firm currently has no debt, but it is considering borrowing $870,000 on a short-term basis to help finance its purchase of the project. The firm will owe $900,000, including principal and interest, in one year. There is a 60% chance a boom will occur and only a 40% chance a bust will occur.
3. Calculate (show all work) the expected value of the high and low risk project to MarCher Industries’ stockholders if the firm remains unlevered. Predict which project the stockholders prefer. Justify your prediction.
4. Calculate (show all work) the expected value of the high and low risk project of MarCher’s stockholders and bondholders, assuming the firm does borrow money to partially finance the purchase of the project. Predict which project the bondholders prefer. Justify your prediction. Predict which project stockholders would prefer. Justify your prediction.
(Use the following for questions 5 and 6.) Fiera Corporation is evaluating a new project that costs $45,000. The project will be financed using 40% debt and 60% equity, thus maintaining the firm’s current debt-to-equity ratio. The firm’s stockholders have a required rate of return of 18.36%, and its bondholders expect a 10.68% rate of return. The project is expected to generate annual cash flows of $13,000 before taxes for the next two decades. Fiera Corporation is in the 36% tax bracket.
5. Using Modigiliani and Miller’s Proposition II, determine the required return on unleveraged equity. Show all calculations.
6. Evaluate why violations of the Modigiliani and Miller assumptions of perfect markets require revisions to your capital budgeting analysis.
(Use the following for question 7.) Go to www.sec.gov or www.FreeEdgar.com and download a company’s prospectus from the SEC’s Edgar site. Choose one of the following sections: risk factors, use of proceeds, dividend policy, dilution, capitalization, Management’s Discussion, business or Management. Summarize what this section says about the company.
7. Based on your summary of the prospectus section indicate whether it makes you more or less likely to buy the stock. Give your reasons for your judgment.
(Use the following on question 8.) Go to www.oanda.com. Select a currency and create a chart of currency values for the past year. Chart the dollars values for each currency.
8. Evaluate the impact the current recession has had on the currency you chose.