Question

Mini Case 2: Excel Hydro Inc.

Unit 8 (6% of the grade)

Excel Hydro took a loan contract which requires a payment of $40 million plus interest two years after the contract's date of issue. The interest rate on the $40 million face value is 9.6% compounded quarterly. Before the maturity date, the original lender sold the contract to a pension fund for $43 million. The sale price was based on a discount rate of 8.5% compounded semi-annually from the date of sale

Excel Hydro is also considering building a nuclear power plant, which will be ready for production in 2030. The country's governing body is also considering a decommissioning liability law for the operator to put aside $1 million every month towards decommissioning cost. If the production life of the plant is 60 years and the operator puts the money at the end of the month in a savings account, earning 7.25% compounded monthly.

During the 60 years of production life of the plant, the operator will put $1 million at the end of the month in a savings account, earning 7.25% compounded monthly. At the end of the production life of the plant, there are no more contributions and the money is expected to grow at the rate of 6% compounded quarterly for the next 30 years.

1. How many months before the maturity date did the sale take place?
2. What will be the value of the decommissioning fund after 60 years of production?

It is an ordinary simple annuity problem

3. What will be the value of the decommissioning fund in 2120?
4. How much interest is included in the future value in 2120?

Six years ago, Excel Hydro Inc purchased a mailing machine at a cost of $368,000. This equipment is currently valued at $172,200 on today's statement of financial position but could actually be sold for $211,400. This is the only fixed asset the firm owns. Net working capital is $121,000 and long-term debt is $82,500. The Vice President of Excel Hydro, Inc. wants to improve the current ratio on the company's next financial statement.

5. What is the book value of shareholders' equity?
6. Explain what the Vice President can legitimately do now to help accomplish this goal. Provide specific examples in your answer.

Excel Hydro plans to raise $6.2 million to expand their business. To accomplish this, they plan to sell 20-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 9.5%. The company plans on depositing $10,000 a year in real terms into your investment account for the next four years. The relevant nominal discount rate is 7.5% and the inflation rate is 4.2%.

7. What is the minimum number of bonds they must sell to raise the $6.2 million they need?
8. What are the deposits worth in today's dollars?

Excel Hydro Inc. has just issued dividends at $2 per share. There are 500,000 shares outstanding. The recently released Income statement shows net earnings of $1200,000. Dividends will grow at the rate of 10% for the next four years. The required rate of return is 12%.

          9.Calculate the EPS of the company.

          10. Calculate the Present value of the stock.

Answer 1

Given Data,
A. Net Earnings as per recently released data = $1,200,000
B. Outstanding No. of Shares = 500,000
C. Dividend paid recently = $2 per share
D. Required rate of return = 12% P.A.
E. Growth rate of Dividend = 10% P.A.
Answer to Question numbered 9:
Earnings per share of the Co. = Total Earnings of the Co./Total Outstanding share of the Co.
		=	$1,200,000/500,000
		=	2.4
Answer to Question numbered 10:
Present Value of Stock as per Gordons model = D0(1+g)/r-g
where, D0 = Dividend paid recently ($2 Per Share)
r = required rate of return (12% P.A.)
g = Growth rate of Dividend (10%)
Therefore value of Stock = (2*(1+0.10))/0.12-0.10
	=	110	Per Share