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.

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

It is an ordinary simple annuity problem

- What will be the value of the decommissioning fund in 2120?
- 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.

- What is the book value of shareholders' equity?
- 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%.

- What is the minimum number of bonds they must sell to raise the $6.2 million they need?
- 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 |

Mini-Case Analysis 2: Excel Hydro Inc.
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...

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[LO11-2] Mercury Inc. purchased equipment in 2016 at a cost of
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equipment was sold for $160,500 part way through 2018. Actual
production in each year was: 2016 = 81,000 units; 2017 = 129,000
units; 2018 = 65,000 units. Mercury uses units-of-production
depreciation, and all depreciation has been recorded through the...

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Answer each of the following
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20
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10
Inventories
20
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Current liabilities
$ 25
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Long-term debt
30
Preferred stock
5
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Section 2 - CASE ANALYSIS INSTRUCTIONS:
1. Read the case below carefully and answer ALL the questions
which follow.
2. Your answers may be entered using a Microsoft Excel
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