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You recently purchased some immature timberland that is forty years from being harvested. You expect to get $438/MBF when you harvest the timber. Prior to harvesting, you have two objectives. You hope to come up with a plan to generate some annual revenue to help pay taxes on the land and you hope to undertake some silvicultural activities to increase your yield. Your neighbor, an avid mushroom and truffle hunter, is willing to sign a formal lease $28/acre/yr to hunt and forage non-timber forest products until you harvest. Your brother-in-law hears about this plan and says he and his buddies would be willing to pay $21/acre/yr to hunt until you harvest but they would need you to spend $70/acre immediately on some feed plots and wildlife openings. They will host a BBQ for you at the start of each hunting season as well. The two of them don't get along and will not share the property. You are also looking at a fertilizer treatment that will add 34% to your expected yield (around 6.6 MBF). The fertilizer treatment will cost $32/acre. Your neighbor harvests organic natural truffles and mushrooms only and will not harvest on the fertilized land. Your neighbor sells truffles for $50/lb and collects around 4 lbs/acre on a good year. You have traditionally made 7% in equity markets.
A. Who do you give the lease to and why?
B. How much would the other party have to pay per acre per year in order to change your decision?
Aaron's Rentals has long-term debt of $758,250, preferred stock of $612,000, and common stock of $2,088,000. The market rate on debt is 7.88%, the market rate on preferred stock is 11.76%, and the market rate on common stock is 7.48%. The tax rate is..
RRM Incorporated has just declared a dividend of $10.25 per share. The tax rate of dividends is 20 percent. The tax rate on capital gains is zero. The tax laws require the taxes to be withheld when the dividend is paid. RRM currently sells for $107..
Jones Corp’s outstanding bonds, which have a face value of $1,000, have 10 years remaining to maturity. The bonds’ coupon rate is 6%, and interest is paid semiannually. If investors require a rate of return equal to 5% to invest in similar-risk bonds..
Mel plans to save 11,000 dollars per year in his retirement account for 3 years. His first savings contribution to his account is expected in 1 year. Mel expects to earn 8.07 percent per year in his account. He plans to retire in 3 years. In retireme..
You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow is expected to be $90.0 million, the FCFs are expected to grow..
Of the capital budgeting techniques discussed, which works equally well with conventional and non-conventional cash flows and with independent and mutually exclusive project?
In the context of estimating cash flows for capital budgeting, sensitivity analysis and simulation analysis is useful. Explain another context where cash flows must be estimated and sensitivity analysis and simulation analysis could be used to measur..
Manny borrows 8600 dollars from Moe at an effective rate of 5.3 percent, and agrees to make 10 equal annual payments (the first a year from now) to repay the loan. Immediately after Manny makes the third payment, Moe sells the loan to Jack at a price..
Z. Company plans to raise $100 million. The flotation cost is expected ti be 8% issuing debt, 6% for issuing preferred stock and 5% for issuing common stock. How much additional capital will they need ti raise in order ti procure a net amount of $100..
Distinguish between operating leases and financial leases. Would you be more likely to find an operating lease employed for a fleet of trucks or for a manufacturing plant? Explain.
Pricing objectives and pricing methods in the services sector
ABC Corporation’s bonds have 22 years remaining until maturity. Interest is paid annually at the end of each year. Each bond has a par value of $1,000, a coupon rate of 5.75% and a current market price of $924. (a) What is the amount of annual intere..
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