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Barbara is considering investing in a stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her
analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below, find
| Probability | Return |
| Boom | 0.1 | 25.00% |
| Good | 0.3 | 15.00% |
| Level | 0.4 | 10.00% |
| Slump | 0.2 | -5.00% |
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1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.2. St. Lukeâs Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?3. Your firm is considering the following three alternative bank loans for $1,000,000:a) 10 percent loan paid at year end with no compensating balanceb) 9 percent loan paid at year end with a 20 percent compensating balancec) 6 percent loan that is discounted with a 20 percent compensating balance requirementAssume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?
pensating balance requirementAssume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?
us funds that it…
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[order_calculator]Which of the following statements is most correct? (Points : 1)
If annual compounding is used, the effective annual rate equals the simple rate.
If annual compounding is used, the effective annual rate equals the periodic rate.
If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11.66 percent.
Both the first and second answers are correct.
Both the first and third answers are correct.
2. Why is the present value of an amount to be received (paid) in the future less than the future amount? (Points : 1)
Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.
Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.
Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.
Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.
None of the above is a correct answer.
3. Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose? (Points : 1)
The annuity due.
The deferred annuity.
Either one, because as the problem is set up, they have the same present value.
Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better.
The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.
4. Which of the following statements is correct? (Points : 1)
For all positive values of r and n, FVIFr, n > 1.0 and PVIFAr, n > n.
You may use the PVIF tables to find the present value of an uneven series of payments. However, the PVIFA tables can never be of use, even if some of the payments constitute
n annuity (for example, $100 each year for Years 3,
4, and 5), because the entire series does not constitute an annuity.
If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.
The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
All of the above statements are false.
5. Alice’s investment advisor is trying to convince her to purchase an investment that pays $250 per year. The investment has no maturity; therefore the $250 payment will continue every year forever. Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it. If Alice decides to buy the investment, she would receive the first $250 payment one year from today. How much should Alice be willing to pay for this investment? (Points : 1)
$1,304.03, because this is the present value of an ordinary annuity that pays $250 a year for 10 years at 14 percent.
$1,486.59, because this is the present value of an annuity due that pays $250 a year for 10 years at 14 percent.
$1,785.71, because this is the present value of a $250 perpetuity at 14 percent.
There is not enough information to answer this question, because the selling price of the investment in 10 years is not known today.
None of the above is correct.
6. A recent advertisement in the financial section of a magazine carried the following claim: “Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine.” Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually? (Points : 1)
Approximately 3.5 years
Approximately 5 years
Exactly 7 years
Approximately 10 years
Exactly 14 years
7. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (Points : 1)
$1,171
$1,126
$1,082
$1,163
$1,008
8. If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (Points : 1)
$240.42
$263.80
$300.20
$315.38
$346.87
9. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%? (Points : 1)
12 years
15 years
18 years
20 years
23 years
10. Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually. If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20? (Points : 1)
$52,821.19
$57,900.83
$58,988.19
$62,527.47
$64,131.50
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[order_calculator]An Investor in the 28% tax bracket is trying to decide which of the two bonds to select: one is a 6.5% U.S. Treasury bond selling at par; the other is a municipal bond with a 5.25% coupon, which is also selling at par. Which of these two bonds should the investor select? Why?
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[order_calculator]The price of Custom Solutions is now $65. The company pays no dividends. Mr. Stephen Conroy expects the price 4 years from now to be $105 a share. Should Mr. Conroy buy stock in Custom Solutions if he desires a 15% rate of return?
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[order_calculator]The Cost of Capital
Assume that you are a member of an aerospace company s newly formed executive committee that has been given the role of reviewing requests for major capital expenditures. The committee chairman has laid the groundwork for approving requests that managers of various organizational units have submitted by reminding the group that their charge is to approve the investment opportunities that will best meet the company s financial objective of maximizing shareholder wealth.
One of the more outspoken individuals on the committee vigorously pushed the concept that the best way to maximize shareholder wealth would be to accept all of the projects that promise a return that is higher than the long-term interest rates on bonds or bank loans. This same committee member is also insistent that the company turn to borrowed funds as needed to augment existing funds so that all of the projects that are attractive to the committee, and that promise a return that is higher than the borrowing rate, can be accepted.
Other committee members expressed concern about that approach but the time scheduled for adjourning the meeting arrived before the disagreement was resolved. You have been assigned to examine the issue and, in the spirit of taking advantage of a teaching moment, circulate a report that will bring all committee members to a common understanding of the decision criteria that should be adopted by the committee. The chairman asked that your report address the following questions that seemed to be present during the committee meeting.
Prepare a 3-4 page report in which you answer the questions as requested by the committee chairman. Apply APA standards for writing style to your report.
| Assignment 2 Grading Criteria | Maximum Points |
| Explained why using the cost of new debt as the hurdle rate probably would not result in maximizing the shareholders wealth. | 20 |
| Explained the role that the cost of capital should play in the committee s work. | 16 |
| Described how a company s WACC might be affected by changes in the size of its capital budget. | 16 |
| Explained when and why it would be inappropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Identified the situations in which it would be appropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Explained the alternatives that might be used as the hurdle rate for situations in which it would be inappropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Writing Craftsmanship, APA and Ethical Scholarship. | 12 |
| Total: | 100 |
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[order_calculator]The target capital structure for Jowers Manufacturing is 49% common stock, 10% preferred stock, and 41% debt. If the cost of common equity for the firm is 20.7%, the cost of preferred stock is 11.6%, and the before tax cost of debt is 10.8% what is Jowers’ cost of capital? The firms’ tax rate is 34%.
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How to get the holding period return for a $980 selling security that purchased fiver years before at $798?Prove that this return overstates the
annualized, compound return.
Based on the following information calculate the holding period return:
P0= $11.00
P1= $11.40
D1= $1.02
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[order_calculator]Exercise 4
(2 points) The Fantastic Stuff Co. currently has debt with a market value of $400 million outstanding. The debt consists of 10% annual coupon bonds which have a maturity of 10 years and are currently priced at $1,211 per bond. The par value of each bond is $1,000. The firm also has an issue of 3 million preferred shares outstanding with a market price of $15.00. The preferred shares pay an annual dividend of $1.38. Fantastic also has 20 million shares of common stock outstanding with a price of
$26.00 per share. The firm is expected to pay a $2.
Exercise 4
(2 points) The Fantastic Stuff Co. currently has debt with a market value of $400 million outstanding. The debt consists of 10% annual coupon bonds which have a maturity of 10 years and are currently priced at $1,211 per bond. The par value of each bond is $1,000. The firm also has an issue of 3 million preferred shares outstanding with a market price of $15.00. The preferred shares pay an annual dividend of $1.38. Fantastic also has 20 million shares of common stock outstanding with a price of
$26.00 per share. The firm is expected to pay a $2.34 common dividend one year from today, and that dividend is expected to increase by 6% per year forever. Fantastic is subject to a 40% marginal tax rate.
What is the firm’s after tax cost of debt?
What is the firm’s cost of preferred stock?
What is the firm’s cost of common stock?
What is the firm’s weighted average cost of capital?
(2 points) Polk Automotive sells about 3,000 engines a year. The cost of placing an order with its supplier is $1,000, and the inventory carrying costs are $208 for each engine. Polk likes to maintain safety stock of 20 engines at all times.
What is the firm’s EOQ?
How many orders will the firm need to place this year?
What is the average inventory for the season?
(2 points) You are trying to value a company. Following is the information for that company as well as the information for a comparable company:
Company you are valuing
Comparable company
Value of debt = $7.5 million
Stock price = $45.00
Est. EBITDA next year = $9 million
Number of shares outstanding = 6.5 million
Est income next year = $3 million
Value of debt = $35 million
Est. EBITDA next year = $32 million
Est income next year = $10 million
Estimate the enterprise value of the company you are evaluating using the P/E multiples
Estimate the enterprise value of the company you are evaluating using the enterprise value/EBITDA multiples.
Question #4 (1 point)
When a firm follows a flexible current…
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Exercise 4
(2 points) The Fantastic Stuff Co. currently has debt with a market value of $400 million outstanding. The debt consists of 10% annual coupon bonds which have a maturity of 10 years and are currently priced at $1,211 per bond. The par value of each bond is $1,000. The firm also has an issue of 3 million preferred shares outstanding with a market price of $15.00. The preferred shares pay an annual dividend of $1.38. Fantastic also has 20 million shares of common stock outstanding with a price of
$26.00 per share. The firm is expected to pay a $2.34 common dividend one year from today, and that dividend is expected to increase by 6% per year forever. Fantastic is subject to a 40% marginal tax rate.
What is the firm’s after tax cost of debt?
What is the firm’s cost of preferred stock?
What is the firm’s cost of common stock?
What is the firm’s weighted average cost of capital?
(2 points) Polk Automotive sells about 3,000 engines a year. The cost of placing an order with its supplier is $1,000, and the inventory carrying costs are $208 for each engine. Polk likes to maintain safety stock of 20 engines at all times.
What is the firm’s EOQ?
How many orders will the firm need to place this year?
What is the average inventory for the season?
(2 points) You are trying to value a company. Following is the information for that company as well as the information for a comparable company:
Company you are valuing
Comparable company
Value of debt = $7.5 million
Stock price = $45.00
Est. EBITDA next year = $9 million
Number of shares outstanding = 6.5 million
Est income next year = $3 million
Value of debt = $35 million
Est. EBITDA next year = $32 million
Est income next year = $10 million
Estimate the enterprise value of the company you are evaluating using the P/E multiples
Estimate the enterprise value of the company you are evaluating using the enterprise value/EBITDA multiples.
Question #4 (1 point)
When a firm follows a flexible current…
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[order_calculator]for xoon….quiz help
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[order_calculator]Can you please answer and post the calculations as well.
Thank you.
$10
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[order_calculator]| The Effect of Leverage on Firm Earnings | ||||||||
| A firm needs $100 to start and has the following expectations: | ||||||||
| Sales | $200 | |||||||
| Expenses | $185 | |||||||
| Tax rate | 33% of earnings | |||||||
| a. What are earnings if the firm owners invest the $100 thus utilizing no financial leverage? Tax and net earnings values should be rounded to 2 decimal places. | ||||||||
| b. If the firm borrows (utilizes financial leverage) $40 of the $100 at an interest rate of 10%, what are the firm’s net earnings? Tax and net earnings values should be rounded to 2 decimal places. | ||||||||
| c. What is the return on equity when financial leverage is and is not utilized? Why do the returns differ? ROE results should be shown with 2 decimal places. | ||||||||
| d. If expenses increase to $194, what will be the new return on equity values for each scenario? ROE results should be shown with 2 decimal places. | ||||||||
| e. Did the returns decline more when financial leverage was or was not utilized? | ||||||||
| f. How does the use of financial leverage effect a firm’s earnings? When is using financial leverage beneficial? When is it disadvantageous? | ||||||||
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[order_calculator]Finance questions
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[order_calculator]Help?
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[order_calculator]This only needs to be four paragrapghs. Resources need to be from an online source no books. and the website needs to be included.
Simialrity score needs to be very low. Please do not message me if this cannot be done in a timely fashion. I do not want to waste anyone’s time.
James Williams (fictitious) was recently hired as the executive director for the Reach The World Mobile Telephone Company (RTWMTC). As part of his goal to manage and improve the company’s spending and income, he asks you to explain the importance of budgeting for the RTWMTC.
For this assignment, you must answer the following questions:
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[order_calculator]I need proffesisonal work in this. Someone ready to follow instructions and deliver.
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[order_calculator]I have a finanace case study attached, I would like you to please read it and understand it clearly. After that I would like you to put it in presentation format, using 12-14 slides + an introducation slide. Dont not include too much information in the slides use general material and then please describe it in the notes for us to discuss. Thank youÂ
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[order_calculator]I have a finanace case study attached, I would like you to please read it and understand it clearly. After that I would like you to put it in presentation format, using 12-14 slides + an introducation slide. Dont not include too much information in the slides use general material and then please describe it in the notes for us to discuss. Thank you
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[order_calculator]A risky $400,000 investment is expected to generate the following cash flows: Year 1 2 3 4 $145,300 $175,445 $156,788 $145,000 A. If the firm’s cost of capital is 10 percent, should the investment be made? B. An alternative use for the $400,000 is a four-year U.S. Treasury bond that pays $28,000 annually and repays the $400,000 at maturity. Management believes that the cash inflows from the risky investment are equivalent to only 75 percent of the certain investment, which pays 7 percent. Does this information alter the decision in a?
A firm’s cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows:
Cash Inflows
A B C
Year 1 $395 — $1,241
2 395 — —
3 395 — —
4 — $1,749 —
Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive.
a. Which investment(s) should the firm make according to the net present values? Why?
b. Which investment(s) should the firm make according to the internal rates of return? Why?
c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?
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[order_calculator]I need a detailed and spacific analysis. See attachemnt.
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[order_calculator]For this assignment, go to the Yahoo Stock Screener and use this page to find a publicly traded company that you find interesting and would like to study for this class. The company should not be a bank or a financial institution of any kind including insurance companies.
Write a two to three page paper discussing what you find interesting about this company, and whether or not you think this company will have a successful future. Get to the company’s web site, into the “investors relations” section and provide some financial highlights of your company for the past year. Indicate which stock exchange the company is listed on and what was the past 12 month rate of return (% gain or loss) to investors who bought shares of this company a year ago and sold the shares yesterday. This rate of return is called the one-year Holding Period Return, or HPR. Also state what is the most recent price of the shares on the company?
In addition discuss briefly some information about the top management team including the CEO and CFO. If there are any issues involved with the company that relate to the issues discussed in the case assignment, mention them briefly as well.
APA & Word
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[order_calculator]1.You were hired as a consultant to Keys Company, and you wereprovided with the following data: Target capitalstructure: 40% debt, 10% preferred, and 50% commonequity. The after-tax cost of debt is 4.00%, the cost ofpreferred is 7.50%, and the cost of retained earnings is11.50%. The firm will not be issuing any new stock. What is the firm’s WACC?
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[order_calculator]Â If Diplomat goes ahead with this project today, it willobtain knowledge that will give rise to additional opportunities 5years from now (at t = 5). The company can decide at t = 5 whetheror not it wants to pursue these additional opportunities. Based onthe best information available today, there is a 35% probabilitythat the outlook will be favorable, in which case the futureinvestment opportunity will have a net present value of $6 millionat t = 5. There is a 65% probability that the outlook will beunfavorable, in which case the future investment opportunity willhave a net present value of -$6 million at t = 5. Diplomat.com doesnot have to decide today whether it wants to pursue the additionalopportunity. Instead, it can wait to see what the outlook is.However, the company cannot pursue the future opportunity unless itmakes the $3 million investment today. What is the estimated netpresent value of the project, after consideration of the potentialfuture opportunity?
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[order_calculator]P&D Co. has a capital budget of $1,000,000. The companywants to maintain a target capital structure which is 30% debt and70% equity. The company forecasts that its net income this yearwill be $800,000. If the company follows a residual dividendpolicy, what will be its total dividend payment?
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[order_calculator]Which of the following is NOT a key element in strategicplanning as it is described in the text?
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[order_calculator]1. Which of the following is true regarding the evaluationof projects? (Points: 4)
sunk costs should beincluded
erosion effects should not beconsidered
financing costs are notincluded
opportunity costs areirrelevant
2.Which of the following investment ranking methods does notconsider the time value of money? (Points: 4)
net present value method
payback method
internal rate of returnmethod
all of these are time-adjustedmethods
3. You can ensure that an investment is expected to createvalue for (Points: 4)
have a PI equal to zero.
produce negative rates ofreturn.
have positive AARs.
have positive IRRs.
have positive NPVs.
4. What is the net present value of a project with thefollowing cash flows, if the discount rate is 15percent? (Points: 4)
-$2,989.48
-$2,599.55
$1,153.37
$2,880.08
$3,312.09
5. Howard Company is considering a new project that willrequire an initial cash investment of $575,000. The project willproduce no cash flows for the first three years. The projected cashflows for years 4 through 8 are $73,000, $112,000, $124,000,$136,000, and $145,000, respectively. How long will it take thefirm to recover its initial investment in this project? (Points:4)
5.81 years
6.05 years
6.96 years
7.90 years
This project never paysback
6. Ignoring the option to expand: (Points: 4)
overestimates the internalrate of return on a project.
ignores the possibility that anegative net present value project might be positive, given changesover time.
ignores the possibility thatone variable is the primary source of the forecasting riskassociated with a project.
underestimates the net presentvalue of a project.
7. ____________, refers to the situation a firm faces when ithas positive net present value projects, but cannot obtainfinancing for those projects. (Points: 4)
capital planning.
soft rationing.
capital rationing.
hard rationing.
a sunk cause.
8. ABC Cameras is considering an investment that will have acost of $12,000 and the following cash flows: $6,000 in year 1,$4,000 in year 2 and $3,000 in year 3. Assume the cost of capitalis 10 percent, which of the following is true regarding thisinvestment? Select all that apply: (Points: 4)
the net present value of theproject is approximately $1,000
this project should not beaccepted because it has a negative net present value
this project’s payback periodis 2 years
none of the above is true
9. Assume Company X plans to invest $60,000 in new computers.Using Tables 9.6 and 9.7 of your textbook (Page 277), which is thesecond year depreciation amount under MACRS? (Points: 4)
$12,000
$19,200
$19,800
None of the above
10. Assume a project has earnings before depreciation andtaxes of $120,000, depreciation of $40,000, and that the firm has a30 percent tax bracket. What are the after-tax cash flows for theproject? (Points: 4)
$56,000
$96,000
a loss of $21,000
none of these
11. Which of the following statements is true regardingsystematic risk? Select all that apply: (Points: 4)
is diversifiable
is the total risk associatedwith surprise events
it is not project or firmspecific
is measured by beta
is measured by standarddeviation
12. Which statement is not true regarding risk? (Points:4)
the expected return is usuallynot the same as the actual return
a key to assess risk isdetermining how much risk an investment adds to a portfolio
some risks can not bedecreased or mitigated by the financial manager.
the higher the risk, thehigher the return investors require for the investment
all of the above are truestatements
13. The stock of Hobby Town has an expected return of 8.8percent. Given the information below, what is the expected returnon this stock if the economy is normal? (Points: 4)
3.86 percent
4.42 percent
6.43 percent
7.28 percent
8.21 percent
14. You own a portfolio that consists of $8,000 in stock A,$4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. Whatis the portfolio weight of stock D? (Points: 4)
17.68 percent
17.91 percent
18.42 percent
19.07 percent
19.46 percent
15. You would like to create a portfolio that is equallyinvested in a risk-free asset and two stocks. The one stock has abeta of .80. What does the beta of the second stock have to be ifyou want the portfolio risk to equal that of the overall market?(Points: 4)
1.4
1.6
1.8
2.0
2.2
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[order_calculator]. P. Daves Inc. hired you as a consultant to help themestimate their cost of equity. The yield on the firmâs bondsis 6.5%, and Daves’ investment bankers believe that the cost ofequity can be estimated using a risk premium of 4.0%. What is anestimate of Daves’ cost of equity from retained earnings?
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[order_calculator]7. If a typical U.S. company uses the same cost of capitalto evaluate all projects, the firm will most likely become
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[order_calculator]8. Blanchford Enterprises is considering a project thathas the following cash flow data. What is the project’s IRR?Note that a project’s projected IRR can be less than the WACC (andeven negative), in which case it will be rejected.
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[order_calculator]1. Which of the following is a reason for the initial needfor financial statements?
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[order_calculator]3. You were recently hired by Hemmings Media, Inc., toestimate their cost of capital. You were provided with thefollowing data: D1 = $2.50; P0 = $60; g = 7% (constant); and F =5%. What is the cost of equity raised by selling new commonstock?
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[order_calculator]I cant get this to be correct I need help Please
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WhackAmOle has 3 million shares of common stock outstanding, 2.0 million shares of preferred stock outstanding, and 75,000 bonds. Assume the |
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What would be the weights used in the calculation of WhackAmOle’s WACC? (Do not round intermediate calculations |
| Equity weight | % |
| Preferred stock weight | % |
| Debt weight | % |
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Note 1: It is best to not round intermediate and earlier answers when using data from these steps/prior answers for later questions. You could perform the
problem with a spreadsheet and then intermediate steps could be referred to in later steps and all intermediate steps will not be rounded. I set the grading up
so that different answers will be graded as correct using various rounding conventions, but it is still best to not round earlier steps/answers if using data
for later answers. If you believe your answer is right but was marked wrong on the first try because of rounding, contact us and we will check your work/answer
before your second attempt. We can also check the final attempt and change your score if there is just a rounding issue. Remember, people have different data
so it will take us a little bit (we will work as fast as possible) to rework the problem and check your answer. If possible, please send us your
calculations and please send your data.
Note 2: To determine the value in the last question you need to know the steady cash flows of this zero growth firm (i.e. NOPAT) and divide this amount by the
discount rate (WACC). We computed the present value of a steady stream of cash flows a couple times during our class discussions.
Note 3: Remember, stock price times # of shares equals equity market value.
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, and its
stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm’s EBIT is
$14.095 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 5%. BEA is considering increasing its
debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire
the old debt in order to issue new debt, and the rate on the new debt will be 11%. BEA has a beta of 0.9.
| Beta | ________ |
| Cost of equity | ________ % |
What is its total value of the firm with 40 % debt? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not
1,200,000. Also, round your answer to three decimal places.
$ ________ million
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[order_calculator]Instructions on how to would be appreciated
What is the monthly payment for a 20 year mortgage for $230,000 at a 6% interest rate? (Use table 9.5 on page 271).
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[order_calculator]MC Qu. 46 Which of the following statements is correct…
Which of the following statements is correct?
| The MIRR corrects IRR’s faulty and unreasonable reinvestment assumption. | |
| The MIRR is a better capital budgeting tool than NPV. | |
| The MIRR may lead you to choose the wrong mutually exclusive project for a particular range of projects. | |
| All these statements are correct. |
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THE “REQUIRED RATE OF RETURN”? (RE) FOR THE HAPPY COMPANY IS 8%. ITS EXPECTED ROE IS 10% AND
EXPECTED (END OF COMING YEAR) EPS IS $5.00. IF THE FIRM’S PLOWBACK RATIO IS 60%, WHAT WILL BE ITS INTRINSIC PRICE AND P/E RATIO?
I NEED TO KNOW HOW TO DO IT AND LABEL FORMULAS must be provide, thanks short explanation would be great !
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Why might the Internal Rate of Return and the Net Present Value method be preferred over the Cask Payback method when evaluating investment proposals by
financial analysts?
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Mississippi River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before
depreciation from $30,000 to $52,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value.
The new machine will be depreciated over its 5-year MACRS recovery period; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%.
The applicable corporate tax rate is 40%, and the firm’s WACC is 16%. The old machine has been fully depreciated and has no salvage value.
What is the NPV of the project? Round your answer to the nearest cent.
$
Should the old riveting machine be replaced by the new one?
-Select-YesNoItem 2
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Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively.
What is the internal rate of return if the initial cost of the project is $225,000?
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Molly is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 10
percent. What is the net present value of this project if it the start-up cost is $2,100?
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Required: I paid $312 in student loan interest in 2012. How will that interest impact my taxes. Assuming I am in the 15% tax
bracket.
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Mr. Davidson plans to buy a new house in October 2013. The sale price of the house is $436,000. He plans to pay 20% down payments and borrow additional 80%
from Bank of America with a 15-year, 3.875% fixed-rate mortgage loan. He is expected to pay an equal MONTHLY payment starting from November 2013 for 15 years.
(1) Calculate the required monthly mortgage payment for Mr. Davidson.
(2) Construct the 2013~2015 amortization table (26 months) for Mr. Davidson.
(13 Mr. Davidson should prepare his 2013 tax filings in early 2014. Please compute the total mortgage interest payments which he can use for
his 2013 tax deductions.
The MS Energy Corp. is planning a new investment project which is expected to yield cash inflows of $185,000 per year in Years 1 through 2, $220,000 per
year in Years 3 through 6, and $198,000 in Years 7 through 9. This investment will cost the company $790,000 today (initial outlay). We assume that the firm’s
cost of capital is 6.8%.
(1) Draw a time line to show the cash flows of the project.
(2) Compute the project’s payback period, net present value (NPV), profitability index (PI), and internal rate of return (IRR).
(3) Discuss whether the project should be taken.
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You are a mortgage banker at BB&T Bank in Miami. One customer, Peter, wants to borrow money from your bank to finance his new home. He
just finds a new job and plans to buy the house at a price of $300,000. He wants to borrow a 80% loan
to purchase the home. You tell Peter that a constant payment, 30 year amortization period, fully amortizing loan (FRM) is available. The interest rate for the loan is 4.5%, which is the same as the market interest rate. Moreover, you will charge a loan origination fee of 3% for the loan.
(a) What is the monthly payment for the loan?
(b) What is the effective interest rate, assuming the mortgage is paid off after 30 years?
(c) If Peter plans to repay the loan after three years, what is the effective interest
rate?
(d) If Peter wants to borrow a 90% loan, the loan rate will be 5.5%. Everything else being equal (i.e., he prepays the loan after 3 years,
with the 3% loan fee), would you recommend him to borrow the 90% loan? [hint: calculate incremental cost of borrowing]
(e) Suppose Peter can get a loan with a below-market interest rate from the homebuilder. This fully amortizing FRM loan will have a 80% LTV,
4% interest rate, 30 years amortization period, and with no loan fees. At what price should the homebuilder sell the home to Peter in order to earn the market
rate of interest (4.5%) on the loan? Assume that Peter would have the loan for the entire term of 30 years and the home would normally sell for $300,000
without any special financing.
Please include all keystrokes and calculator input.
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[order_calculator]What is the monthly payment for an $18,000, 3-year, 9 percent loan with interest calculated using the add-on method?
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[order_calculator]Which of these statements is true?
| When people purchase a stock, they know exactly what their dollar and percent return are going to be. | |
| When people purchase a stock, they do not know what their return is going to be “?o either short-term or in the long run. | |
| Many people purchase stocks as they find comfort in the certainty of this safe form of investing. | |
| When people purchase a stock, they know the short-term return, but not the long-term return. |
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[order_calculator]Which statement is true?
| The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. | |
| The lower the liquidity ratios, the less liquidity risk a firm has. | |
| Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets. | |
| Liquid assets generate profits for the firm. |
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[order_calculator]|
Stock in Dragula Industries has a beta of 1.2. The market risk premium is 6 percent, and T-bills are currently yielding 4.90 percent. The |
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If the stock sells for $36 per share, what is your best estimate of the company’s cost of equity? (Do not round |
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[order_calculator]The source of funds is supplied by _____.
Answer
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customers |
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investors |
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suppliers The WACC is tied to the _____. Answer
|
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[order_calculator]| 18.1% | |
| 12.4% | |
| 5.7% | |
| 6.7% |
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[order_calculator]|
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.77 million at the end of the first year, and |
|
What is the maximum initial cost the company would be willing to pay for the project? |
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Schalheim 1) Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation
is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock,
preferred stock, and debt. Which of the following events would REDUCE its WACC?
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a. |
The market risk premium declines. |
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b. |
The flotation costs associated with issuing new common stock increase. |
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c. |
The company’s beta increases. |
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d. |
Expected inflation increases. |
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e. |
The flotation costs associated with issuing preferred stock increase. |
____ 12. 2) LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC
of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
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a. |
Project B, which is of below-average risk and has a return of 8.5%. |
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b. |
Project C, which is of above-average risk and has a return of 11%. |
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c. |
Project A, which is of average risk and has a return of 9%. |
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d. |
None of the projects should be accepted. |
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e. |
All of the projects should be accepted. |
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Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6 krona = $1 and the exchange rate between the dollar and the British pound was A??L1
= $1.85. What was the exchange rate between Swedish kronas and pounds? Round your answer to two decimal places.
kronas per pound
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[order_calculator]Suppose we have the following returns for large-company stocks and Treasury bills over a six year period:
Year: 1 Large Company: 3.96 U.S. Treasury Bill: 4.50
Year: 2 Large Company: 14.12 U.S. Treasury Bill: 4.88
Year: 3 Large Company 19.01 U.S. Treasury Bill: 3.80
Year: 4 Large Company: -14.67 U.S. Treasury Bill: 6.96
Year: 5 Large Company: -32.16 U.S. Treasury Bill: 4.88
Year: 6 Large Company: 37.26 U.S. Treasury Bill: 6.14
a.
Calculate the arithmetic average returns for large-company stocks and T-bills over this period.
b.
Calculate the standard deviation of the returns for large-company stocks and T-bills over this period
c-1
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this
period?
c-2
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk
premium over this period?
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk
premium over this period?
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suppose that your firm generate net income of $20 million this year and usually pay out 30% of its net earnings as dividends. The returns on equity is 10%. let
DPR represent the payout ratio (30%). Find out Retained earnings of this year.
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Zocco Corporation has an inventory conversion period of 77 days, an average collection period of 29 days, and a payables deferral period of 23 days.
Assume 365 days in year for your calculations.
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Summer Tyme, Inc. has cash available and is considering a new three-year expansion project that requires an initial fixed asset investment of
$3.9 million. The fixed assets will be depreciated straight-line to zero over its three-year tax life. The fixed assets will have a market value of $200,000 at
the end of the project. The project is estimated to generate following revenues during those three years: $2,000,000 for year one, $2,500,000 for year two, and
$3,000,000 for year three. Costs are equal to 20% of the same year sales. The project
net working capital is equal to 10% of the next year’s revenue. The tax-rate is 35%.
What are the project’s net cash flows for years 0-3? What is the IRR on this project?
Use available Excel template and complete.
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[order_calculator]True or False Stock classes may differ in both voting rights and dividends rights
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Year 0 1 2 3 4 Cash flows -$1,000 $350 $350 $350 $350
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[order_calculator]This is used as a measure of the total amount of available cash flow from a project.
| operating cash flow | |
| free cash flow | |
| investment in operating capital | |
| sunk cash flow |
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Truman Industries is considering an expansion. The necessary equipment would be purchased for $16 million, and the expansion would require an
additional $3 million investment in net operating working capital. The tax rate is 40%.
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[order_calculator]|
Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a 14 percent compensating balance, discounts |
| (a-1) |
Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Round your answers to 2 decimal |
| Effective rate | |
| Fidelity Bank | % |
| Southwest Bank | % |
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| (a-2) | Which loan should Summit accept? | ||||
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| (b) |
Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,040 at each bank in deposits that will serve as |
| Effective rate | |
| Fidelity Bank | % |
| Southwest Bank | % |
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| (c) | Does your choice of banks change if the assumption in part b is correct? | ||||
|
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Suppose you bought a 6 percent coupon bond one year ago for $929. The bond sells today for $933. The face value is $1,000. If the inflation rate last year was
4.3 percent, what was your total real rate of return on this investment?
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Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 40 years. How much will she have available for
retirement if she can make 8% on her investment?
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[order_calculator] Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company’s marginal tax rate is 40%, what will be the effect on cash flows
of this sale (i.e., what will be the after-tax cash flow of this sale)?
| $95,000 | |
| $92,000 | |
| $3,000 | |
| $5,000 |
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The interest rate is 4 percent per year. The time to expiration of both options below is 6 months. The price of a share of IMF Global is X. The call option at 90 sells for 5.818 while the put option sells for 9.036.
You can go long or short 75 shares, and as many calls or puts as you like. Given this, graph your profits from
arbitrage as X goes from 78 to 88.
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What must the rate be less than to be worth it to incur a compensating balance of $1,200 in order to get a 1.5-percent lower interest rate on a 1-year, pure
discount loan of $100,000?
| The rate must be less than 15.58%. | |
| The rate must be greater than 15.58%. | |
| The rate must be greater than 19.27%. | |
| The rate must be less than 19.27%. |
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After reading about three successful investors in The Wall Street Journal you decide that
active investing will also provide you with superior trading results. What sort of behavioral tendency are you exhibiting?
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How do you think the capital structure of the typical public utility compares with the capital structure of the typical technology firm? What aspects of the
two industries cause these differences in capital structure?
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Timo Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $144,980 and have an estimated useful
life of 9 years. It believes it can sell the exhibit for $72,400 at that time. (Amusement parks need to rotate exhibits to keep people interested.) If the
project sells the company will recoup all gains from the sale of the exhibit. It is expected to increase net annual cash flows by $27,900. The company’s
borrowing rate is 8%. Its cost of capital is 10%. Its tax rate is 20%. The exhibit will be depreciated using 5 year straight line depreciation with the
half year convention. Calculate the net present value of this project to the company.
Select one:
a. Negative
$12,190
b. Negative
$15,323
c. Positive
$12,190
d. Positive
$15,323
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Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50/50 basis. Which type of entity did they create if
they have no personal liability for the firm’s debts? Answer
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Limited partnership |
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Corporation |
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Sole proprietorship |
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General partnership |
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Public company |
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[order_calculator]Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years? Answer
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$96.00 |
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$101.15 |
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$480.00 |
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$492.16 |
||
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$519.97 |
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Barbara is considering investing in a stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her
analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below, find
| Probability | Return |
| Boom | 0.1 | 25.00% |
| Good | 0.3 | 15.00% |
| Level | 0.4 | 10.00% |
| Slump | 0.2 | -5.00% |
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1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.2. St. Lukeâs Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?3. Your firm is considering the following three alternative bank loans for $1,000,000:a) 10 percent loan paid at year end with no compensating balanceb) 9 percent loan paid at year end with a 20 percent compensating balancec) 6 percent loan that is discounted with a 20 percent compensating balance requirementAssume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?
pensating balance requirementAssume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts for early payment. What is the formula to determine the effective interest rate if the discount is not utilized?
us funds that it…
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[order_calculator]Which of the following statements is most correct? (Points : 1)
If annual compounding is used, the effective annual rate equals the simple rate.
If annual compounding is used, the effective annual rate equals the periodic rate.
If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11.66 percent.
Both the first and second answers are correct.
Both the first and third answers are correct.
2. Why is the present value of an amount to be received (paid) in the future less than the future amount? (Points : 1)
Deflation causes investors to lose purchasing power when their dollars are invested for greater than one year.
Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future.
Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted.
Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future.
None of the above is a correct answer.
3. Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose? (Points : 1)
The annuity due.
The deferred annuity.
Either one, because as the problem is set up, they have the same present value.
Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better.
The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.
4. Which of the following statements is correct? (Points : 1)
For all positive values of r and n, FVIFr, n > 1.0 and PVIFAr, n > n.
You may use the PVIF tables to find the present value of an uneven series of payments. However, the PVIFA tables can never be of use, even if some of the payments constitute
n annuity (for example, $100 each year for Years 3,
4, and 5), because the entire series does not constitute an annuity.
If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate.
The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases.
All of the above statements are false.
5. Alice’s investment advisor is trying to convince her to purchase an investment that pays $250 per year. The investment has no maturity; therefore the $250 payment will continue every year forever. Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it. If Alice decides to buy the investment, she would receive the first $250 payment one year from today. How much should Alice be willing to pay for this investment? (Points : 1)
$1,304.03, because this is the present value of an ordinary annuity that pays $250 a year for 10 years at 14 percent.
$1,486.59, because this is the present value of an annuity due that pays $250 a year for 10 years at 14 percent.
$1,785.71, because this is the present value of a $250 perpetuity at 14 percent.
There is not enough information to answer this question, because the selling price of the investment in 10 years is not known today.
None of the above is correct.
6. A recent advertisement in the financial section of a magazine carried the following claim: “Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine.” Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually? (Points : 1)
Approximately 3.5 years
Approximately 5 years
Exactly 7 years
Approximately 10 years
Exactly 14 years
7. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (Points : 1)
$1,171
$1,126
$1,082
$1,163
$1,008
8. If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? (Points : 1)
$240.42
$263.80
$300.20
$315.38
$346.87
9. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%? (Points : 1)
12 years
15 years
18 years
20 years
23 years
10. Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually. If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20? (Points : 1)
$52,821.19
$57,900.83
$58,988.19
$62,527.47
$64,131.50
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[order_calculator]An Investor in the 28% tax bracket is trying to decide which of the two bonds to select: one is a 6.5% U.S. Treasury bond selling at par; the other is a municipal bond with a 5.25% coupon, which is also selling at par. Which of these two bonds should the investor select? Why?
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[order_calculator]The price of Custom Solutions is now $65. The company pays no dividends. Mr. Stephen Conroy expects the price 4 years from now to be $105 a share. Should Mr. Conroy buy stock in Custom Solutions if he desires a 15% rate of return?
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[order_calculator]The Cost of Capital
Assume that you are a member of an aerospace company s newly formed executive committee that has been given the role of reviewing requests for major capital expenditures. The committee chairman has laid the groundwork for approving requests that managers of various organizational units have submitted by reminding the group that their charge is to approve the investment opportunities that will best meet the company s financial objective of maximizing shareholder wealth.
One of the more outspoken individuals on the committee vigorously pushed the concept that the best way to maximize shareholder wealth would be to accept all of the projects that promise a return that is higher than the long-term interest rates on bonds or bank loans. This same committee member is also insistent that the company turn to borrowed funds as needed to augment existing funds so that all of the projects that are attractive to the committee, and that promise a return that is higher than the borrowing rate, can be accepted.
Other committee members expressed concern about that approach but the time scheduled for adjourning the meeting arrived before the disagreement was resolved. You have been assigned to examine the issue and, in the spirit of taking advantage of a teaching moment, circulate a report that will bring all committee members to a common understanding of the decision criteria that should be adopted by the committee. The chairman asked that your report address the following questions that seemed to be present during the committee meeting.
Prepare a 3-4 page report in which you answer the questions as requested by the committee chairman. Apply APA standards for writing style to your report.
| Assignment 2 Grading Criteria | Maximum Points |
| Explained why using the cost of new debt as the hurdle rate probably would not result in maximizing the shareholders wealth. | 20 |
| Explained the role that the cost of capital should play in the committee s work. | 16 |
| Described how a company s WACC might be affected by changes in the size of its capital budget. | 16 |
| Explained when and why it would be inappropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Identified the situations in which it would be appropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Explained the alternatives that might be used as the hurdle rate for situations in which it would be inappropriate to use the firm s cost of capital as calculated on its existing capital structure to evaluate new investment opportunities. | 12 |
| Writing Craftsmanship, APA and Ethical Scholarship. | 12 |
| Total: | 100 |
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[order_calculator]Year Revenues (thousands)
1 $2,058
2 $2,534
3 $2,472
4 $2,850
5 $3,000
6 ?
Predict Florida Home Health’s Year …
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[order_calculator]Write a 350 to 700 word response to the following e-mail:
Dear Consultant,
I am currently starting a business and developing my business plan. I’m in need of some advice on how to start forming my business. I am not sure exactly how it will be financed and whether or not I want to take on partners. I am interested and willing to learn the intricacies of my options to determine how to best proceed with my plan.
Please advise on what my options are, the advantages and disadvantages of each, and possible tax consequences for each scenario?
Respectfully,
John Owner
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