Larry’s best friend, Garfield, owns a lasagna factory. Garfield’s financial skills are not very strong, so he asked Larry to take a look at his financials. Here is the information Garfield provided to Larry for 2019.

- Sales were $23,730

- COGS were $16,780

- Depreciation was $2,840

- Interest paid was $414

- Tax rate was 35%

- The paid dividends were $616  

Garfield also gathered some balance sheet information for 2018 and 2019. The numbers are presented in the following table. December 31, 2018 December 31, 2019 Current Assets $2,940 $3,528 Net Fixed Assets $16,560 $18,840 Current Liabilities $2,592 $2,484

Because Larry is very busy following the current market developments, he asked you to help him. You must

a) Compute the net income

b) Compute the operating cash flow

c) Compute the free cash flow

d) Explain and interpret the positive or negative sign of your answer in part c.

Check point: OCF = $5,511.50

1. What’s the cost of each component of capital and which need to be adjusted?
   • What do the IRR and NPV tell us?
   • what it means for a stock to be in equilibrium?
   • what is a callable bond, when will a bond be called and how that helps/hurts an investor?

PROBLEM # 4:

You are considering investing $300,000 in an activity which will generate a yearly income of $25,000 for the first 5 year, thereafter the income will increase by $7,000 per year for the following 10 years, when the life of the investment will end. You know that the ongoing money market interest rate is 5%.

1. Should you proceed with the investment? (show the equation)
2. Plot the NPW of the investment for i= 3%, 5%, 7%, 8%, 9%, 10% . At what point does the investment becomes unattractive?

Q1) A(n) 8.3% bond matures in 7 years and has a current yield (not YTM) of 6%. The bond's current trading price is $________.

Q2) A 4% coupon bond with 6 months remaining until maturity is currently trading at $997.26. Assume semi-annual coupon payments. The bond's YTM is__________%.

If you can do both, please do! Thank you.

Peter and Blair recently reviewed their future retirement income and expense projections. They hope to retire in 29 years and anticipate they will need funding for an additional 21 years. They determined that they would have a retirement income of $62304 in today's dollars, but they would actually need $45000 in retirement income to meet all of their objectives. Calculate the total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent. The total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent is $______________

Suppose that one year US and Polish rates are 2.5% and 6.5% respectively. One year US inflation forecast is 1.5%. What should be the expected inflation rate in the Poland if we can assume that International Fisher Effect holds? [Hint: Use accurate Fisher Effect formula on slide #5 in Parity Relationships-2 ; do not use approximation]

a. 0.90%

b. 5.46%

c. 1.50%

d. 6.50%

If the interest rate is 11%, what is the Equivalent Annual Cost (EAC) of the following machine: Cost: $9,000 Life: 10 years Annual cost to operate: $2,000 Answer to 2 decimal places, for example 970.12

On January 1, 2015 IBM leases an equipment from Omaha Inc. for an annual lease rental of $20,000. The lease term is five years and the lessor's interest rate implicit in the lease is 8%. The lessee's incremental borrowing rate is 8.25%. The useful life of the equipment is five years and its estimated residual value equals its removal cost. Annuity tables indicate that the present value of an annual lease rental of $1 (at 8% rate) is $3.993. The fair value of leased equipment equals the present value of rentals. (Assume the lease is capitalized.) Required: Prepare IBM’s accounting entries for 2015. Compute and illustrate the effect on the income statement for the year ended December 31, 2015, and for the balance sheet as of December 31, 2015. Construct a table showing payments of interest and principal made every year for the five-year lease term. Construct a table showing expenses charged to the income statement for the five-year lease term if the equipment is purchased. Show a column for (1) amortization, (2) interest, and (3) total expenses. In one paragraph, discuss the income and cash flow implications from this capital lease.

Six years from today you need $10,000. You plan to deposit $1,600 annually, with the first payment to be made a year from today, in an account that pays a 6% effective annual rate. Your last deposit, which will occur at the end of Year 6, will be for less than $1,600 if less is needed to reach $10,000. How large will your last payment be? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Manchester Inc. must purchase $10,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 8% and would be amortized over 5 years, with 5 end-of-year payments. Manchester can also lease the equipment for 5 end-of-year payments of $2,300,000 each. How much larger or smaller is the bank loan payment than the lease payment?

Equipment associated with manufacturing small railcars had a first cost of $210,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $650,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 37%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be_____ $ .

Kiko​ Peleh's Puts. Kiko Peleh writes a put option on Japanese yen with a strike price of $ 0.008000 divided by yen ​(yen 125.00 divided by $​) at a premium of 0.0080 cents per yen and with an expiration date six month from now. The option is for ​¥12,500,000. What is​ Kiko's profit or loss at maturity if the ending spot rates are yen 110 divided by $​, yen 115 divided by $​, yen 120 divided by $​, yen 125 divided by $​, yen 130 divided by $​, yen 135 divided by $​, and yen 140 divided by $.

Suppose you observe the following situation:

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?
Shows all the step and formula. Don't round off until you get the answer.

2. Fascination Tool and Die began development for a new factory in the area around San Francisco, California. However, recent events have caused the city to shut down all construction, and withdraw building permits. Fascination has already invested $150,000 in the San Francisco building, but Dallas, Texas has offered the company an incentive to bring their factory there, instead. In Dallas, the factory would cost $8 million to build. In San Francisco, the company will incur $1.2 million in additional building costs, and will experience a 1-year delay before they are able to begin selling the product, which will mean only nine years of sales instead of ten. In Dallas, the city is also offering a $500,000 one-time up front cash incentive to convince companies to make the move. The factory in either location will build components for companies in California, so shipping them from Texas will be more costly. If the company abandons the San Francisco deal, they believe they would be able to recoup $340,000 by selling the partially finished building and land to a used car dealership. In Dallas, they will need to purchase land for $750,000 to build on. Regardless of which deal they choose, they believe the salvage value of the factory will decline rapidly, but they should be able to recoup $100,000 at the end of year 10 in either case, after which time, the product line will be obsolete, and no further production will be worthwhile. Over the 10 year period, however, either factory will be able to build 60,000 units per year. The selling price per unit is expected to be $140 each, and production costs at either plant are estimated at $36 per unit. The machinery, which initially cost $3 million, will be depreciated over 7 years, using the straightline method. Delivery cost per unit from Dallas will be $18 per unit more than from San Francisco. However, Fascination is convinced that the delays to construction will cause the company to miss the entire first year of production, while Dallas has smoothed the permitting process to allow speedy construction and eliminate that delay. The company anticipates that either project will require an additional $5 million in working capital to be committed for the life of the project, but that working capital can be recovered after the project is ended. The company's tax rate is 24%.

Given this scenario, determine and map out the relevant cash flows for capital budgeting. Then use Excel to build your spreadsheet for the 10-year calculations, and after developing your estimates of each year's cash flow under the two scenarios, use the NPV method to determine what decision the company should make regarding the factory. Assume a 9% cost of capital. Explain your answer, and turn in the spreadsheet detailing your calculations.