RELO Manufacturing has a machine replacement decision. RELO will buy one of two machines, which will be replaced at the end of its life. Both machines cost $1,800. Machine A has a 4-year life, a salvage value of $800, and expenses of $525 per year and will be depreciated down to $800. Machine B has a 5-year life, a salvage value of $300, and expenses of $500 per year. Machine B will be depreciated down to a book value of $300. Assume conditions of straight-line depreciation to the salvage value, a tax rate of 35%, and a discount rate of 18%. Which machine should RELO choose and why?

A. Machine A because it has a lower present value of total costs

B. Machine B because it has a lower present value of total costs

C. Machine A because it has a lower EAC

D. Machine B because it has a lower EAC

Topperton Company has developed a new industrial product. An outlay of $8 million is required for equipment to produce the new product, and additional net working capital of $400,000 is required to support production and marketing. In addition, a one-time $400,000 (before-tax) expense will be incurred the year that the equipment is placed into service. The equipment will be depreciated on a straight-line basis to a zero book value over 6 years. Although the depreciable life is 6 years, the project is expected to have a productive life of 8 years, and it is estimated that the equipment can be sold for $1 million at that time. Revenues minus expenses are expected to be $3 million per year. The cost of capital for this project is 14%, and the relevant tax rate is 30%. What is the NPV of the new product?

You are thinking of buying a machine that has a 4-year useful life, and would require an initial outlay of $240,000. The machine would be depreciated to a zero book value over 4 years on a straight-line basis, so depreciation would be $60,000 per year. The machine would generate an incremental increase in operating income of $100,000 per year in real terms before taxes, and the relevant tax rate is 40%. Inflation (i) is expected to be 8% per year, and the project's required return in real terms would be r_r = 10%. What is the net present value of this machine?

-$17,505

$13,762

-$22,944

$26,269

RELO Manufacturing has a machine replacement decision. RELO will buy one of two machines, which will be replaced at the end of its life. Both machines cost $1,800. Machine A has a 4-year life, a salvage value of $800, and expenses of $525 per year and will be depreciated down to $800. Machine B has a 5-year life, a salvage value of $300, and expenses of $500 per year. Machine B will be depreciated down to a book value of $300. Assume conditions of straight-line depreciation to the salvage value, a tax rate of 35%, and a discount rate of 18%. Which machine should RELO choose and why?

Machine A because it has a lower present value of total costs

Machine B because it has a lower present value of total costs

Machine A because it has a lower EAC

Machine B because it has a lower EAC

Topperton Company has developed a new industrial product. An outlay of $8 million is required for equipment to produce the new product, and additional net working capital of $400,000 is required to support production and marketing. In addition, a one-time $400,000 (before-tax) expense will be incurred the year that the equipment is placed into service. The equipment will be depreciated on a straight-line basis to a zero book value over 6 years. Although the depreciable life is 6 years, the project is expected to have a productive life of 8 years, and it is estimated that the equipment can be sold for $1 million at that time. Revenues minus expenses are expected to be $3 million per year. The cost of capital for this project is 14%, and the relevant tax rate is 30%. What is the NPV of the new product?

$2,956,923

$3,326,891

$3,002,696

None of these

You are 40 now and at age 60 you wish to buy a 20 year annuity that makes monthly payments of $3,500 which earns a rate of 1% per

month.

a. You have $15,000 to invest now to save up and buy that annuity. Would annual interest rate would you need to earn to achieve

your goal?

b.How many periods will it take money to double at rate of 10% per period (rounded to the nearest period)?

Consider a T-Bill with a rate of return of 2% and the following risky secuirties:

Security A: E(r) = .14 Variance = .07

Security B: E(r) = .11 Variance = .05

Security C: E(r) = .09 Variance = .02

Security D: E(r) = .13 Variance = .06

The investors must develop a complete portfolio by combing the risk-free asset with one of the securities mentioned above. The security the investor should chose as part of his complete portfolio to achieve the best CAL would

a) Security A

b) Security B

c) Security C

d) Security D

Over the past 5 years Truman Incorporated has been maintaining its total debt ratio in the range of 60%-70%. (Support your answers with a framework of any capital structure theories we discussed in class):

a) Give at least three reasons why Truman might be using debt financing, instead of using equity financing only?

b) Truman Inc. has been maintaining debt levels in a range of 60%-70% over the past 5 years. Why is Truman not using equity only? Alternatively, why does not Truman increase its leverage beyond 70%, for example?

c) As an external consultant to Truman – what would you recommend to Truman’s CEO as “best practices” in their project financing needs for the next 4-5 years? (You may bullet-point you suggestions/ideas. List at least 5 suggestions).

in 300 words, Consider this statement. Government should implement a policy that sees the tax levied on smokeable forms of cannabis be priced higher/taxed heavier than edibles or other non-smokeable forms. is this a reasonable policy? Why or why not?

A stock pays an annual dividend of $8.4 in one year time. The dividend is expected to increase by 7% per year (roughly the inflation rate) forever. The price of the stock is $73 per share. At what cost of capital is this stock priced?

Select one:

a. The cost of capital is 18.51%

b. The cost of capital is 19.51%

c. The cost of capital is 17.51%

d. The cost of capital is 19.01%

You are the CFO of an all-equity financed firm. Now, you are evaluating a capital restructuring plan to issue some debt and use the proceeds to repurchase some shares. How will the earnings per share (EPS) change with respective to the leverage change? In what circumstances, increasing leverage will be beneficial for shareholders? In what circumstances, increasing leverage will hurt shareholders?

Consider the information below which shows the rates at which firm X and firm Y are able to borrow in the fixed- and variable-rate debt markets. Prepare a fully labelled diagram to show the construction and cash flows of the direct interest rate swap. In your diagram, show which firm will initially borrow fixed-rate debt and which firm will borrow variable-rate debt. Assume the comparative advantage net differential is to be shared equally between the companies.

This will be a direct swap without an intermediary.

LIBOR rate 1.90800%

Assume a barley producer wishes to develop a hedging strategy for the sale of 100,000 tonnes of Eastern Australian Feed Barley. Using current information about future prices from the ASX explain some of the strategies available to the producer and how the use of futures can mitigate against risk.

Current spot price $358

Futures price $292 JAN 20

$296 March 2020

Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these:

1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend.

2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3.

3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3.

4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year.

5. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company’s line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $3,500,000. This line of credit is the company’s only interest-bearing debt.

6. Based on her discussions with management the advertising and sales commission percentages are expected to stay the same. Based on her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years.

Comparative income statement information for Uden Supply Company is presented in the below table.

UDEN SUPPLY COMPANY

Comparative Income Statements

Years Ended December 20X1, 20X2, and 20X3

(Thousands)

20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected

Sales 12,300 13,100 13,900

Cost of goods sold 8,490 9,050 9,620

Gross profit 3,810 4,050 4,280

Sales commissions 860 920 970

Advertising 246 260 280

Salaries 1,121 1,154 1,187

Payroll taxes 196 201 206

Employee benefits 179 184 189

Rent 72 75 78

Depreciation 72 75 78

Supplies 38 41 44

Utilities 33 36 39

Legal and Accounting 46 49 52

Miscellaneous 24 27 30

Interest Expense 354 372 384

Net income before taxes 569 656 743

Income taxes 128 148 167

Net income 441 508 576

Required:

b. Determine the expected amounts for 20X4 for each of the income statement items. (Round gross profit ratio and income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other intermediate computations to the nearest whole value. Enter your answers in thousands.)

c. Uden’s unaudited financial statements for the current year show a 30.79 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. (Enter your answers in thousands.)

Find the present value of an annuity due that pays $3000 at the beginning of each quarter for the next 9 years. Assume that money is worth 6.6%, compounded quarterly. (Round your answer to the nearest cent.)