Students must analyze a capital project based on the criteria below and determine whether to undertake the project.

You are evaluating a project based on the following:

Initial Investment:     $1,250,000                                

Cash Flows:              $275,000 per year for 5 years (end of year)

Required Return: 10%

Required Payback: 5 Years

1.    Would you accept or reject the project based on the Net Present Value (NPV)?

2.    Would you accept or reject the project based on the Payback Period?

3.    Would you accept or reject the project based on the Discounted Payback Period?

4.    Based on your answers to Questions 1-3, would you accept or reject the project? Why?

Answer questions and include all work on the submission.

You are thinking to buy some convertible notes or bonds for Marty’s fixed income portfolio. You recall that we discussed Tesla’s recent issue of 2% convertible notes due May 15, 2024. Each $1000 note is convertible into 3.2276 common shares, equal to an initial conversion price of $309.83 per share, and the notes are non-callable. For a while following the issue, Tesla shares were trading below $200 a share, but as of last Friday Dec 13 they were up to $358.39. Demand for the convertible notes has been brisk, and as of Friday, the notes traded at 134.605 % of par.

At that price, what is the premium over conversion value for each note?

Similar maturity non-convertible notes issued by Tesla are yielding 5.3%. At that yield, what is the straight investment value of the notes? What is the current premium over investment value for each note?

Should we purchase the Tesla convertible notes for Marty’s portfolio? Why or why not?

A stock is currently priced at $77.00. The risk free rate is 3.2% per annum with continuous compounding.

Use a one-time step Cox-Ross-Rubenstein model for the price of the stock in 15 months assuming the stock has annual volatility of 19.4%. Compute the price of a 15 month call option on the stock with strike $81.00.

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $12.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.14 million per year and increased operating costs of $688,290.00 per year. Caspian Sea Drinks' marginal tax rate is 24.00%. The internal rate of return for the RGM-7000 is _____.

Round to 4 decimal places, % sign required

Which of the following strategies can be implemented in falling interest rate environment to hedge the interest rate risk (select as many as applicable)? Please explain your logic in a concise way.
1. Buy short-term and long-term bonds
2. Sell long term bonds and buy short term
3. Buy long term bonds and sell short term
4. Sell a fixed coupon bond and enter a swap receiver position
5. Buy a fixed coupon bond and enter a swap payer position
6. Buy the corporate bond and sell the matching maturity government bond
7. Buy a CDS
8. Sell a CDS
9. Receive a total return swap
10. Pay a total return swap

Ann wants to buy an office building which costs $1,000,000. She obtains a 30 year fully amortizing fixed rate mortgage with 80% LTV, an annual interest rate of 4%, with monthly compounding and monthly payments. The mortgage has a 2% prepayment penalty if the borrower prepays in the first 5 years. Suppose Ann makes the required monthly payment for 3 years and prepays after her final monthly payment at the end of 3 years. What is the annualized IRR on Ann s mortgage

A) Sydney wants to establish a savings. plan that will accomplish two tasks. First, he would like to purchase a new car at the end of five years from now for $30,000. Second, he would like to retire at the end of 15 years from now with enough money to provide him with a pretax income of $40,000 per year for ten years after retirement. Sydney can save $8,000 per year for the first five years. How much would he have to invest (supposing interest rates remain at 10% per year over the entire time period above) each year from years 6 through 15 to accomplish his goals?

B) Impossible Inc. has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend t6 be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year (in which dividends are $3 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 6 percent. If the firm's investors expect to earn a return of 14 percent on this stock, what must be its price today?

In October of 2013, Jacob Industries borrowed funds by selling bonds with a $1,000 face value. At issue, the bonds had 10 years to maturity, and bore a coupon rate of 16%, paid semiannually. At the time, the yield to maturity of the bonds was 14%. In October of 2017, interest rates had fallen and the yield on bonds of the same level of risk as those of Jacob Industries had dropped to 12%. If you could sell the bonds in October of 2017, what would each be worth?

Recall that the monthly payment (PMT) is constant for a fully amortizing residential mortgage. If BAL denotes the original loan balance, N denotes the number of years, and Y is the (annual) interest rate, then PMT can be obtained by solving the equation:

BAL = PMT/(1+Y/12) + PMT/(1+Y/12)² + PMT/(1+Y/12)³ + PMT/(1+Y/12)^12N

[1] Can you give a brief explanation of this equation?

It’s a straight present value calculation. It says that when the lender loans out BAL and receives the payment stream PMT (each month) then the lender’s yield equals Y.

[2] Can you sum the geometric series to get a more compact expression?

Question 5

(a)











(b)



TLT company has $720 million in common stock outstanding. Its cost of equity is 12%. Moreover, TLT has $360 million in 6% coupon rate bonds outstanding. The bond is currently sold at par. There are no taxes in the country in which TLT company operates.

i. Calculate the weighted average cost of capital (WACC) of TLT.

ii. TLT has decided to issue $180 million in common stock and use the proceeds to buy back its bonds. According to the Modigliani & Miller (M&M) propositions, what are the TLT’s new WACC and new cost of equity?

Critically discuss the importance of dividend clientele effect to the firm value. (word limit: 150 words)

ROST Corporation is a manufacturer of a variety of kitchen utensils. In order to improve the
quality of existing products, the production manager of the company proposes to replace a
machine used in the molding process. As a financial manager of the company, you are
responsible for assessing the feasibility of this project. After a preliminary study, it is
estimated that the new project will generate additional sales revenue of $310,200 in each of
the next four years. It is known that the company faces a marginal tax of 26% and wants a
17% required rate of return. In addition, the company employs the straight-line method to
compute its depreciation. To finance the project, the company would have to borrow
$1,200,000 at 10% interest from its bank. Other findings of the study are presented as
follows:
Old Machine New Machine
Initial purchase price $1,120,000 $960,000
Tax life 20 years 4 years
Age 16 years 0 years
Expected salvage value $0 $0
Current market value $224,000 N.A.
Annual cash expense $360,000 $380,000
(a)
(b)
(c)
Determine the annual after-tax cash flows associated with this project.
Determine whether you would accept or reject the project if the net present
value rule is used.
Without doing any calculation, how would you reply to your boss if he told you
to evaluate this project by the internal rate of return rule rather than the net
present value rule? (word limit: 150 words)

(a)
(b)
TLT company has $720 million in common stock outstanding. Its cost of
equity is 12%. Moreover, TLT has $360 million in 6% coupon rate bonds
outstanding. The bond is currently sold at par. There are no taxes in the
country in which TLT company operates.
i. Calculate the weighted average cost of capital (WACC) of TLT.
ii. TLT has decided to issue $180 million in common stock and use the
proceeds to buy back its bonds. According to the Modigliani & Miller
(M&M) propositions, what are the TLT’s new WACC and new cost of
equity?
Critically discuss the importance of dividend clientele effect to the firm
value. (word limit: 150 words)

Question 4

ROST Corporation is a manufacturer of a variety of kitchen utensils. In order to improve the quality of existing products, the production manager of the company proposes to replace a machine used in the molding process. As a financial manager of the company, you are responsible for assessing the feasibility of this project. After a preliminary study, it is estimated that the new project will generate additional sales revenue of $310,200 in each of the next four years. It is known that the company faces a marginal tax of 26% and wants a 17% required rate of return. In addition, the company employs the straight-line method to compute its depreciation. To finance the project, the company would have to borrow $1,200,000 at 10% interest from its bank. Other findings of the study are presented as follows:

Old Machine New Machine Initial purchase price $1,120,000 $960,000 Tax life 20 years 4 years Age 16 years 0 years Expected salvage value $0 $0 Current market value $224,000 N.A. Annual cash expense $360,000 $380,000 (a)

(b)


(c)








Determine the annual after-tax cash flows associated with this project.

Determine whether you would accept or reject the project if the net present value rule is used.

Without doing any calculation, how would you reply to your boss if he told you to evaluate this project by the internal rate of return rule rather than the net present value rule? (word limit: 150 words)

"Ann wants to buy an office building which costs $1,000,000. She obtains a 30 year fully amortizing fixed rate mortgage with 80% LTV, an annual interest rate of 4%, with monthly compounding and monthly payments. The mortgage has a 2% prepayment penalty if the borrower prepays in the first 5 years. Suppose Ann makes the required monthly payment for 3 years and prepays after her final monthly payment at the end of 3 years. What is the annualized IRR on Ann s mortgage? "  

Kenny is planning for retirement in 20 years. Currently, he has $300,000 in a savings account
and $600,000 in a mutual fund. Moreover, he plans to add to his savings by depositing $3,000
per month in his savings account at the beginning of each month for the next twenty years
until retirement. The savings account will return 5% APR compounded monthly and the
investment in the mutual fund will return 8% compounded annually.
(a) How much money will Kenny have at retirement 20 years later?
(b)Kenny expects to live for 20 years after he retires and at retirement he will
deposit all of his savings in a bank account paying 2% APR compounded
monthly. If he wants to withdraw an equal sum of money at the end of
each month from the bank account for financing his daily expenses after
retirement, how much can he withdraw each time?
(c)If the yield to maturity of a bond is higher than its coupon rate, the par
value of the bond should be higher than its price, resulting in a discount
bond. Conversely, if the yield to maturity of a bond is lower than its
coupon rate, the par value of the bond should be lower than its price,
resulting in a premium bond. Critically discuss this phenomenon. (word
limit: 150 words)

After attending a seminar about corporate social responsibility (CSR), John advised Mary to
focus her investment on those companies with CSR plans. However, Mary argued with John
that maximizing shareholders’ wealth is the only goal of financial management, not CSR. Do
you agree with Mary’s viewpoint? Think of some specific scenarios to illustrate your
arguments and justify your stance. (word limit: 300 words)