Your firm is considering a project that costs $67,277. This opportunity will provide cash flows of $20,706, $24,210, $20,287, and $24,022 over the next four years. Your firm has a required rate of return of 14%.

What is the project's npv?

You purchase 43 shares of General Motors stock at $35.9 per share. Additionally, you purchase 23 shares of Ford for $112.5 and 48 shares of Fiat for $131.8 each. What is your portfolio weight for GM?

(Enter your response as a percentage with two decimal places, ex: 12.34)

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,230,000 million. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 34 percent. You would like an option to sell the land in the next 12 months for $1,380,000. The risk-free rate of interest is 5 percent per year, compounded continuously.

What is the price of the put option necessary to guarantee your sales price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price of put option $

Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 that matures in one year. The current market value of the firm’s assets is $27,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,300, and Project B has an NPV of $3,100. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 48 percent per year. If Project B is taken, the standard deviation will fall to 29 percent per year.

a-1. What is the value of the firm’s equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Market value Equity $ Debt $

a-2. What is the value of the firm’s equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Market value Equity $ Debt $

b. Which project would the stockholders prefer? Project B Project A

c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)? Yes No

Projected sales for 2015 are 8,932. Determine the variable and fixed cost components of COGS and then project the gross profit for 2015.

a. 2,754

b. 2,831

c. 2,928

d. 2,864

One year ago your company purchased a machine for $110,000. You have learned that a new, much better machine is available for $150,000--it will be depreciated on a straight line basis and has no salvage value. You expect the machine to produce $60,000 per year in revenue and cost $20,000 per year to operate for the next ten years. The current machine is expected to produce $40,000 per year in revenue and also costs $20,000 per year to operate. The current machine’s depreciation expense is $10,000 per year for the next 10 years, after which it will be discarded. It will have no salvage value. The market value of the current machine today is $50,000. Your company’s tax rate is 45% and the opportunity cost of capital is 10%. Should your company replace its year-old machine?

PLEASE SHOW ALL WORK

Given that the risk-free rate is 5%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market portfolio is 20%, answer the following questions:

a. You have $100,000 to invest. How should you allocate your wealth between the risk free asset and the market portfolio in order to have a 15% expected return?

b. What is the standard deviation of your portfolio in (a)?

c. Now suppose that you want to have a portfolio, which pays 25% expected return. What is the weight in the risk free asset and in the market portfolio?

d. What do these weights mean: What are you doing with the risk free asset and what are you doing with the market portfolio?

e. What is the standard deviation of the portfolio in c?

f. What is your conclusion about the effect of leverage on the risk of the portfolio?

A stock is currently priced at $60. The stock will either increase or decrease by 10 percent over the next year. There is a call option on the stock with a strike price of $55 and one year until expiration.

If the risk-free rate is 3 percent, what is the risk-neutral value of the call option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Call value $

XYZ Inc. is considering producing a new handheld, wireless internet device. Management spent $3.5 million last year on test marketing and has developed the following set of forecasts. Total cash costs (excluding depreciation) of the device will be $30 each, and they will sell them all for $100 each. They can produce and sell 55,000 devices each year for the next five years. XYZ would have to prepare a manufacturing facility and buy necessary equipment, which would cost $10 million to be spent immediately and be depreciable over 10 years using straight-line depreciation. They would have to invest $2.5 million in inventory beginning today, and this amount would not change over the life of the project. In 5 years, they will quit, dispose of the plant for $1.5 million, and recover working capital. The tax rate is 40%, the firm uses stock financing, and stockholders require a 15% return. Should XYZ accept the project? Show any needed calculations and justify the answer.

Consider the following mutually exclusive investments T=0, 1, 2 Investment A: -200, 40, 210 Investment B: -200, 170, 70

a. Find IRRs for both projects

b. “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph.

c. Solve for the crossover rate

d. Please describe as fully as possible which project is the best and under which circumstances.

Your task is to analyse a cost cutting project, where a new and more efficient machinery is installed. You have the following data:

• Cost of a new machinery: $250,000
• Decrease in the working capital requirement: $25,000 (reversed at the end of project)
• Annual (before tax and depreciation) cash savings from the improved efficiency: $60,000
• Lifespan of a new machine: 5 years
• Corporate marginal tax rate: 35%
• Depreciation: straight-line to zero book value in 5 years.
• Market value of the machinery in 5 years: 20,000
• Cost of capital: 10%

Compute the NPV of this cost cutting project and argue if the company should accept this project or not?

Your task is to find the cost of capital (WACC) for a company. The company has three sources of capital available. The marginal tax rate for the company is 35%.

Common stock: 100 000 shares outstanding with the book value of $20 but currently trading at P/B=2.0. One may apply CAPM to estimate the cost of equity. Inputs for estimations are: risk free rate 2.8%, market risk premium 10.0% and the stock beta is 1.20.

Debt: 2 000 discount bonds with $1 000 par value, with 4 year to maturity. Bonds currently offer 6% yield to bondholders.

Preferred stock: 14 000 shares outstanding with $90 market price and 7% yield.

Find the cost of each financing source, capital structure weights for each source and the WACC.

Linda Jones is deciding between two investment projects.

Choice 1 Linda can invest into a young biotech firm. She expects that she will need to pay this firm $35,000 at the end of each year for the next two years. After that, she expects to receive back from the firm $90,000 at the end of each year for 18 years.

Choice 2 Linda can invest $200,000 today into an AI firm. She expects to be paid $42,000 at the end of the year, and expects cash flows from the AI firm to increase by 5% every year, paid at the end of each year in perpetuity

a. “Draw” timelines (tables), showing cash flows of each investment.

b. Suppose Linda’s discount rate is 12%. Which project should she choose?

c. At which discount rate would Linda be indifferent between her two choices?