General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation).

a. Compute the mean, standard deviation, and coefficient of variation for both investments. (Do not round intermediate calculations. Enter your answers in millions. Round "Coefficient of variation" to 3 decimal places and "Standard deviation" to 2 decimal places.)
  

b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?
  

• Merger A

• Merger B

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $920,000, and it would cost another $20,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $500,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $304,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 25%.

1. What is the Year-0 cash flow?

   Book Answer −$955,500.

2. What are the cash flows in Years 1, 2, and 3?

   Book Answer $306,326, $332,458, $262,804.

3. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?

   Book Answer 407,759.50.

4. If the project’s cost of capital is 12%, what is the NPV?

Book answer is NPV = $60,331; Purchase.

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.9 million in annual pretax cost savings. The system costs $7.7 million and will be depreciated straight-line to zero over 5 years. Wildcat's tax rate is 21 percent, and the firm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.76 million per year. Lambert's policy is to require its lessees to make payments at the start of the year. a. What is the NAL for Wildcat? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum lease payment that would be acceptable to the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $6,500,000 and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,910,000 per year for four years. The tax rate is 25 percent. You can borrow at 7 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Problem 12-21 Firm Valuation

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 6 percent. The company’s market capitalization is $440 million, and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 4 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding, and the tax rate for both companies is 30 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe’s? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price           $

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8.

b. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price           $

1. What is a call option? Pick a specific call option on IBM from the link above and detail how you could make money if the value of IBM stock increased. Use specific numbers. What would happen to your investment if the price of IBM fell?

Differentiate between net cash flow and accounting profit. A firm has net income of $5 million. Assuming that depreciation of $1 million is its only noncash expense, what is the firm’s net cash flow?

A project has annual cash flows of $4,000 for the next 10 years and then $10,000 each year for the following 10 years. The IRR of this 20-year project is 11.63%. If the firm's WACC is 11%, what is the project's NPV?

Also, please show steps as to how to compute this problem using the BA II Plus financial calculator. Thank you!

Organizations often face the "build it or buy it" decision: whether to expand "organically," or to expand through some form of business combination such as mergers or acquisitions, joint ventures, licensing, franchising (a form of licensing), or contractual, strategic alliances.

Discuss the key advantages and disadvantages of organic expansion and each of the listed forms of business combination for an international expansion. Support your views with relevant examples.

Innovantec Inc. is a B2C payment services company that is seeking to acquire biometric security device manufacturing equipment, and wishes to conduct a capital budgeting analysis. The equipment costs $245,000 and will last five (5) years before it must be replaced. The 5 year project is expected to produce after-tax cash flows of $70,000 in the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $110,000. In addition, salvage value of the equipment will net the firm $15,000 in additional cash at the end of five years, making the total cash flow in year 5 of $125,000. Projects must pay back within 4 years.

Required: Answer the following, including variables and calculations to show your work.

(a)   Does the payback period for the proposed investment support acceptance?

(b)   If the required return is 15%, is the project's discounted payback period favorable?

(c)   Assuming the required return is 15%, is the project's net present value favorable? (1 mark)

(d)   If the required rate of return is 25% does the IRR support acceptance of the investment? (1 mark)

(e)   Does the project's profitability index support proceeding if the required return is 15%?

KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciation; they total $50,000. The machine has an expected life of three years and a $75,000 estimated resale value. Revenue from the new game is expected to be $600,000 per year, with fixed costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

FCF for year 0

Year 1

Year 2

Year 3

what would be the optimal asset allocation? What is the expected return on the portfolio?

Greta, an elderly investor, has a degree of risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 5.2% per year, with a SD of 20.2%. The hedge fund risk premium is estimated at 10.2% with a SD of 35.2%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim.

a-1. Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

a-2. What is the expected return on the portfolio? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)