Problem 35. Capital allocation?

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 7.2% per year, with a SD of 22.2%. The hedge fund risk premium is estimated at 12.2% with a SD of 37.2%. 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.

What should be Greta’s capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)

Firms A and B are competitors. Both have similar
assets and business risks and are all-equity firms.
Firm A has aftertax cash flow of $20,000 per year
forever and firm B has aftertax cash flow of $150,000
per year forever. If the two firms merge, the perpetual
aftertax cash flow will be $179,000. If the appropriate
discount rate is 15% what is the MOST B will pay for
A?
A) $9,000
B) $20,000
C) $60,000
D) $133,333
E) $193,333

If anyone want to start a sole proprietorship firm as a Loan Consultant (work from home), what are the problems and solutions? At least 5 problems and their solutions.

You have a portfolio with a standard deviation of 26% and an expected return of 15%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 30% of your money in the new stock and 70% of your money in your existing​ portfolio, which one should you​ add?

Standard deviation of the portfolio with stock A is _%?

Standard deviation of the portfolio with stock B is _%?

Blossom Corporation is financed with debt, preferred equity, and common equity with market values of $22 million, $14 million, and $33 million, respectively. The betas for the debt, preferred stock, and common stock are 0.2, 0.4, and 1.1, respectively. The risk-free rate is 3.99 percent, the market risk premium is 6.07 percent, and Blossom’s average and marginal tax rates are both 30 percent.

What is the company’s cost of capital? (Round intermediate calculation to 4 decimal places, e.g. 1.2512 and final answers to 3 decimal places e.g. 5.215%.)

What is the company’s cost of capital? (Round intermediate calculation to 4 decimal places, e.g. 1.2512 and final answers to 3 decimal places e.g. 5.215%.)

Question 6:

XYZ Construction is considering two projects to develop. The expected cash inflows are

as follows :

                 Project M      Project N

Year 1        10,000        25,000

Year 2        15,000         25,000

Year 3         20,000        25,000

Year 4         25,000        25,000

Year 5         30,000         25,000

Each Project requires an investment of $100,000. A rate of 10% has been selected for the NPV

Analysis.                                                                            

Required:

a) Calculate the NPV and the Profitability Index and suggest which project should be

recommended based on each method.

b) Explain what the key decisions are a Finance Manager has to take in an

Organization with suitable examples.

McCarver Inc. is considering the following mutually exclusive projects:

At what cost of capital will the net present value of the two projects be the same? (That is, what is the "crossover" rate?) (3 points)

What is the present value of a 6-yr annuity with annual payments of $1,012, paid at the beginning of each year, and evaluated at a 10.5 percent interest rate, which is compounded quarterly? Please show financial calculator key strokes.

uno's has projected its Q1 sales at $46,000 and its Q2 sales at $48,000. Purchases equal 71 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 45 days. At the beginning of Q1, the accounts receivable balance is $12,200 and the accounts payable balance is $14,800. The firm pays $1,500 a month in cash expenses and $400 a month in taxes. At the beginning Q1, the cash balance is $280 and the short-term loan balance is zero. The firm maintains a minimum cash balance of $250. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of the Q1, prior to any short-term borrowing?

Multiple Choice

• $8,880

• $8,633

• $9,157

• $9,210

• $9,684

• Sunny Disposition, Inc. has net working capital of $32,500, current assets of $59,000, equity of $74,500, and long-term debt of $42,500. What is the amount of the net fixed assets?

  Multiple Choice

• $84,500

• $94,600

• $111,000

• $58,000

• $63,900

Holiday Tree Farm has a cash balance of $34 and a short-term loan balance of $180 at the beginning of Q1. The net cash inflow for the first quarter is $36 and for the second quarter there is a net cash outflow of $48. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $20. What is the short-term loan balance at the end of Q2?

Multiple Choice

• $184.3

• $193.1

• $128.4

• $138.6

• $179.2

• Which statement is true?

  Multiple Choice

• The number of days in the cash cycle can be positive, negative, or equal to zero.

• Paying a supplier within the discount period rather than waiting until the end of the normal credit period will decrease the cash cycle.

• An increase in the inventory turnover rate must increase the cash cycle.

• The payables period must be shorter than the receivables period.

• A decrease in the accounts receivable turnover rate decreases the cash cycle.

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $4 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%.

Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

= $

Why is this AFN different from the one when the company pays dividends?

A. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

B. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.

C. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.

D. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.

E. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 9% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%.

What is the expected return on equity under each current assets level? Round your answers to two decimal places

Restricted policy= %

Moderate policy= %

Relaxed policy= %

In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?

A. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.

B. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.

C. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.

D. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.

E. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.

How would the firm's risk be affected by the different policies?

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