A bicycle manufacturer currently produces 221 comma 000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ 1.90 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct​ in-house production costs are estimated to be only $ 1.40 per chain. The necessary machinery would cost $ 291 comma 000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a​ ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $ 44 comma 000 of inventory and other working capital upfront​ (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $ 21 comma 825. If the company pays tax at a rate of 20 % and the opportunity cost of capital is 15 %​, what is the net present value of the decision to produce the chains​ in-house instead of purchasing them from the​ supplier?

The annual free cash flows for years 1 to 10 of buying the chains is?

The NPV of buying the chains from the FCF is?

The initial FCF of producing the chains is?

The FCF in years 1 through 9 of producing the chains is

​The FCF in year 10 of producing the chains is

The NPV of producing the chains from the FCF is

The net present value of producing the chains​ in-house instead of purchasing them from the supplier is

December 31, 2015, Martin Corp invested in Marlin’s 5-year, $200,000 bond with a 5% interest rate for $191,575. The bond pays semiannual interest on June 30^th and December 31^st. The fair values of the bonds at the end of 2016~2018 are $194,500, $194,200, and $195,750. Martin sold its investment in Marlin’s bond on July 1, 2019 at 98 ½ (i.e. selling price is = 98.5% of the face value). Please answer all following questions using Excel Template.

1. What is the market interest rate for Marlin’s bond?

4.13

2. Consider the impact on the market for U.S. Treasury bonds when there are unusually high returns in the U.S. stock market. What changes in the market for U.S. Treasury bonds? What happens to the equilibrium, price, quantity, and interest rate on U.S. Treasury bonds? **Select ALL that apply. **

1. ___ Demand for U.S. Treasury bonds rises
2. ___ Demand for U.S. Treasury bonds falls
3. ___ Demand for U.S. Treasury bonds does not change
4. ___ quantity increases
5. ___ quantity decreases
6. ___ Supply of U.S. Treasury bonds rises
7. ___ Supply of U.S. Treasury bonds falls
8. ___ Supply of U.S Treasury bonds does not change
1. ___ price increases
10. ___ price decreases
11. ___ interest rate increases
50. ___ interest rate decreases

As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 25% versus a project required return of 11%.

The loom has an invoice price of $270,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 9% interest rate, with payments to be made at year-end. In the event the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $19,000 per year paid at year-end. The loom falls in the MACRS 5-year class, and Tanner-Woods's marginal federal-plus-state tax rate is 35%. The applicable MACRS rates are 20%, 33%, 19%, 16%, 13%, and 5%.

United Automation Inc., maker of the loom, has offered to lease the loom to Tanner-Woods for $70,000 upon delivery and installation (at t = 0) plus 4 additional annual lease payments of $70,000 to be made at the end of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance servicing. Actually, the loom has an expected life of 10 years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $46,000. Tanner-Woods plans to build an entirely new plant in 4 years, so it has no interest in leasing or owning the proposed loom for more than that period. Round your answers to the nearest dollar.

1. Should the loom be leased or purchased?

   PV cost of owning at 5.85% is $ .

   PV cost of leasing at 5.85% is $ .

   Tanner-Woods Textile should -Select-purchaseleaseItem 3 the loom.

2. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pretax discount rate is 14%. What would be the effect of a salvage value risk adjustment on the decision? Round your answer to the nearest dollar.

   NPV is $ .

   The firm should -Select-purchaseleaseItem 5 the loom.

3. The original analysis assumed that Tanner-Woods would not need the loom after 4 years. Now assume that the firm will continue to use the loom after the lease expires. Thus, if it leased, Tanner-Woods would have to buy the asset after 4 years at the then existing market value, which is assumed to equal the book value. What effect would this requirement have on the basic analysis? (No numerical analysis is required; just verbalize.)

   The firm would choose to -Select-own or lease Item 6 as the net advantage.

   Explain.

Spoofer National Bank has created an instrument called a “market participation CD” (MPCD). The CD will mature in one year and at that time will pay either $50 or the value of one share of Megatronics stock, whichever is greater. However, in the fine print of the contract, it specifies that the payoff will never exceed $55, even if the stock price is above that amount. Thus the payoff for the market participation CD is:

State of market:        MPCD pays:

S₁< 50                       50

50 < S₁< 55               S₁

55 < S₁                         55

a. Diagram the payoff function for the MPCD. Be sure to label the critical values on the diagram including: maximum payoff, minimum payout, and the location of any “kinks” in the diagram.

b. Your boss at Spoofer NB has asked you to construct a portfolio that will provide the bank with exactly the amount needed to cover the payments it will be required to make on one MPCD in every state of the market. What instruments would you use to construct the portfolio? Please specify i) the type of instrument ii) including relevant parameters such as strike price, face value, etc., and iii) type of position (long or short).

c. Based on your answer to b, what is the fair marketvalue of an MPCD?

Chapter 11 Sunland, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $32,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Sunland will recover these changes in working capital at the end of the project 13 years later. Assume the appropriate discount rate is 8 percent. What are the present values of the relevant investment cash flows? (Do not round intermediate calculations. Round answer to 2 decimal places, e.g. 15.25.) Present value $enter the Present value in dollars rounded to 2 decimal places

If we add more factors into the one-factor asset pricing model, what happens to the required returns, increase or decrease? If the expected future cash flows of the financial securities remain the same, will that increase or decrease the current market price? Why?

Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12 megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000, payable in three months (90 days). Larkin derived its price quote of €4,000,000 by dividing its normal U.S. dollar sales price of $4.320,000 by the then current spot rate of $1.0800/€.

Four approaches are possible:

1. Hedge in the forward market. The 3-month forward exchange quote was $1.1060/€.

2. Hedge in the money market. Larkin could borrow euros in the Libor market at 8% per annum and invest in € at 5% p.a. In

the USD Libor market the firm can borrow at 7% p.a. and invest at 4% p.a.

3. Hedge with foreign currency options. August put options were available at strike price of $1.1000/€ for a premium of 2.0%

per contract. August call options with a strike at $1.1000/€ could be purchased for a premium of 3.0%.

4. Do nothing. Larkin could wait until the sales proceeds were received in August and sell the euros received for dollars in the

spot market.

Larkin’s banker forecasts that the exchange rate in 90 days will be $1.1400/€.

What should Larkin do?

I have been able to determine a. but am stuck on b. and c. for this question...

If Wild Widgets, Inc., were an all-equity company, it would have a beta of 0.9. The company has a target debt–equity ratio of .4. The expected return on the market portfolio is 12 percent, and Treasury bills currently yield 4.1 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 7.2 percent. The bond currently sells for $1,090. The corporate tax rate is 35 percent.

a. What is the company’s cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt__ 6.39% __

b. What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity ____% _

c. What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC____ %_

Please provide details for how to solve b and c if at all possible.

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dantzler's WACC is 11%.

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
   $   million
   
2. What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
   $   million
   
3. Suppose Dantzler has $102.10 million of debt and 32 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent.
   $  

SNIDER CORPORATION Balance Sheet December 31, 20X1 Assets Current assets: Cash $ 57,100 Marketable securities 26,100 Accounts receivable (net) 184,000 Inventory 242,000 Total current assets $ 509,200 Investments 64,500 Plant and equipment $689,000 Less: Accumulated depreciation 256,000 Net plant and equipment 433,000 Total assets $ 1,006,700 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 92,700 Notes payable 76,500 Accrued taxes 17,000 Total current liabilities $ 186,200 Long-term liabilities: Bonds payable 151,000 Total liabilities $ 337,200 Stockholders' equity Preferred stock, $50 par value $ 100,000 Common stock, $1 par value 80,000 Capital paid in excess of par 190,000 Retained earnings 299,500 Total stockholders' equity $ 669,500 Total liabilities and stockholders' equity $ 1,006,700 SNIDER CORPORATION Income Statement For the Year Ending December 31, 20X1 Sales (on credit) $ 2,076,000 Cost of goods sold 1,326,000 Gross profit $ 750,000 Selling and administrative expenses 490,000 * Operating profit (EBIT) $ 260,000 Interest expense 31,800 Earnings before taxes (EBT) $ 228,200 Taxes 84,400 Earnings after taxes (EAT) $ 143,800 *Includes $36,400 in lease payments. Using the above financial statements for the Snider Corporation, calculate the following ratios. a. Profitability ratios. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) b. Assets utilization ratios. (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. Liquidity ratios. (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. Debt utilization ratios. (Do not round intermediate calculations. Input your debt to total assets answer as a percent rounded to 2 decimal places. Round your other answers to 2 decimal places.)