Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 35 percent debt. There are currently 10,560 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $60,696. The interest rate on new debt is 5 percent and there are no taxes.

Your father has just retired and does not know what to do with his retirement bonus. One of his friends told him that bonds might be a good option to invest since they are less risky. His friend suggest your father two bonds, however he cannot choose one to invest in. Thus, he asks your opinion.

Bond 1: Issued by U.S. Treasury today. It is a zero coupon Treasury Bill, one year to maturity and 10,000 par value. The yield to maturity on this bill is 7%.

Bond 2: Issued by Galveston Galleries Inc. The 30 year bond was issued ten years ago at a face value of $1,000, paying a coupon rate of 8%. It is paying semi-annual coupon payments. The bonds of companies that were similar to Galveston at the time its bond was issued are now yielding 10%.

a)Calculate the price of Bond 1.
b)CalculatethepriceofBond2.
c) If Bond 1 is selling for $9,000 and Bond 2 is selling for $950 today then decidewhich one your father should choose to invest. Briefly discuss your answer.
d) Assume that one year passed and the yield to maturity for Bond 2 becomes 9%calculate the new price of Bond 2.

e) If your father buys Bond 2 from the price you calculated in part (b) and sells it a year later from the price you calculated in part (d) then calculate the coupon yield and capital gains yield.
f) Assume your father did not sell Bond 2 and hold it one more year so another year passes and the price of Bond 2 becomes $1,101.45. Calculate yield to maturity on this bond. Please make only two iterations. Where you start and in which direction you change the yield to maturity in the second iteration are important for getting full credit on this question.
g) Assume your father bought Bond 2 two years ago and still holds it. Today he reads an article on the newspaper and learns that the credit rating of Galveston Galleries Inc. has decreased from AAA to AA. Briefly discuss how this information will affect the yield to maturity and price of Bond 2.

Explain in a few lines why diversifiable risk cannot be remunerated on markets in equilibrium?

A shareholder requires a rate of return that is twice as high on a share with a β coefficient that is twice as high as an other share. True or false(Explain)

What does a low-risk premium indicates?

Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $585,846 is estimated to result in $250,457 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $139,172. The press also requires an initial investment in spare parts inventory of $62,850, along with an additional $11,981 in inventory for each succeeding year of the project. If the shop's tax rate is 0.23 and its discount rate is 0.1, what is the total cash flow in year 4? (Do not round your intermediate calculations.)

(Make sure you enter the number with the appropriate +/- sign)

What is the Net Present Value (NPV) and Internal Rate of Return (IRR) of spending $120,000 today on law school assuming you made $50,000/year before going to law school and $55,000/year for the next 35 years after law school? Assume you could invest this money elsewhere and earn 13%? with financial calculator

answer NPV = ($82,072.14); IRR = 2.26%

Given the two projects with given cash flows, the NPV of project A is how many more (or less) dollars than project B if the discount rate is 9%?

Answer with two decimals.

Project A    Project B

CF0: -13,773    -10,543

CF1: 3,480    1,723

CF2: 4,302    2,290

CF3: 9,768    4,794

CF4: 8,914    7,550

CF5: 2,684 12,530

why isn't the total risk of a portfolio simply equal to the weighted average of the risks of the securities in the portfolio

Option #1: Exotic Foods, Inc., Capital Budgeting Case

Exotic Food Inc., a food processing company located in Herndon, VA, is considering adding a new division to produce fresh ginger juice. Following the ongoing TV buzz about significant health benefits derived from ginger consumption, the managers believe this drink will be a hit. However, the CEO questions the profitability of the venture given the high costs involved. To address his concerns, you have been asked to evaluate the project using three capital budgeting techniques (i.e., NPV, IRR and Payback) and present your findings in a report.

CASE OVERVIEW

The main equipment required is a commercial food processor which costs $200,000. The shipping and installation cost of the processor from China is $50,000. The processor will be depreciated under the MACRS system using the applicable depreciation rates are 33%, 45%, 15%, and 7% respectively. Production is estimated to last for three years, and the company will exit the market before intense competition sets in and erodes profits. The market value of the processor is expected to be $100,000 after three years. Net working capital of $2,000 is required at the start, which will be recovered at the end of the project. The juice will be packaged in 20 oz. containers that sell for $3.00 each. The company expects to sell 150,000 units per year; cost of goods sold is expected to total 70% of dollar sales.

Weighted Average Cost of Capital (WACC):

Exotic Food’s common stock is currently listed at $75 per share; new preferred stock sells for $80 per share and pays a dividend of $5.00. Last year, the company paid dividends of $2.00 per share for common stock, which is expected to grow at a constant rate of 10%. The local bank is willing to finance the project at 10.5% annual interest. The company’s marginal tax rate is 35%, and the optimum target capital structure is:

Your main task is to compute and evaluate the cash flows using capital budgeting techniques, analyze the results, and present your recommendations whether the company should take on the project.

QUESTIONS

To help in the analysis, answer all the following questions. Present the analysis in one Excel file with the data, computations, formulas, and solutions. It is preferred that the Excel file be embedded inside the WORD document (question 8).

1. What is the total investment amount at the start of the project (i.e., year zero cash flow)?
2. What is the depreciation amount for each year?
   • Create a depreciation schedule
3. What is the after-tax salvage value of the equipment?
4. What is the projected net income and Operating Cash Flows (OCF) for the three years?
   • Complete an income statement for each year.
5. What are the Free Cash Flows (FCF) generated from the project?
   • Create a projected cash flow schedule
6. What is the Weighted Average Cost of Capital (WACC)?
   • Compute the after-tax cost of debt
   • Compute the cost of common equity
   • Compute the cost of preferred stock
   • Compute the Weighted Average Cost of Capital (WACC)
7. Using a WACC of 15%, apply four capital budgeting techniques to evaluate the project, assuming the Free Cash Flows are as follows:

   Years	Free Cash Flows
   0	($252,000.00)
   1	$118,625.00
   2	$127,125.00
   3	$181,000.00

   
   The four techniques are NPV, IRR, MIRR, and discounted Payback. Assume the reinvestment rate to be 8% for the MIRR. Also, assume that the business will only accept projects with a payback period of two and half years or less.
8. Which of the four techniques should be selected and why?

(Show step by step answers )

(TCO H) Regulation of the securities markets was discussed in Chapter 3. With respect to regulation of brokers and investment advisors, the Security and Exchange Commission has a rule about what constitutes the "suitability" of an investment for an investor. There is also another standard of "fiduciary" care.

Based on your reading and online research, describe these two standards of care? What is the difference?

The foreign exchange market performs THREE (3) important functions. Critically explain.

Banks differ from other financial institutions which makes them special. Explain FIVE
(5) basic type of services offered by a bank.

A key part of the lending process involves the 6Cs of credit. While the use of credit scoring models is growing in importance, many loans must be evaluated using the traditional method, 6Cs. Critically explain them.