discuss two sources of systematic risks and two sources of unsystematic risks.

Exercise 7 The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets 2012 Cash and securities $ 1,554.0 Accounts receivable 9,660.0 Inventories 13,440.0 Total current assets $24,654.0 Net plant and equipment 17,346.0 Total assets $42,000.0 Liabilities and Equity Accounts payable $ 7,980.0 Notes payable 5,880.0 Accruals 4,620.0 Total current liabilities $18,480.0 Long-term bonds 10,920.0 Total debt $29,400.0 Common stock 3,360.0 Retained earnings 9,240.0 Total common equity $12,600.0 Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2012 Net sales $58,800.0 Operating costs except depr'n $54,978.0 Depreciation $ 1,029.0 Earnings bef int and taxes (EBIT) $ 2,793.0 Less interest 1,050.0 Earnings before taxes (EBT) $ 1,743.0 Taxes $ 610.1 Net income $ 1,133.0 Other data: Shares outstanding (millions) 175.00 Common dividends $ 509.83 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 35% Year-end stock price $77.69 Required: a. What is the firm's current ratio? b. What is the firm's quick ratio? c. What are the firm’s days sales outstanding? Assume a 360-day year for this calculation. d. What is the firm's total assets turnover? e. What is the firm's inventory turnover ratio? f. What is the firm's ROA? g. What is the firm's ROE? h. What is the firm's net profit margin? i. Analyze the company performance.

Integrative—Investment decision   

Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.27 million and requires installation costs of $159,000.

The existing machine can be sold currently for $177,000 before taxes. It is 2 years​ old, cost $799,000 new, and has a $383,520 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a​ 5-year recovery period and therefore has the final 4 years of depreciation remaining. If it is held for 5 more​ years, the​ machine's market value at the end of year 5 will be $0. Over its​ 5-year life, the new machine should reduce operating costs by $359,000 per year. The new machine will be depreciated under MACRS using a​ 5-year recovery period. The new machine can be sold for $193,000 net of removal and cleanup costs at the end of 5 years. An increased investment in net working capital of $25,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 9.2% cost of capital and is subject to a 40% tax rate.

a. Develop the net cash flows needed to analyze the proposed replacement.

b. Determine the net present value​ (NPV) of the proposal.

c. Determine the internal rate of return​ (IRR) of the proposal.

d. Make a recommendation to accept or reject the replacement​ proposal, and justify your answer.

e. What is the highest cost of capital that the firm could have and still accept the​ proposal?

Cory and Tisha have a total household gross monthly income of $7,000 and monthly debt repayment of $911, what is the maximum mortgage loan amount for which Cory and Tish could qualify? Monthly real estate tax and homeowner’s insurance together are estimated to be $170 per month. Use 4 percent as the current rate of interest and assume a 30-year, fixed rate mortgage.

1. Explain the 28 percent rule, and calculate the mortgage loan amount under the 28 percent rule.

2. Explain the 36 percent rule, and calculate the mortgage loan amount under the 36 percent rule.

3. What other information would be necessary or useful to help Cory and Tisha determine the appropriate loan amount?

Maverick Company generated $ 14 million in pre-tax operating income on $ 100 million in revenues last year; the firm is stable and does not expect revenues or operating income to change over the next 10 years. Its eCommerce management is in shambles and eCommerce as a percent of revenues amounted to 10% last year. Maverick considering investing in a new eCommerce management system, which will cost $ 17 million. The eCommerce management system is expected to have a 10- year life, over which period it can be depreciated straight line down to a salvage value of zero. The new eCommerce management system benefits the company by providing management with updated sales information; it is expected to increase revenues to $ 117 million next year (and operating margins to remain unchanged). The revenues and operating income from year 2 to year 10 will remain unchanged at year 1 levels.

A.) Calculate the cash flows at time 0 (today) from this investment. B.) Calculate the NPV of investing in the new eCommerce management system. C.) Calculate IRR of the new eCommerce management system.

Question 1:
a.) Evaluate a 4-year project costing $25,000 and returning $8,000 annually using the payback period technique and a 3-year cutoff. Required Return is 10%.
answer: 3.125 years

b.) Evaluate the Discount Payback Period for the project above.

c.) Evaluate MIRR.

Clark​ Explorers, Inc., an engineering​ firm, has the following capital​ structure:  

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. Using market value and book value​ (separately, of​ course), find the adjusted WACC for Clark Explorers at the following tax​ rates:a.  

4040​%

b.  

2525​%

c.  

1515​%

d.  

1010​%

a.  What is the market value adjusted WACC for Clark Explorers at a tax rate of

4040​%?

5.3    

a.   Eighteen-year-old Linus is thinking about taking a five-year university degree. The degree will cost him $25,000 each year. After he's finished, he expects to make $50,000 per year for 10 years, $75,000 per year for another 10 years, and $100,000 per year for the final 10 years of his working career. All these values are stated in real dollars. Assume that Linus lives to be 100 and that real interest rates will stay at 5% per year throughout his life.

i.    Calculate the present value of his lifetime earnings.          (1 mark)

ii.   Calculate the present value of the cost of his schooling.     (1 mark)

iii. Subtract the present value of the schooling cost from his lifetime labour earnings to determine his human capital. Use that value to determine his permanent income, that is, the equal annual consumption Linus could enjoy over the rest of his life.                                         (1 mark)

b.   Linus is also considering another option. If he takes a job at the local grocery store, his starting wage will be $40,000 per year, and he will get a 3% raise each year, in real terms, until he retires at the age of 53. Assume that Linus lives to be 100.

i.    Calculate the present value of Linus’s lifetime earnings, using a spreadsheet or using the growing annuity formula. You can find the formula in the lesson notes, at the end of Note 7 in Lesson 4.         (1 mark)

ii.   Use that value to determine Linus’s permanent income, i.e., how much can Linus spend each year equally over the rest of his life?                                                  (1 mark)

c.   Do you think Linus is better off choosing option a. or option b.? Consider both financial and non-financial measures.                                                                        

What is the difference between American and European options? Is one more valuable than the other? Should it be?

• Assume you have $1 million now, and you have just retired from your job. This would be your initial wealth, W₀.
• You expect to live for 20 years, and you want to have the same level of consumption for each of the 20 years, after adjusting for inflation. That is, you want to keep the same purchasing power of consumption for all 20 years. In the equation, this means that C_t will be constant in real dollars over the rest of your lifetime.
• You also wish to leave the purchasing power equivalent of $100,000 today to your kids at the end of the 20 years as a bequest (or to pay them to take care of you). In real dollars, of course, since there is no inflation in real dollars, you will need to have $100,000 to give them at the end of the 20 years.
• You expect real interest rates to stay at 5% per year. So, your savings account will earn 5% in real dollars over the next 20 years.
• The Omar example in the textbook shows Omar’s human capital through labour earnings, but our assignment problem does not have any labour earnings. You have already earned your retirement savings of $1 million.
• The assignment problems will ask you to apply the formula to calculate the level of consumption that fits the intertemporal budget constraint, given assumptions about initial wealth and a planned bequest.

5.1     

a.   Calculate the present value of your bequest of $100,000 in real dollars.          (1 mark)

b.   Determine the constant value of consumption that equates the value of your initial wealth on the right side of the equation with the total of consumption and your bequest.      

Hint: To do this, you need to recognize that the equation contains an annuity for future consumption. The bequest is a single lump sum value, and the initial wealth is already stated at present value. The present value of labour income is zero.

Use this information to determine

i.    the present value of consumption for all 20 years.

ii.   use that value to determine the annual consumption for each of the 20 years. This part is very similar to the last question on Assignment 1.