Tailoka is a large company with gearing debt to equity ratio by market values of 1:2.The
company’s profit after tax in the most recent year were K2,700,000 of which K1,070,000
was distributed as ordinary dividends. The Company has 5 million issued ordinary
shares which are currently trading on the LUSE at K3.21.Corporate tax rate is 35% and
corporate debt is risk free.Tailoka would want to undertake a new capital project. The
project is a major diversification into a new industry. You have been tasked to provide
estimates of the discount rate to be used in evaluating this new investment.
You have been given the following information showing estimates for the next five years.
Growth rate of own company earnings12%Average Equity Beta coefficient1.5Average industry gearing (debt to equity) ratio1:3 by market valueAverage payout ratio55%Stock market total return on equity16%Growth rate of own company dividends11%Growth rate of own company sales13%Treasury bills12%Own company dividend yield7%Own company geared equity beta1.4Own company share price rise14%

Required
(a) Calculate the company’s weighted Average Cost of Capital (WACC) using the
Capital Asset Pricing Model (CAPM).
(b) Calculate the company’s weighted Average Cost of Capital (WACC) using the
dividend valuation model
(c) Describe the situations under which the above two models will produce same
values for WACC
(d) Discuss any five (5) practical problems of using CAPM in investment
appraisal.|
(e) Prepare a brief report recommending which discount rate you should use for this
investment.Information from pars (a),(b) and (c ) above may be useful.

Bond X is noncallable and has 20 years to maturity, an 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 7%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 7.5%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

5. Midwest Packaging's ROE last year was only 5%; but its management has developed a new op-erating plan that calls for a debt-to-assets ratio of 60%, which will result in annual interest charges of $120,000. The firm has no plans to use preferred stock. Management projects an EBIT of $332,000 on sales of $4,000,000, and it expects to have a total assets turnover ratio of 2.1. Under these conditions, the tax rate will be 40%. If the changes are made, what will be the company's return on equity? Round your answer to two decimal places. %

6. Fontaine Inc. recently reported net income of $7 million. It has 560,000 shares of common stock, which currently trades at $25 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $11.9 million. Over the next year it also anticipates issuing an additional 84,000 shares of stock so that 1 year from now it will have 644,000 shares of common stock. Assuming Fontaine's price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Round your answer to the nearest cent. $

A 9.17% semiannual-pay corporate bond matures 15 August 2028 and makes coupon payments on 15 February and 15 August. The bond uses the 30/360 day-count convention for accrued interest. The bond is priced for sale on June 5, 2020 (that is, 110 days since the Feb. 15 coupon). What is its flat price (or clean price) per $ 100 of par value on June 5, 2020 if its yield to maturity is 4.6%? Carry intermediate calcs. to four decimals. Answer to two decimals. Assume 1,000 par value and semi annual compounding

1. Jaster Jets has $15 billion in total assets. Its balance sheet shows $1.5 billion in current liabilities, $10.5 billion in long-term debt, and $3 billion in common equity. It has 600 million shares of common stock outstanding, and its stock price is $48 per share. What is Jaster's market/book ratio? Round your answer to two decimal places.

2. A company has an EPS of $2.10, a book value per share of $20.16, and a market/book ratio of 2.4x. What is its P/E ratio? The stock price should be rounded to the nearest cent. Round your answer to two decimal places.
   
3. Ebersoll Mining has $4 million in sales, its ROE is 15%, and its total assets turnover is 3.2x. Common equity on the firm’s balance sheet is 60% of its total assets. What is its net income? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. Do not round intermediate steps.

2. [6 pts] A borrower is faced with choosing between two fully amortizing level-payment loans. Loan A is available for $75,000 at 10% MEY for 30 years, with 6 points included in the closing costs. Loan B would be made for the same amount, but at 11% MEY for 30 years, with 2 points included in the closing costs. Neither loan defaults/is curtailed. a. [4] If the loan is to be repaid after 15 years, which is the better choice? b. [2] If the loan is repaid after 5 years, which is the better choice?

Hint: Use the effective cost of borrowing to make the decision. Show work.

Pharoah, Inc., has four-year bonds outstanding that pay a coupon rate of 7.10 percent and make coupon payments semiannually. If these bonds are currently selling at $917.89.

What is the yield to maturity that an investor can expect to earn on these bonds? (Round answer to 1 decimal place, e.g. 15.2%.)

What is the effective annual yield? (Round answer to 1 decimal place, e.g. 15.2%.)

Cost of Capital is 8%. Acceptable payback period is 3 1/2 years. Acceptable discounted payback period is 4 1/2 years. Based on the above data, calculate payback, discounted payback, net present value, internal rate of return and modified rate of return.

Based on the above data, calculate payback, discounted payback, net present value, internal rate of return and modified rate of return for each project.

Sheridan Chiropractic Clinic produces $200,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 20 percent. The firm’s management would like to repurchase $680,000 of its equity by borrowing $680,000 at a rate of 10 percent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Sheridan after it changes its capital structure. Assume that Modigliani and Miller Proposition 1 assumptions hold. (Round answer to 2 decimal places, e.g. 17.54%.) Cost of equity capital enter the cost of equity capital in percentages rounded to 2 decimal places %

REPLACEMENT ANALYSIS

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $110,000 per year, using the straight-line method.

The new machine has a purchase price of $1,150,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $160,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $200,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

1. What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
   $_____?
   
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2
   3
   4
   5

3. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

4. Should the firm purchase the new machine?
   =YES/ NO??
   
   Support your answer. The input in the box below will not be graded but may be reviewed and considered by your instructor.
   
5. In general, how would each of the following factors affect the investment decision, and how should each be treated?
   1. The expected life of the existing machine decreases. 2. The WACC is not constant but is increasing as Bigbee adds more projects into its capital budget for the year.

Johnson & Merk, Inc’s 20x4 income statement listed:
Sales = $12.5 million,
EBIT = $5.6 million,
Net Income = $3.25 million, and
Common stock dividends = $1.2 million.
The 20x4 year-end balance sheet listed:
Total assets = $52.5 million, and
Common stockholders’ equity = $21 million with 2 million shares outstanding.
(Part 1)What is Johnson & Merk, Inc’s 20x4 Return on Asset (ROA)?
a.12%
b.6%
c.5%
d.9%

Bluetooth, Inc’s 20x4 income statement listed:
Sales = $12.5 million,
EBIT = $5.6 million,
Net Income = $3.25 million, and
Common stock dividends = $1.2 million.
The 20x4 year-end balance sheet listed:
Total assets = $52.5 million, and
Common stockholders’ equity = $21 million with 2 million shares outstanding.
(Part 2)What is Bluetooth, Inc’s 20x4 Return on Equity (ROE)?
a.12.3%
b.16.7%
c.15.4%
d.9.4%

(Part 3)In 2012 Bard, Inc. (BCR) had sales per share of $36.21, net profit margin of 19.1%, and paid $1.39 dividend per share. The Dividend Payout Ratio and Retention Rate are:
a.21% and 86%
b.32% and 74%
c.20% and 80%
d.50% and 50%

Here are the returns on two stocks.

Digital Cheese Executive Fruit

January +14 +7

February −3 +1

March +5 +4

April +7 +12

May −4 +2

June +3 +7

July −2 −3

August −8 −2

Required: a-1. Calculate the variance and standard deviation of each stock. a-2. Which stock is riskier if held on its own? b. Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks. c. Is the variance more or less than halfway between the variance of the two individual stocks?

Carla Vista Security Company produces a cash flow of $160 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Carla Vista is 16 percent, and the firm is financed entirely with equity. Management would like to repurchase $100 in shares by borrowing $100 at a 10 percent annual rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1 answer the following questions.

What is the value of the firm today?

What is the value of equity after the repurchase?

What will be the rate of return on common stock required by investors after the stock repurchase? (Round answer to 2 decimal places, e.g. 17.54%.)