Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%.

1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).)

1-b. Which capital structure shall Mr. Johnson choose to fund the new project?

• Scenario 1

• Scenario 2

Part 2

Assume the new project’s operating cash flows for the upcoming 5 years are as follows:

2-a. What are the WACC (restated from Part 1), NPV, IRR, and payback years of this project? (Negative values should be entered with a minus sign. All answers should be entered rounded to 2 decimal places. Your answers for WACC and IRR should be whole percentages (e.g. .3555 should be entered as 35.55).)

2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?

• Project A should be accepted

• Project A should be rejected

1. We consider to purchase 5-years zero-coupon bond with the nominal value of 1000 USD and YTM of 4 %. We would like to invest in this bond

a) For 3 years

b) For 7 years

What would be your yield/loss if the day after the bond purchase

a) YTM will increase by 1 %

b) YTM will decrease by 1 %

. Caswell-Cassey Pharmaceutical has a stockholders’ equity account as shown below. The firm’s common stock currently sells for $20 per share.

1. What is the maximum dividend per share Caswell-Casey can pay? (Assume capital   includes all paid-in capital)
2. Recast the partial balance sheet (the stockholders’ equity accounts) to show independently

(i)         2 for 1 stock split of the common stock.

(ii)        cash dividend of $1.50 per share.

(iii)       stock dividend of 5 percent on the common stock.

please show all the steps

You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85. If the stock price at expiration is $82, what is your dollar profit? What if the stock price is $72?

1a)

Suppose you have $28,000 to invest. You’re considering Miller Enterprises, which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00. Miller Enterprise pays no dividends. What is your annualized return from these two investments if, in six months, Miller Enterprise is selling for $48 per share?

b)

suppose a dividend of $0.80 per share is paid. Comment on how the returns would be affected

critically discuss the Langtry Falls Expansion Plan and evaluate the issues in the Langtry benchmark-setting decision.

Problem 8-11 Cost-Cutting Proposals

Blue Line Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $235,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $94,000. The press also requires an initial investment in spare parts inventory of $29,000, along with an additional $3,400 in inventory for each succeeding year of the project. The shop’s tax rate is 35 percent and the project's required return is 9 percent. Refer to Table 8.3.

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $

Should the company buy and install the machine press?
  

• No

• Yes

Problem 10. Deer Pointe Charters has $20 million in outstanding long-term debt. In addition, the firm has 1 million shares of $25 par value preferred stock shares currently valued at $4.50 per share. Further, the firm’s outstanding common shares are currently trading at $15 per share and they have 1.7 million shares outstanding with 2 million shares authorized. The firm’s total assets are $35.5 million. The firm’s debt is trading at par value and carries a coupon of 6.5% and matures in 25 years. The preferred stock pays a dividend of $0.38 per share. The firm has a beta of 1.22. Treasuries are currently yielding about 1.78% and the S&P 500 has a return of about 10.5%. The firm recently paid a dividend of $0.98 per share and dividends are growing at about 3.75% annually. Determine the firm’s WACC using the (1) CAPM approach to find Rs; and (2) DDM approach to find Rs. The firm’s tax rate is 28%.

Describe how derivatives can be used to more effectively manage an investment portfolio. And why might there be restrictions on the usage of derivative for some funds?

1. The market and Stock J have the following probability distributions.  Calculate the standard deviations for the Stock J.

   Probability	r M	r J
   0.3	-10%	10%
   0.4	20%	18%
   0.3	25%	30%

   		6.22%
   		14.87%
   		12.50%
   		3.85%
   		7.81%