Black-Scholes Model

Assume that you have been given the following information on Purcell Industries' call options:

According to the Black-Scholes option pricing model, what is the option's value? Do not round intermediate calculations. Round your answer to the nearest cent. Use only the values provided in the problem statement for your calculations.

Replacement Analysis

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $600 for 5 years and $330 for the sixth year. Its current book value is $3,330, and it can be sold on an Internet auction site for $4,030 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.

Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,200, and has an estimated useful life of 6 years with an estimated salvage value of $1,700. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and the project cost of capital is 14%.

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

$  

Should it replace the old steamer?

The old steamer -Select-shouldshould notItem 2 be replaced.

Duela Dent is single and had $189,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate her income taxes. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Taxable income

0-9525 10%

9525- 38,700 12%

38,700- 82,500 22%

82,500- 157,500 24%

157,500- 200,000 32%

1-20 years

5 turbines

Average hourly power output per turbine: 0.31 MWh

Operational days per year 363.00 days

Capital expenditure per turbine $3,000,000.00

Life 20.00 years (Turbines will be dismantled at end of 20 years if not overhauling.)

Salvage per turbine $200,000.00 (Market value at end of 20 years.)

Expected price per MWh of power in first year $80.00 (Price per MWh is then expected to increase at inflation.)

Expected price per MWh of renewable energy certificate in first year $70.00 (For each MWh generated by the wind turbines, SAI will be issued with a renewable energy certificate which it can sell to electricity retailers who have sold renewable energy to customers. Price of certificates is then expected to increase at inflation.)

Expected operating expenses per turbine in first year $100,000.00 (Annual operating expenses then expected to increase by inflation.)

Depreciation method- Straight Line

Working capital- $0 (Given service agreements, there is no working capital requirement)

Inflation Rate (p.a.) 0.026

Tax Rate 0.30 (Tax payment occurs at the same year as income)

Discount Rate 0.10

Additional Information to extend life to 40 years

Overhaul cost at end of 20th year per turbine $1,500,000.00

Life of overhaul 20.00 years

Salvage $0

Depreciation method of overhaul cost Straight Line (Overhaul expense is capitalised and then depreciated over extended life.)

Treatment of existing capital expenditure (e.g. original outlay) $0 (Remaining book value of original capital expenditure written down to zero in year 20.)

Calculate EBITDA, depreciation and gain/loss of sale for the extended life

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next seven years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $3.50. The dividends are expected to grow at 8 percent over the next seven years. The company has a payout ratio of 35 percent and a benchmark PE of 45. What is the target stock price in seven years? What is the stock price today assuming a required return of 12 percent on this stock?

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. CANTON CORPORATION Income Statement for 20X1 Sales $ 145,600 (11,200 units at $13.00) Cost of goods sold 84,000 (11,200 units at $7.50) Gross profit $ 61,600 Selling and administrative expense 8,736 Depreciation 12,500 Operating profit $ 40,364 Taxes (30%) 12,109 Aftertax income $ 28,255 a. Assume in 20X2 the same 11,200-unit volume is maintained but that the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $7.50 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 20X2. (Do not round intermediate calculations. Round your answer to the nearest whole number.) b. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) c. Now assume that in 20X3 the volume remains constant at 11,200 units, but the sales price decreases by 15 percent from its year 20X2 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $8.00 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income. (Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.)

1-20 years

Calculate the free cash flows for the extended life of 40 years

Inventory Management

Williams & Sons last year reported sales of $86 million, cost of goods sold (COGS) of $70 and an inventory turnover ratio of 5. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 7 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Round your answer to the nearest dollar.

$  

An online apparel retailer groups its customers into two segments: premier and regular. There are 1000 customers of each type. The contribution margins of the two segments are $100 and $50, respectively. Each period, 30% of premier customers become regular customers and 10% are lost forever. Also, 10% of regular customers become premier customers and 40% are lost forever. Assuming a discount rate of 4%, what is the CLV or a single Premier and a single regular customer? Based on CLV, what are the net forecasted sales over a five year period?

1) Identify the internal factor that influences the stock price of a firm.

a. Capital structure

b. Conditions in the stock market

c. Tax laws

d. Legal constraints

e. General level of economic activity

A low inventory turnover ratio might indicate that:

a. the firm is using the last-in first-out (LIFO) method of inventory valuation during inflationary periods.

b. the cost of inventory of the firm is lower than that of the similar firms.

c. the inventory of the firm is sold and restocked very often.

d. the firm purchases all its inventory on credit.

e. the firm is holding excess stocks of inventory.

Benson, Inc., has sales of $39,230, costs of $12,930, depreciation expense of $2,630, and interest expense of $1,910. The tax rate is 22 percent. What is the operating cash flow, or OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Nicholas Company loaned $68,587 to Nathan, Inc. in exchange for Nathan’s 2-year, $80,000, zero-interest-bearing note.  Nathan’s incremental borrowing rate for comparable debt is 8%.

Required:

1. Prepare an effective interest amortization schedule for Nicholas relative to this note. (Round to whole dollars.)

2. Prepare Nicholas’ journal entries for the initial loan transaction, recognition of interest each year, and the collection of the note at maturity.

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

The company has a 25% tax rate, and its WACC is 13%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $   
2. 
   
3. If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
   The firm's OCF would now be $   .