Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Inc. just paid a dividend of $1.10 per share at the end of 2019. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (r_s) is 9%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent.
$   per share

6. You are considering replacing the plastic extrusion machine that create basic moldings of the outdoor pool furniture your company produces. The current extrusion machine was purchased two years ago for $240,000 and is being depreciated on the straight line basis over 5 years towards a zero salage value. Although the old machine is anticipated to have a salvage value of $40,000 three years from now, it can be sold today for $150,000. The new machine costs $400,000 and will be depreciated on a straightline basis toward a zero-salvage value over a 5-year period. At the end of three years, you expected to be able to sell it for and $50,000. You have estimated that the more modern form of the furniture will result in sales increasing of $220,000 per year. Manufacturing costs are anticipated to increase $120,000 per year. The firm is in the 40% tax bracket.

a. What are the net of free cash flow for each year?

b. Assume the answer of part a is as follow:

Year 0 Year 1 Year 2 Year 3
Net Cash Flow $(275,000) $115,000 $140,000 110,000

What is the IRR for this project?

1. You are the financial officer of a non-profit organization that is negotiating a five-year loan with a local bank to purchase a small warehouse. The loan will be for $100,000 at a 6% interest repaid in five annual installments.
a. What annual payment will you have to make on the loan each year?
b. Assume your answer to part a above is $24,500. The bank will charge a loan origination fee of $3,000 dollar that must be paid at the beginning, plus you must pay $500 to file a release of lien against warehouse at the end of five years when the loan is paid off. What is the effective rate of interest on the loan when the origination fee and release of line fee are taken into consideration?

Armand Company projects the following sales for the first three months of the year: $10,600 in January; $12,300 in February; and $12,900 in March The company expects 60% of the sales to be cash and the remainder on account. Sales on account are collected 50% in the month of the sale and 50% in the following month. The Accounts Receivable account has a zero balance on January 1. Round to the nearest dollar. 1. Prepare a schedule of cash receipts for Armand for January, February, and March. What is the balance in Accounts Receivable on March 31? 2. Prepare a revised schedule of cash receipts if receipts from sales on account are 60% in the month of the sale, 30% in the month following the sale, and 10% in the second month following the sale. What is the balance in Accounts Receivable on March 31? Solution: Requirement 1 Schedule of Cash Receipts from Customers January February March Total Total Sales $10,600 $12,300 $12,900 $35,800 Cash Receipts from Customers Accounts Receivable Balance, January 1 $0 1st Qtr. - Cash sales (60%) 6,360 1st Qtr. - Collected for sales on credit (20%) 2,120 2nd Qtr. - Collection of remaining amount of Jan. sales (20%) $2,120 2nd Qtr. - Cash sales (60%) 7,380 2nd Qtr. - Collected for sales on credit (20%) 2,460 3rd Qtr. - Collection of remaining amount of Feb. sales (20%) $2,460 3rd Qtr. - Cash sales (60%) 7,740 3rd Qtr. - Collected for sales on credit (20%) 2,580 Total cash receipts from customers $8,480 $11,960 $12,780 $33,220 Calculate and show below the Accounts Receivable Balance as of March 31 Requirement 2 Revised Schedule of Cash Receipts from Customers January February March Total Accounts Receivable balance, March 31: Amount February - Credit sales (finish this . . . .

The General Hospital is evaluating new office equipment offered by 2 companies. In each case the interest rate is 15% and the useful life of the equipment is 4 years. Use incremental analysis benefit cost ratio pW to determine the company from which you should purchase the equipment

Company A, Company B

First cost $ 15,000 $ 25,000

Annual M&R cost $ 1,600 $ 800

Annual benefit $ 8,000 $ 3,000

one-off cash flow $ 1,200. $ 900. (both saved in 2 years)

Salvage value. $ 3,000 $ 3,500

During the year just​ ended, Anna​ Schultz's portfolio, which has a beta of 0.98​, earned a return of 8.7%.

The​ risk-free rate is currently 4.2%​, and the return on the market portfolio during the year just ended was 9.4%.

A. Calculate​ Treynor's measure for​ Anna's portfolio for the year just ended.

b. Compare the performance of​ Anna's portfolio found in part a to that of Stacey​ Quant's portfolio, which has a​ Treynor's measure of 1.36%. Which portfolio performed​ better? Explain.

c. Calculate​ Treynor's measure for the market portfolio for the year just ended.

d. Use your findings in parts a and c to discuss the performance of​ Anna's portfolio relative to the market during the year just ended.

a.The​ Treynor's measure for​ Anna's portfolio is ___​%. (Round to two decimal​ places.)

2. ​Anna's portfolio_____

1.outperformed

2.underperformed   Stacy's with a TM of ___

1. 4.59

2. 1.36

​% versus one of 1.36​%. (Select from the​ drop-down menus.)

c.  The​ Treynor's measure for the market portfolio is ___​%. (Round to two decimal​ places.)

d.  The market_____

▼

1.outperformed

2. underperformed

​Anna's portfolio; its TM was______

▼

1. 4.59

2. 1.36

3. 5.20

​%, compared to

▼

1. 4.59

2. 1.36

3. 5.20

​% for her portfolio.  ​(Select from the​ drop-down menus.)

Norman Borlaug has a wheat farm which produces 20,000 units and typically can produce them for $0.58 each with fixed costs of $3,000. The current market price for wheat forces them to sell their units for $0.71 each. Because of the tough market conditions, one of their competitors is looking to exit the business and instead rent their land out for $4,500 a month. Borlaug believes with the additional land they could produce and sell an extra 80,000 units each with the same variable cost of $0.58 per unit. However by creating these additional units and adding supply to the market, the company would then sell all the wheat it produces from both farms for $0.68 per unit.

1. Create a contribution income statement which can be used to determine whether Borlaug needs the second farm in order to turn a profit.

2. Create a CVP graph for profitability levels for every 10,000 units from 0 to 100,000 units with the appropriate title and axes labels added

3. Determine the number of units they would need to break-even. Save and submit the spreadsheet with that number entered into the units sold input.

Notes: keep in mind that now the revenues and fixed expenses are changing based on whether we need the second farm, meaning that you will need an IF statement for both the revenues and fixed expenses of the contribution income statement, but not the variable expenses. In addition, when creating the revenues and expenses columns to make the CVP graph, both columns will take IF statements as, once again, the revenues and fixed expenses both change if we need two farms. If everything is set up correctly, the break-even should be 75,000 units. As always, feel free to email me with any questions and best of luck!

You decide to invest in a portfolio consisting of 33 percent Stock A, 44 percent Stock B, and the remainder in Stock C. Based on the following information, what is the variance of your portfolio? State of Economy Probability of State Return if State Occurs of Economy Stock A Stock B Stock C Recession .111 − 9.80% − 3.20% − 12.20% Normal .659 9.10% 10.60% 16.60% Boom .230 21.49% 24.99% 29.69% rev: 04_25_2019_QC_CS-167128 .00803 .01084 .00747 .00843 .00907

Option #2: Capital Budgeting Analysis

Suppose you are the financial manager of a firm considering the following five projects.

	Project A	Project B	Project C	Project D	Project E
Initial Investment	-$10,000	-$15,000	-$14,000	-$6,000	-$1,500
Year 1	$5,000	$5,000	$6,000	$4,000	$1,000
Year 2	$4,000	$5,000	$4,000	$2,000	$250
Year 3	$2,000	$5,000	$3,500	$2,000	$100
Year 4	$1,000	$5,000	$2,500	$2,000	$100
Year 5		$5,000	$2,000		$100
Year 6			$2,000		$100

1. Calculate the Payback Period for each project.
2. Calculate the NPV for each project, assuming a discount rate of 11%.
3. Calculate the IRR for each project.
4. Which projects should the firm implement based on your analysis If the projects are mutually exclusive? What if they are independent? Write an email to your CFO explaining your rationale proving the choices based on the considerations of shareholder value. Assume there is no capital constraint and any desired projects can be funded.

Wan purchased a 7-year Treasury bond with a coupon rate of j₂ = 4.5% p.a. and a face value of $100 that matures at par and is subject to a 30% tax on interest and capital gain. The purchase price was $94.230.

a. Use the approximate bond yield formula to estimate the net yield rate. Give your answer in j₂ form, rounded to 3 decimal places.

b. Use linear interpolation to calculate the net yield rate. Give your answer in j₂ form, rounded to 3 decimal places. Hint: 1.9% per half year and 2% per half year are the lower bound and the upper bound for the net yield rate.

c. Recalculate the bond price if the net yield rate is j₂ = 4.3% p.a. and all tax payments (interest tax payments and capital gain tax payment) are delayed by half year. Round the result to 3 decimal places.

d. Wan decides to hold this bond to maturity. Over the seven years the before-tax reinvestment rates he earned are shown in table 1. Calculate Wan's total realised compound yield rate if he has received a tax exemption and so does not need pay the taxes for this bond. Assume that Wan purchased this bond at a yield rate of j₂ = 4.3% p.a. and the purchase price was $101.20. Give your answer in j₂ form, rounded to 2 decimal places.

Annual reinvestment rates as below:

Year 1 - Year 2	j2 = 4.3% p.a.
Year 3 - Year 7	j2 = 4.7% p.a.

Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly.

Assume that a $1,000,000 par value, semiannual coupon US Treasury note with four years to maturity has a coupon rate of 4%. The yield to maturity (YTM) of the bond is 7.70%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:

a) $1,049,602.92

b) $874,669.10

c) $551,041.53

d) $743,468.74

Based on your calculations and understanding of semiannual coupon bonds, complete the following statement:

When valuing a semiannual coupon bond, the time period variable(N) used to calculate the price of a bond reflects the number of periods remaining in the bond’s life.

Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 8.5%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?

A) $6,594 B) $9,988 C) $10,134 D) $15,363 E) $21,802

Investment and Speculation

• What do you think is the difference between investment and speculation?
• Some claim that the recent record-high oil prices are due to the speculations in the oil futures market. Do you think the investments in the futures markets made the market more volatile?
• Is the speculation a bad thing? Be brief.

Suppose you purchase a​ ten-year bond with 9 % annual coupons.You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the​ bond's yield to maturity was 8.05 % when you purchased and sold the​ bond, a. What cash flows will you pay and receive from your investment in the bond per $ 100 face​ value? b. What is the internal rate of return of your​ investment? Note​: Assume annual compounding.

1A. Which of the following is not a type of financial cash flows?

1. Interest expenses on commercial papers
2. Capital raised from a private firm’s initial public offering (IPO)
3. Larger bonus payments to the senior executives due to an elevated share price
4. Cash spent on share repurchases in the secondary stock markets

1B. What type of risk matters to an investor with a well-diversified portfolio? How is this type of risk measured?

1. Systematic risk; beta
2. Unique risk; standard deviation
3. Idiosyncratic risk; beta
4. Total risk; standard deviation