1. Describe the primary features of long-term debt securities
2. What are the three major rating agencies and what criteria do they use when assigning ratings?

You are considering making a movie. The movie is expected to cost $11.4 million up front and take a year to produce. After that, it is expected to make $5.1 million in the year it is released and $2.3 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 11.2% ?

Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $550 per hour and her opportunity cost of capital is 15% per year. What does the IRR rule advise regarding the payment arrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 15% .) What about the NPV rule? The IRR is nothing %. (Round to two decimal places.)

what can happen if a firm is poorly managed and its stock price falls substantially below its maximum potential price?

3 . The multi-stage valuation model

Consider the case of Flying Cow Aviation Inc.:

Flying Cow Aviation Inc. is expected to generate a free cash flow (FCF) of $1,180,000 this year, and the FCF is expected to grow at a rate of 14% over the following two years (FCF22 and FCF33). After the third year, however, the company’s FCFs are expected to grow at a constant rate of 6% per year, which will last forever (FCF4 - ∞4 - ∞). If Flying Cow’s weighted average cost of capital (WACC) is 12%, complete the following table and compute the current value of Flying Cow’s operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year.

Flying Cow’s debt has a market value of $16,875,959, and Flying Cow has no preferred stock in its capital structure. If Flying Cow has 100,000 shares of common stock outstanding, then the total value of the company’s common equity is

, and the estimated intrinsic value per share of its common stock is

per share.

Assume the following:

Is the percentage of Flying Cow’s expected long-term cash flows consistent with the value cited in the professional studies?

No, because only 50.05% of the firm’s share price is derived from its expected long-term free cash flows.

No, because the percentage of Flying Cow’s expected long-term cash flows is actually 14.30%.

Yes, because 85.70% of the firm’s share price is derived from its expected long-term free cash flows.

Yes, because 75.42% of the firm’s share price is derived from its expected long-term free cash flows.

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The customer has asked to have a customer representative office set up in the same building as the project office. As a project manager, you put the customer’s office at the opposite end of the building from where you are, and on a different floor. The customer states that he wants his office next to yours. Should this be permitted, and, if so, under what conditions?

NPV

Your division is considering two projects with the following cash flows (in millions):

1. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

2. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

CAPITAL BUDGETING CRITERIA

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

1. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
   Project M    $
   Project N    $

   Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      years
   Project N      years

   Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      years
   Project N      years

2. Assuming the projects are independent, which one(s) would you recommend?  
   -Select-
   1. Both projects would be accepted since both of their NPV's are positive
   2. .Only Project M would be accepted because IRR(M) > IRR(N).
   3. Both projects would be rejected since both of their NPV's are negative.
   4. Only Project M would be accepted because NPV(M) > NPV(N).
   5. Only Project N would be accepted because NPV(N) > NPV(M).Item 11
3. If the projects are mutually exclusive, which would you recommend?
   -Select-
   1. If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.
   2. If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.
   3. If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.
   4. If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.
   5. If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.
4. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
   1. The conflict between NPV and IRR occurs due to the difference in the size of the projects.
   2. The conflict between NPV and IRR is due to the relatively high discount rate.
   3. The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.
   4. The conflict between NPV and IRR is due to the difference in the timing of the cash flows.
   5. There is no conflict between NPV and IRR.

Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 8%.

1. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places.

   $   million

2. What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answers to two decimal places.

   Plane A: $   million

   Plane B: $   million

Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following​ table:

Year 1 $210,000

Year 2 -$966,000

Year 3 $1,661,100

Year 4 -$1,265,460

Year 5 $360,360

.

1.  Why is it difficult to calculate the payback period for this​ project?

2.  Calculate the​ investment's net present value at each of the following discount​ rates: 0%, 5​%, 10​%, 15​%, 20%, 25%, 30%​, 35%.

3.  What does your answer to part b tell you about this ​project's IRR​?

4.  Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?

5.  In​ general, when faced with a project like​ this, how should a firm decide whether to invest in the project or reject​ it?

1.  Why is it difficult to calculate the payback period for this​ project? ​ (Select the best answer​ below.)

A.The huge amount of cash outflow in year 3 makes the calculation difficult.

B.The oscillating cash flows make it difficult to compute the payback period.

C.The short life of the project makes it difficult to compute the payback period.

D.It is unreal for a project to have a cash inflow as an initial investment.

2. If the discount rate is 0%, the​ investment's NPV is . ​$______(Round to two decimal​ places.)

If the discount rate is 5​%, the​ investment's NPV is . $________​(Round to two decimal​ places.)

If the discount rate is 10%, the​ investment's NPV is $________(Round to two decimal​ places.)

If the discount rate is 15​%, the​ investment's NPV is ​$________(Round to two decimal​ places.)

If the discount rate is 20%, the​ investment's NPV is $________(Round to two decimal​ places.)

If the discount rate is 25%, the​ investment's NPV is $________​(Round to two decimal​ places.)

If the discount rate is 30%, the​ investment's NPV is ​$________​(Round to two decimal​ places.)

If the discount rate is 35%, the​ investment's NPV is $________(Round to two decimal​ places.)

3.  What does your answer to part b tell you about this ​project's ​IRR?  ​(Select the best answer​ below.)

A. There are multiple IRRs for this project.

B. There are infinite IRRs for this project.

C. There is no IRR for such cash flows.

D. There is only one IRR for this project.

4.  Should Froogle invest in this project if its cost of capital is 5​%?

A. Yes

B. No

Should Froogle invest in this project if its cost of capital is 15%?

A.Yes

B.No

5.  In​ general, when faced with a project like​ this, how should a firm decide whether to invest in the project or reject​ it?  ​(Select the best answer​ below.)

A.It is best to use the IRR method.

B.It is best to use the payback period method.

C.It is best to use the NPV method.

D.None of the methods is suitable.

Company A and Company B are identical in every respect except Company A is unlevered and Company B has $1 million of perpetual debt with an interest rate of 6%. Expected EBIT for both firms is $900,000 in perpetuity and all available earnings are immediately distributed to common shareholders. Company A's cost of equity is 18%. Assume all M&M assumptions are satisfied.

For parts (a) to (c), assume there are no personal or corporate taxes
(a) According to M&M Proposition I without taxes, what is the value of each firm?
(b) According to M&M Proposition II without taxes, what is the cost of equity for Company B?
(c) According to M&M Proposition II without taxes, what is the WACC for each firm?

For parts (d) to (f), assume there are no personal taxes but the corporate tax for both companies is 30%
(d) According to M&M Proposition I with taxes, what is the value of each firm?
(e) According to M&M Proposition II with taxes, what is the cost of equity for Company B?
(f) According to M&M Proposition II with taxes, what is the WACC for each firm?

Masters Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $485,000 is estimated to result in $205,000 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 $74,000. The press also requires an initial investment in spare parts inventory of $40,000, along with an additional $4,100 in inventory for each succeeding year of the project. The shop’s tax rate is 25 percent and its discount rate is 8 percent. (MACRS schedule) Calculate the NPV of this project.

1. An investment has a cost of $3500. The investment will have a payout of X at the end of the first year. This initial payout X will grow at the rate of 12% per year for the next 4 years, then by 7% per year for the next 4 years, and then at the rate of 3% per year for the following 3 years. You believe the riskiness of this investment is 9%.
   1. Calculate the smallest X that would entice you to invest.

Amortization schedule with periodic

payments.

  Moulton Motors is advertising the following deal on a new Honda​ Civic: ​ "Monthly payments of

​$400.40400.40

for the next

6060

months and this beauty can be​ yours!" The sticker price of the car is

$ 18 comma 000$18,000.

If you bought the​ car, what interest rate would you be paying in both APR and EAR​ terms? What is the amortization schedule of the first six​ payments?

If you bought the​ car, what monthly interest rate would you be​ paying?

​(Round to four decimal​ places.)