Consider the following bonds currently traded in the market. Using this information find the no-arbitrage price of a 5-Year bond with a coupon of 5%. Suppose this bond is currently selling for $102 in the market. Is there an arbitrage opportunity? Explain how you would execute this arbitrage (All coupons are annual payment, including the bond you are asked to price)

Mesa Blanca decides to invest $5 million in Action Technologies. Expected exit valuation is $125 million and time to exit is 5 years. Mesa Blanca wants a 50% / year return and expects future dilution of 60%.

What might lead Mesa Blanca to expect future dilution of 60%?

What would the pre and post money valuation, and % ownership Mesa Blanca require at the time of their investment?

What does this analysis suggest about Action Technologies?

Your firm is contemplating the purchase of a new model commercial airplane which is more fuel efficient that the models your firm is currently flying. On the basis of capital budgeting techniques that we have learned and used, thus far, what are the factors that you will consider in deciding whether or not to purchase and add the newer model planes to your fleet. Explain thoroughly.

1. Price a European Call & Put and an American Put on a stock that is currently selling at $25 and has a volatility of 25%. The options all have a life of 7 months and a strike price of $26. The 7-month risk free rate is 3% per annum with continuous compounding. a. Use a 12-step binomial tree to price all 3 options b. Use a 13-step binomial tree to price all 3 options c. Use the Black-Scholes-Merton formula to price the European options

2. Use the information in question 1, but now the stock will pay a dividend of $1 in 3 months from today. Price European Call & Put and American Call & Put using a 7-step binomial tree.

Looking for answer and explanation in Excel please

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $4.6 million in annual pretax cost savings. The system costs $9.6 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 21 percent and the firm can borrow at 9 percent. Lambert’s policy is to require its lessees to make payments at the start of the year. Suppose it is estimated that the equipment will have an aftertax residual value of $1,020,000 at the end of the lease.

What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $331. Variable cost per unit $188 Units sold 488 Fixed costs $5,750 Interest expense $16,184 Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?

Cash Discounts

Suppose a firm makes purchases of $3.55 million per year under terms of 3/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations.

1. What is the average amount of accounts payable net of discounts? (Assume that the $3.55 million of purchases is net of discounts - that is, gross purchases are $3,659,794, discounts are $109,794, and net purchases are $3.55 million.) Round your answer to the nearest dollar.
   $  
   
2. Is there a cost of the trade credit the firm uses?
       -Select-IIIItem 2
   I. There is no cost of trade credit at this point. The firm is using "free" trade credit.
   II. The cost of the trade credit is $291,781.
   
3. If the firm did not take discounts but it did pay on the due date, what would be its average payables? Round your answer to the nearest dollar.
   $  
   If the firm did not take discounts but it did pay on the due date, what would be its nominal cost? Round your answer to two decimal places.
        %
   If the firm did not take discounts but it did pay on the due date, what would be its effective cost? Round your answer to two decimal places.
        %
   
4. What would the firm's cost of not taking discounts be if it could stretch its payments to 39 days? Round your answers to two decimal places.

   Nominal cost	%
   Effective cost	%

After inheriting $50,000 you open up two separate brokerage accounts and divide your

inheritance equally in both accounts ($25,000 in each). You use only these funds to

trade in two stocks for two months at the end of which you clear both your positions and

evaluate your performance. Assume the following:

- You pay $50 per transaction (use only your inheritance as source of funds)

- Call money rate is 3.5% (APR compounded daily – 365 days a year)

- Initial margin is 50% and maintenance margin is 30%. The maximum amount in

‘borrowed’ funds is based on the number of ‘whole’ shares.

- Only your equity funds in the short arrangement earn interest.

- Treat each account separately for purposes of this assignment.

On 7/1 you did the following:

1. Buy stock SOFT for $40 (account 1) and short stock XESLA for $250 (account 2)

using initial margin is 50% in each of the two accounts. Provide the following

information (it is advisable to answer 1 and 2 one account at a time):

a. For each account, describe the price change (increase or decrease) that would

be desirable.

b. Number of shares bought/sold of each stock.

c. Amount of money borrowed for the margin trade in each account.

d. The price will you receive a margin call for each account.

2. Suppose you close out of each position at the end of the two months at the following

prices:

a. Suppose SOFT price has increased to $50.

b. Suppose SOFT price has decreased to $30.

c. Suppose XESLA price has increased to $275.

d. Suppose XESLA price has decreased to $225.

For each ending price, evaluate your performance by computing the following:

• The holding period return of each account2

• The annualized holding period return of each account.

3. Assume that you did not pay brokerage fees what would be the difference in

performance in each account in #2 above?

4. Compute the holding period return of the combined accounts (portfolio) when the

prices of the stocks increase (ignore # 3 above).

Lindsey was recently hired by Swift Ltd. as a junior budget analyst. She is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. She must give her analysis and recommendation to the capital budgeting committee.

Lindsey has a B.S. in accounting from CWU (2014) and passed the CPA exam (2017). She has been in public accounting for several years. During that time she earned an MBA from Seattle U. She would like to be the CFO of a company someday--maybe Swift Ltd.-- and this is an opportunity to get onto that career track and to prove her ability.

As Lindsey looks over the financial data collected, she is trying to make sense of it all. She already has the most difficult part of the analysis complete -- the estimation of cash flows. Through some internet research and application of finance theory, she has also determined the firm’s beta.

Here is the information that Lindsey has accumulated so far:

The Capital Budgeting Projects

She must choose one of the four capital budgeting projects listed below:  

Table 1

Table 1 shows the expected after-tax operating cash flows for each project. All projects are expected to have a 4 year life. The projects differ in size (the cost of the initial investment), and their cash flow patterns are different. They also differ in risk as indicated in the above table.

The capital budget is $20 million and the projects are mutually exclusive.

Capital Structures

Swift Ltd. has the following capital structure, which is considered to be optimal:

Cost of Capital

Lindsey knows that in order to evaluate the projects she will have to determine the cost of capital for each of them. She has been given the following data, which he believes will be relevant to her task.

(1)The firm’s tax rate is 35%.

(2) Swift Ltd. has issued a 8% semi-annual coupon bond with 14 years term to maturity. The current trading price is $960.

(3) The firm has issued some preferred stock which pays an annual 8.5% dividend of $50 par value, and the current market price is $52.

(4) The firm’s stock is currently selling for $35 per share. Its last dividend (D₀) was $2.00, and dividends are expected to grow at a constant rate of 5%. The current risk free return offered by Treasury security is 2.8%, and the market portfolio’s return is 10.80%. Swift Ltd. has a beta of 1.1. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 3.5%.

(5) The firm adjusts its project WACC for risk by adding 2.5% to the overall WACC for high-risk projects and subtracting 2.5% for low-risk projects.

Lindsey knows that Swift Ltd. executives have favored IRR in the past for making their capital budgeting decisions. Her professor at Seattle U. said NPV was better than IRR. Her textbook says that MIRR is also better than IRR.   She is the new kid on the block and must be prepared to defend her recommendations.

First, however, Lindsey must finish the analysis and write her report. To help begin, she has formulated the following questions:

1. What is the firm’s cost of debt?

2. What is the cost of preferred stock for Swift Ltd.?

3. Cost of common equity

(1) What is the estimated cost of common equity using the CAPM approach?

(2) What is the estimated cost of common equity using the DCF approach?

(3) What is the estimated cost of common equity using the bond-yield-plus-risk-premium approach?

(4) What is the final estimate for r_s?

4. What is Swift Ltd.’s overall WACC?

5. Do you think the firm should use the single overall WACC as the hurdle rate for each of its projects? Explain.

6. What is the WACC for each project? Place your numerical solutions in Table 2.

7. Calculate all relevant capital budgeting measures for each project, and place your numerical solutions in Table 2.

Table 2

8. Comment on the commonly used capital budgeting measures. What is the underlying cause of ranking conflicts? Which criterion is the best one, and why?

9. Which of the projects are unacceptable and why?

10. Rank the projects that are acceptable, according to Lindsey’s criterion of choice.

11. Which project should Lindsey recommend and why? Explain why each of the projects not chosen was rejected.

Instructions

1.Your answers should be Word processed, submitted via Canvas.

2.Questions 5, 8, 9, and 11 are discussion questions.

3.Place your numerical solutions in Table 2.

4.Show your steps for calculation questions.

Your employer has just transferred you to beautiful Winnipeg. Since you anticipate being at the branch here for some time, you have decided to purchase a condo downtown. The condo you want to purchase is being listed at $385,000. The mortgage officer at your financial institution has informed you that the current rate on mortgages is 4.80%, compounded semi‐annually. Fortunately, you are a prudent saver and have managed to amass the 10% down payment in your savings account. You have decided to take the mortgage on an 18‐year amortization period hoping that this will keep the every second week (26 payments/year) payments manageable.

1. What is your bi-weekly (every second week) interest rate for this mortgage? (1 mark)

2. What is the bi‐weekly payment for this mortgage

3. What is the effective per annum interest rate that you are paying on this mortgage? (1 mark)

4. How much of your first payment will be principal?

5. If your employer moves you again in 4 years and you must sell your condo, how much principal do you still owe the bank?

a.NAL?

b.Maximum lease payment?

Porsche is expected to sell approximately 60,000 cars in the U.S. in 2019. I'll let you estimate an average selling price across Porsche models. For this example, let's assume that all the sales happen in December of 2019. Also, assume that Porsche has fully hedges their U.S. dollar exposure (based on predicted sales) using futures or forward contracts at a rate of $1.10 per Euro. What happens in the following situations:

a. the Dollar/Euro exchange rate remains unchanged and sales are as predicted

b. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are as predicted.

c. the Euro falls against the Dollar and the exchange rate moves to $1.25 per Euro. Sales are as predicted.

d. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% higher than expected.

e. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% lower than expected.

Be specific in your answers. Where does Porsche lose money, and how much? Where does Porsche make money and how much? What is the overall effect on Porsche's income in their home currency? FYI, you can make the Euro currency symbol in Word by using CRTL + ALT + E.  

1. A property will generate NOI of $12,000 per year for each of the next 8 years. You purchase this property at a 5% cap rate. If you expect to sell this property in 6 years at a terminal cap rate of 6%, what is you IRR?

While the operating budget process is underway in June, the capital budget process must also begin. Describe what should be happening in the capital budget

1. You are considering a property that will cost $54,200 today.  NOI from the property is expected to be $20,608 each year for the next five years.  Also, at the end of the fifth year, you expect you can sell the property for $13,200.  What is the property’s IRR?