1. After going over her budget, a dairy farmer has determined that she can afford to pay KES 632 per month towards a milk packaging machine. She calls up her local bank and finds out that the going rate is 12% per month for 48 months. How much is she able to borrow and repay?

Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 11%?

A. $18,097

B. $14,807

C. $9,871

D.$16,452

E. $11,516

Wizard Inc. is considering a five-year project that has a weighted average cost of capital of 14% and a NPV of $80,720. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project?

A. $22,336

B. $19,985

C. $29,390

D. $28,214

E. $23,512

Halliford Corporation expects to have earnings this coming year of $ 2.72 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 53 % of its earnings. It will then retain 20 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 24.62 % per year. Any earnings that are not retained will be paid out as dividends. Assume​ Halliford's share count remains constant and all earnings growth comes from the investment of retained earnings. If​ Halliford's equity cost of capital is 10.8 %​, what price would you estimate for Halliford​ stock? ​Note: Remenber that growth rate is computed​ as: retention rate times rate of return.

What is the price per share?

a) the information in the statement of comprehensive income if used with information in the other financial statements help external users answer several questions. State and briefly explain the qusetions that can be answered by analysing the statement of comprehensive income.

b) Analysis of earnings quality is often affected by an analyis of receivables and their collectability. The analyst must be alert to changes in the allowance computed relative to sales, receivables or indusry and market conditions. Two key questions arise for the analyst:

i) collection risk

ii) authenticity of receivables

Explain the key issues or questions an analyst should consider when analysing:

i) collection risk

ii) authenticity of receivables

c) Explain any six methods/ ways a firm can undertake earnings management

Question 2

Orange Inc. is considering two mutually exclusive projects (i.e., can choose either one but not both), Alpha in Country A, and Beta in Country B. Project Alpha requests an initial investment of $300,000 and has projected annual cash flows of $20,000, $50,000, $50,000 and $350,000 over 4 years. Project Beta requests an initial investment of $88,000 and has projected cash flows of $12,000 for the first year, and then the cash flows are projected to grow at a constant rate of 5 percent per year forever. Based on the project characteristics, the company requires an 15 percent return for Project Alpha but requires an 17 percent for Project Beta.

You require a 15 percent return on your investment and a payback period of 3 years.

1. If the company requires a maximum payback period of 4 years, which investment will you choose according to the payback criterion? Why?
2. If you apply the NPV criterion, which investment will you choose? Why?
3. Name three disadvantages of the payback period
4. Based on your answer in (a) and (b), which project will you finally choose? Why?

Question 3

Parker & Stone, Inc., is considering a new project that requires an initial fixed asset investment of 1.2 million. The project also requires an initial investment in net working capital of $250,000. The project is expected to generate $950,000 in sales and cost $400,000 every year for three years. The fixed asset follows a straight-line depreciation. After three years, the fixed asset has a zero book value but is estimated to have a market value of $200,000, and the net working capital will fully recovery. The corporate tax rate is 35%.

1. What are the operating cash flows in each year?
2. What are the cash flows from net working capital and the net capital spending in year 3?
3. What are the CFFA in each year?
4. If the required return is 10% for a similar risk level of project, should the company implement this project?

Question 4

At year beginning, you observed that the price of stock Apple was $100 and the price of Stock Orange was $900. To understand the relation between risk and return, you keep watching on the performance of the stock and the bond over the next three years. The information you observed is as follows:

1. What is the stock Apple’s dividend yield in year 2? What is the Stock Orange’s capital gains yield in year 3?
2. During the 3-year observation period, what are the average annual total return of Apple and Orange?
3. Based on the lessons learned from the capital market history, discuss your interpretation of “higher risk and higher expected return”.

Question 5

Consider the following stock information about Tencent and HSBC

1. What’re the expected return on each stock?
2. What’re the standard deviation on each stock?
3. The risk free rate is 1.5%. Based on the CAPM, If Tencent’s market beta is 1.5, what’s the beta of HSBC?
4. If you invested 65 percent in Tencent and 35 percent in HSBC, what is your portfolio expected return? The standard deviation? .
5. Given the portfolio information in (d) and beta information in (c), what is the portfolio’s market beta? .

Question 6

SmartCar Corporation has 1 million shares of common stock outstanding, 20,000 shares of preferred stock outstanding, and 40,000 corporate bonds outstanding. The common stocks sell for $25, with a market beta of 1.5. The corporate bonds sell for $950 and the current YTM is 5%. The preferred stock currently sells for $100, with an annual dividend payment of $8 per share. The risk-free rate is 2% and the market expected return is 8%. SmarCar’s corporate tax rate is 35%. What is SmartCar’s cost of capital?

Suppose you are a fund manager, currently managing a diversified risky portfolio that consists of equity index fund A (40%), bond index fund B (30%), and international equity fund C (30%). The portfolio has an expected rate of return of 12% and a standard deviation of 25%. Lisa, a project manager in IBM, is one of your clients. After some discussion with her, you suggest Lisa to invest her total $800,000 personal wealth in your fund and a T-bill money market fund, which has a return of 4%. You can assume the quadratic utility function for some of the following analysis.

a) If Lisa chooses to invest 70% of a portfolio in your fund and 30% in the T-bill, what is the expected value and standard deviation of the rate of return on her portfolio?

b) Suppose that Lisa prefers to invest in your fund a certain proportion so that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio’s standard deviation will not exceed 18%. What is the investment proportion of your fund in Lisa’s new portfolio? What is the expected rate of return on her overall portfolio?

c) From Lisa’s risk preference questionnaire, you learnt that her risk-aversion coefficient is A = 1.2. What proportions of the total investment should you suggest that she invest in your fund and the T-bill, respectively?

d) Assume Lisa still keeps her allocation as in part a), i.e., 70% in your fund and 30% in the T-bill. Few weeks later, Lisa is granted some IBM company’s stocks worth $200,000, as bonus of the year. By looking at historical return data, you provide her with the following forecast information. What’s the expected return of Lisa’s new portfolio that includes IBM? What’s the standard deviation of her new portfolio?

e) Continue with question d). Now Lisa decides to choose one of the following: i) keep all IBM stocks in her current portfolio; ii) sell all IBM stocks and invest the $200,000 in the previous held portfolio (70% your fund and 30% in the T-bill). Which one will you recommend? Please explain why.

7. Please solve in Excel and round to 3 decimal places:

The original cost of the new production line is estimated at $3 million and falls into 3 year MACRS. This is a 3 year project. Expected annual sales are $2,950,000 per year, with associated annual costs of $1,250,000. The project requires a net working capital of $375,000. They can usually sell their production lines for 40% of their original costs at the end of the project. The tax rate is 32% and the relevant interest rate is 15%.

a. What is the relevant cash flow for year 0?

b. What is the OCF for year 1 (please solve in Excel)?

c. What is the after tax salvage value of the production line (please solve in Excel)?

Question 1) You invest $100,000 today in an online savings account for 5 years. If the interest rate is 4% p.a., calculate the future value under each of the following scenarios:

a) Interest rates are compounded annually
b) interest rates are compounded monthly

Question 2) You expect to receive $50,000 from your superannuation in 3 years from today. If the interest rate is 8% p.a., calculate the future value under each of the following scenarios:

a) interest rates are compounded annually
b) interest rates are compounded quarterly

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 4%, and the market’s average return was 12%. Performance is measured using an index model regression on excess returns.

a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places. Answer must be in percentages)

b. Which stock is the best choice under the following circumstances?

Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 8%. Currently, 1 U.S. dollar will buy 0.85 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 2.6%, while similar securities in Switzerland are yielding 1.3%.

1. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round the net present value to the nearest cent and rate of return to two decimal places.

   NPV = $----------------  

   Rate of return =---------------------- %

2. What is the expected forward exchange rate 1 year from now? Do not round intermediate calculations. Round your answer to two decimal places.

   ------------Swiss franc (SF_r) per U.S. $

3. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine? Do not round intermediate calculations. Round the net present value to the nearest cent and rate of return to two decimal places.

   NPV = ---------- Swiss francs

   Rate of return =---------- %

Research a company currently in the business news. Explain why it has been receiving media attention and describe the company's current financial condition compared to the rest of the industry. Support your answer with financial ratios and cite any references used.

1. You have recently earned the Certified Financial Planner ® designation and have increased your client base because of it. You have just added some members of the Gilligan’s Island cast to your list of clients. Some of their stories and investment goals are described below:

A. Bob Denver (Gilligan) received a large lump sum as compensation for the Season 3 DVD in the amount of $2.1 million. He wants to purchase a home on the beach in Northern California. You advise him to use the entire $2.1 million plus a $3.2 million loan from a financial institution that will charge him a 6.1% annual interest rate over ten years. His first payment is due on August 5, 2019.

Determine the monthly payment on the loan.

2. Alan Hale Jr (the Skipper) currently has $3.8 million invested in a well-diversified portfolio of securities earning 12%. Alan has two children (ages 15 and 10) and would like to create a trust fund for each child so that each would have $10 million on their 25^th birthdays (10 and 15 years from today). Alan would like to save quarterly for the next 5 years to provide for his children.

Determine the quarterly amount (beginning today) Alan must save to reach the goal for both children assuming the new funds will earn 12% annually.

C. Tina Louise (Ginger) has recently seen her entertainment income reduced to zero because the industry has typecast her. Luckily, she has $10 million invested in a retirement fund earning 10% per year. She is considering retirement in three years when she turns 60. Tina believes she can live until she is 90.

Determine the monthly retirement income if she earns 6% during retirement years if she wants to leave $1 million to the Howell Estate on the date of her death.

XYZ Company is considering the purchase of a new machine. The machine
will cost $200,000 and is expected to last 10 years. However, the
machine will need maintenance costing $25,000 at the end of year three
and at the end of year six. In addition, purchasing this machine would
require an immediate investment of $35,000 in working capital which
would be released for investment elsewhere at the end of the 10 years.
The machine is expected to have a $15,000 salvage value at the end of
10 years. The machine will be used to generate net cash inflows of
$46,000 per year in each of the 10 years. XYZ Company has a cost of
capital of 8% and an income tax rate of 40%.

Calculate the net present value (NPV) of this machine.

The ASAN Ink’s Inc. is evaluating the following investment opportunity which will cost the firm $90,000 if undertaken. In addition, it is projected that the following after-tax returns will be generated from the project.

1 30,000

2 45,000

3 40,000

4 -10,000

What will the NPV be on the proposed project based on a weighted average cost of capital of 12%? Additionally, what will the project’s IRR be? Which one is more reliable in this situation? Why?