Use the following information about Rat Race Home Security, Inc. to answer the questions:

Average selling price per unit $317.

Variable cost per unit $198

Units sold 315

Fixed costs $9,229

Interest expense 19,455

Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 6.6 percent?

(You should calculate the degree of financial leverage first).

Use the following information about Rat Race Home Security, Inc. to answer the questions:

Average selling price per unit $305.

Variable cost per unit $184

Units sold 490

Fixed costs $8,722

Interest expense $12,378

Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?

Why are changes in gross interest income and gross interest expense highly correlated, while noninterest income and noninterest expense are less highly correlated?

1. Construct a bond amortization schedule for a $100 par value 2-year bond with 7% coupons paid semiannually, redeemable at par and bought to yield 4% per annum.

2. The following shows the information of a government bond traded in the secondary market.

Type of Bond Government bond

Issue Date May 16, 2006

Maturity Date May 16, 2016

Face Value $100

Redemption Value $108

Coupon Rate 5% payable semiannually

Yield Rate 8% convertible semiannually

Construct the bond amortization schedule for year 5 and year 6 (i.e., for the 9th coupon through the 12th coupon).

11. 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 all-inclusive cash flow for year 3 (please solve in Excel)?

b. What is the NPV (please solve in Excel)?

c. What is the IRR (please solve in Excel)?

d. Does the project add value for shareholders? Why?

21. Please solve in Excel; round to 3 decimal places.

Company A has a single bond issue American bond (American bonds pay out interest semiannually); the bond has a 6.5% coupon, 9 years to maturity, trades at $1245 per $1000 face value with a face value of $600,000. The cost of equity of 11%, cost of preferred stock of 8%. The company has 120,000 shares of common stock outstanding selling at $30 per share. It has 50,000 shares of preferred stock outstanding selling at $25 per share. The tax rate is 30%.

What is Company A's WACC (please solve in Excel)?

“Bankrupt” Corporation is in a deep financial crisis. You are one of the financial avengers “Bankrupt” is desperately seeking help from. CEO of the company informed you that he is considering the two risky projects “Thanos” and “Loki” to protect the firm from financial collapse. Both projects have similar risk characteristics. Bankrupt’s WACC is 11%. The initial investments for both the projects are $200 million. Cashflow from the projects are as follows;

Year           1                2                3                4

Thanos       10M           60M           80M           160M

Loki           70M           50M           20M           160M

Now, your job is to explain the following questions in great detail so that the CEO understands your plans to protect the firm.

1. Explain your decision when Thanos and Loki are mutually exclusive, and when they are independent.
2. WACC has increased to 15%. What change you will see in NPV?
3. What is IRR and how it is different from NPV? What is the IRR for Thanos and Loki? Based on IRR which project you should accept?
4. How is IRR identical to Bond’s YTM?

1. Discuss the differences between the stock split and stock dividends.
2. Discuss the concept of share repurchases. What are the advantages and disadvantages of share-repurchase?

ABC Company plans to sell 500,000 units of finished product in July and anticipates a growth rate in sales of 10% per month. The desired monthly ending inventory in units of finished product is 65% of the next month's estimated sales. There are 355,000 finished units in inventory on June 30. Prepare the production requirement in units of finished product for the July-October.

1. You are the CEO of “I am the top 1%” Corporation, which has a capital structure of 60% equity and 40% debt. The estimated net income of your company is $600K. Your capital budget is $800K for the coming year. If you follow the residual dividend models, how much dividend you can pay and what is your pay-out ratio? What happens to dividend when estimated net income is $400K or $800K?
2. Discuss the advantages and disadvantages of Residual dividend policy.
3. What are the steps you consider in setting your dividend policy?
4. Explain the concept of DRIP with an example.

Beta company is a publicly traded company, with 20 million shares trading at $ 70 a share and $ 600 million in debt (market value as well as book value) outstanding. The firm derives 70% of its value from cloud storage and hosting, and the remaining 30% from technical service. The unlevered beta is 0.8 for firms in the cloud business and 1.2 for firms in the technical service business. Beta company is rated A and can borrow money at 5%. The risk-free rate is 2% and the market risk premium is 8%; the corporate tax rate is 30%, and the firm has a capital gains tax rate of 20%.

1. Estimate the cost of capital for Beta Company

2. Beta Company is considering acquiring Alpha Company, another cloud hosting company (which derives 100% of its revenues from hosting) for $ 350 million, three quarters of which it plans to fund by a new debt issue (which will cause its rating to drop and its cost of debt to rise to 5.5%) and a quarter by issuing new stock. Estimate the cost of capital after the acquisition.

The company is considering a five-year project that will require $680,000 for new manufacturing equipment that will be depreciated straight-line to a zero-book value over five years (depreciation rate is 20% per year). At the end of the project, the equipment can be sold for 15 percent of its original cost. The project requires an initial investment in net working capital of $90,000 (all of which will be recovered at the end of the project). The project is expected to generate annual sales of $845,000 with annual costs of $545,000. The tax rate is 25 percent and the required rate of return is 17.5 percent. Instructions: Complete the pro forma and determine total cash flows for each year of project’s life. Calculate initial outlay (total cash flow in Year 0), after-tax salvage value in Year 5, and NPV of the project. Explain your decision whether you recommend to accept or reject the project.

Federal Biochem's preffered stock pays a fixed annual dividend of $2.4. The company's common stock just paid a dividend of $1 and this dividend is expected to grow at 4% every year starting from today. The required rate of return for both securities is 12%. If you were to buy the preffered stock today and convert it to common stock in 5 years, what would be the approximate conversion ratio from preferred stock to common stock that would allow you to earn annual rate of return of 14.77% on your investment on the preferred stock over the five year investment horizon?