You are thinking of making an investment in a new factory. The factory will generate revenues of $ 1 comma 250 comma 000$1,250,000 per year for as long as you maintain it. You expect that the maintenance costs will start at $ 60 comma 000$60,000 per year and will increase 5 %5% per year thereafter. Assume that all revenue and maintenance costs occur at the end of the year. You intend to run the factory as long as it continues to make a positive cash flow​ (as long as the cash generated by the plant exceeds the maintenance​ costs). The factory can be built and become operational immediately and the interest rate is 6 %6% per year. a. What is the present value of the​ revenues? b. What is the present value of the maintenance​ costs? c. If the plant costs $ 12 comma 500 comma 000$12,500,000 to​ build, should you invest in the​ factory?

You are given the following information concerning Really great Company Inc.:

Debt: 10,000 4.25 percent coupon bonds outstanding, with 10 years to maturity. The bonds provide investors 3% return (YTM).

Common stock: 400,000 shares of common stock selling for $42 per share. The stock has a beta of .90 and will pay a dividend of $3.5 next year. The dividend is expected to grow by 3 percent per year indefinitely.

Preferred stock: 10,000 shares of preferred stock with par value of $100 and 4% fixed dividend currently selling for $80 per share.

Additional information: Corporate tax rate is 35%

Calculate the WACC for the company.

Which of the following is a valid reason for a firm not to use as much debt as it can raise?

a. All of them are valid reasons for a firm to use less debt than might be available

b. The use of more debt is expected to result in a lower price/earnings ratio

c. More debt will increase the firmʹs riskiness                                                         

d. The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered

A 12.75 year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical duration of 11.79 years, but considerably higher convexity of 231.2. Answer the following:

(a)I) Calculate the prices of these two bonds.

ii) do the same but this time assume the yield to maturity on both bonds decreases to 7%.

A firm is currently financed with $400 of debt and $600 of equity. The expected return on the debt is 5%. The market beta of the firmʹs equity is 1.2; the risk -free rate is 2%; and the equity premium is 6%. The firm pays taxes at the marginal rate of 40%.         The firm is considering increasing its debt to $600 and using the funds to repurchase some of its stock. This is likely to change the expected return on debt to 7%. Using same WACC above, what will the new market beta of the firmʹs equity be? Round your answer to the nearest tenth.

a.1.0

b. Not determinable

c. 1.2                                                   

d. 1.4

How much money must you save every month for the next 45 years if you plan on retiring with $879 a month for what you expect is 11 years before you die. The intrest rate at the bank is 7% per year

​(Compound

interest with​ non-annual

periods​)

You just received a bonus of

​$2,000.

a.  Calculate the future value of

​$2,000​,

given that it will be held in the bank for

8

years and earn an annual interest rate of

6

percent.b.  Recalculate part

​(a​)

using a compounding period that is​ (1) semiannual and​ (2) bimonthly. c.  Recalculate parts

​(a​)

and

​(b​)

using an annual interest rate of

12

percent.

d.  Recalculate part

​(a​)

using a time horizon of

16

years at an annual interest rate of

6

percent.e.  What conclusions can you draw when you compare the answers in parts

​(c​)

and

​(d​)

with the answers in parts

​(a​)

and

​(b​)?

a.  What is the future value of

​$2,000

in a bank account for

8

years at an annual interest rate of

6

​percent?

​$nothing  

​(Round to the nearest​ cent.)

The shares of Great Company currently trades at $21. An option trader considers the following strategy concerning the stock. Trader buys one put option that expires next month with the strike of $20 for $1 as premium and simultaneously buys a call option with the strike price of $22 with $2 premium. Please construct a figure that depicts the value of the strategy and the profit at expiration. You may need to look at a relatively wide stock price range at expiration (maybe $13-25 to understand what is going on and to graph the results).

Please discuss also, what are the expectations of the trader about the future price of the stock?

What are the main risks involved?

. The Company is considering a change in its credit standards. The company sells currently 10 000 units of Technotron. The sales price is 40€. The variable cost is 60% of the sales price. The relaxation of credit standards should result in 15% sales increase. However, the average credit collection period increases to 80 days from current 30 days. It is also expected that bad debt loss would also increase from 2% to 5% of the sales. The company finances its current assets with short-term loans that carry 8% of interest.

Try to evaluate if a change in credit standards has a positive effect on the profits of the company or not. In order to do so, you will have to compare additional profits with increase in bad debt expense and financing costs of additional receivables.

Discuss, what are the positive and negative aspects of relaxation of credit standards (in general).

Here are book- and market-value balance sheets of the United Frypan Company:

Assume that MM’s theory holds except for taxes. There is no growth, and the $80 of debt is expected to be permanent. Assume a 32% corporate tax rate.

a. How much of the firm's market value is accounted for by the debt-generated tax shield?

b. What is United Frypan’s after-tax WACC if r_Debt = 6.5% and r_Equity = 16.5%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new value of the firm, other things equal? Assume a borrowing rate of 6.5%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume the correlation between the two stocks equals 1 exactly.Graph the investment opportunity set.

Now assume the correlation between the two stocks equals exactly –1. Again, graph the investment opportunity set.

If you would like, you can perform on the same graph.

If a company accepts all projects by comparing their IRR to the WACC, what will happen?

Your Investment advisor suggests a protective put position: go long the STI index fund and long put options on this fund. The option has an exercise price of $80 and 1 month until expiration. Assume STI index is currently trading at $100. Your best friend Joe recommends you to buy a 1-month call option on the STI index fund with exercise price $90 and buy 1-month risk-free asset with face value of $90.

a) Draw the payoffs to both strategies as a function of the STI index fund value in 1 month' time. Label your graph clearly.

b) Which of these strategies require a greater initial cash flow?

c) Suppose the market prices of the securities are as follows: STI index fund: $100 Riskfree asset: 85 Call: 20 Put: 2 Construct a table of realised profits for each portfolio for the following values of the STI index fund in 1 month: $0, $80, $90, $100, and $120. Plot the profits to each portfolio as a function of STI index fund value on one graph.

d) Which strategy is riskier? Briefly explain.

CASH CONVERSION CYCLE

Parramore Corp has $15 million of sales, $3 million of inventories, $2 million of receivables, and $3 million of payables. Its cost of goods sold is 65% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.
     days
2. 
   
3. If Parramore could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places.
     days
4. 
   
5. How much cash would be freed up, if Parramore could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $
6. 
   
7. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.

Table with Cash Flows for 5 projects.

1. Calculate the IRR for each of the projects presented. Rank the projects based on their IRR.
2. Graph the projects on an Investment Opportunity Schedule (interest rate on the vertical axis and initial investment on the horizontal). Suppose the firm has a capital rationing amount of $170,000 and a required rate of return of 10%.
3. Which projects should the firm implement based on your analysis using the IRR approach above? Write an email to your CFO explaining your rationale proving the choices based on the considerations of shareholder value and the maximum investment budget.