Consider the following $1,000 par value zero-coupon bonds:

a. According to the expectations hypothesis, what is the market’s expectation of the one-year interest rate three years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What are the expected values of next year’s yields on bonds with maturities of (a) 1 year; (b) 2 years; (c) 3 years? (Do not round intermediate calculations. Round your answer to 2 decimal places.

1. A 30 year maturity corporate bond has a 8% coupon rate with coupons paid annually. The bond currently sells for $875.50. A bond market analyst forecasts that in 8 years, yield on such bonds will be at 10%. You believe you will be able to reinvest the coupons earned over the next 8 years at a 5% rate of return. What is your expected annual compound rate of return if your plan on selling the bond in 8 years?

Cost of debt using both methods​ (YTM and the approximation​ formula)   ​Currently, Warren Industries can sell 15 dash year $1,000 ​-par-value bonds paying annual interest at a 11​% coupon rate. As a result of current interest​ rates, the bonds can be sold for $1,100 each before incurring flotation costs of ​$30 per bond. The firm is in the 40​% tax bracket. a.  Find the net proceeds from the sale of the​ bond, Upper N d

b.  Calculate the​ bond's yield to maturity (YTM​) to estimate the​ before-tax and​ after-tax costs of debt.

c.  Use the approximation formula to estimate the​ before-tax and​ after-tax costs of debt.

a.  The net proceeds from the sale of the​ bond,

Upper N d is

​

Liman Company has a single product whose selling price is $140 and whose variable expense is $60 per unit. The company’s fixed expense is $40,000. REQUIRED Using the equation method, solve for the units required to earn a target profit of $6,000 Selling price – Variable expenses – Fixed Expenses = Target profit 140U – 60U – 40,000 = 6,000 80U = 46,000 46,000 / 80 = 575 units (Fixed Costs + Target Income)/CM 46,000 / 80 Using the formula method, solve for the dollar sales that are required to earn a target profit of $8,000 If tax rate is 40%, how many units should be sold to earn a target after tax profit of $6,000? Selling price – Variable expenses – Fixed Expenses = Target profit / (1 – T) 140U – 60U – 40,000 = 6,000 / (1 - .40) 140U – 60U – 40,000 = 6,000/.60 80U – 40,000 = 10,000 80U = 50,000 50,000/80

1. Provide Modigliani and Miller’s explanation of how debt affects firm value and the WACC. Begin with the perfect (no taxes) case, and expand it to the world with taxes.

A project that costs $2,500 to install will provide annual cash flows of $750 for each of the next 5 years.

a. Calculate the NPV if the opportunity cost of capital is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

b. Is this project worth pursuing? Yes No

c. What is the project's internal rate of return IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.) IRR %

Sunland Handicrafts, Inc., has net sales of $3.20 million with 50 percent being credit sales. Its cost of goods sold is $1.92 million. The firm’s cash conversion cycle is 51.5 days, and its operating cycle is 86.5 days. What is the firm’s accounts payable?

Your landscaping company can lease a truck for $7,200 a year for 6 years. It can instead buy the truck for $35,000. The truck will be valueless after 6 years. a. What is the present value of the lease payments, if the opportunity cost of capital is 7%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ b. Is it cheaper to buy or lease? Lease Buy

Problem 5

5.1 Gordon’s model of equity valuation assumes k < g. (True / False)

5.2 High P/E multiple may indicate, all else equal:

              a. High growth

              b. Low systematic risk

              d. Overvaluation

              e. Any of the above

5.3 Under Gordon’s model of equity valuation, the same dividend amount is paid out in perpetuity. (True / False)

5.4 Retention ratio is the percentage of earnings that is paid out as dividends. (True / False)

5.5 Firm X is priced at $10 per share. Expected dividend next year is $1 per share, and the expected stock price next year is $11. Therefore, stock is expected to earn (11 + 1 – 10)/10 = 20%. This implies that the company has required rate of return that is also 20%. (True / False)

5.6 When ROE < k, increasing _______ should increase the intrinsic value of equity.

              a. Retention ratio

              b. Dividend payout

              c. Dividend growth rate

5.7 Present Value of Growth Opportunities PVGO can never be negative. (True / False)

5.8 Required rate of return on equity can be found from which formula?

              a. CAPM

              b. Gordon’s Model

              c. ROE

              d. Either of the above, depends on what information is provided

5.9 If the company is correctly priced under Gordon’s model, and changing dividend payout policy does not change stock price, it must be that

              a. ROE = k

              b. The company is a cash cow

              c. PVGO > 0

5.10 Growth in dividends can be represented as sustainable growth rate in Gordon’s model. (True / False)

Use the Black-Scholes formula for the following stock:

Recalculate the value of the call with the following changes:

Calculate each scenario independently. (Round your answers to 2 decimal places.)

Value of the Call Option

a.=

b.=

c.=

d.=

e.=

1. You are considering three independent projects: A, B, and C. Given the following free cash flow information, calculate the payback period for each. Required rate of return is 9%. (1 Mark)

If you require a 3-year payback before an investment can be accepted, which project(s) would be accepted? (0.5 Mark)

Kirk is a bright individual who is being groomed for the Controller’s position in a medium-sized manufacturing firm. After his first year as Assistant Controller, the officers of the firm were starting to include him in major company functions. For instance, today he was attending the monthly financial statement summary given at a prestigious consulting firm. During the meeting, Kirk was intrigued at how all the financial data he had been accumulating was transformed by the consultant into revealing charts and graphs. Kirk was generally optimistic about the session and the company’s future until the consultant started talking about the new manufacturing plant the company was adding to the current location and the costs per unit of the chemically plated products it produced. At that time, Bob (the President) and John (the chemical engineer) started talking about waste treatment and disposal problems. John mentioned that the current waste facilities were not adequate to handle the waste products that would be created by the “ultramodern” new plant in a manner that would meet the industry's fairly high standards, although they could still comply with federal standards. Kirk’s boss, Henry, noted that the estimated cost per unit would be increased if the waste treatment facilities were upgraded according to recent industry standards. While industry standards are presently more stringent than federal regulations, environmentalists are strongly pressuring for more stringent regulations at the federal level. Bob mentioned that since their closest competitor did not have the waste treatment facilities that already existed at their firm, he was not in favor of further expenditure in this area. Most managers at this meeting resoundingly agreed with Bob, and business continued on to another topic. Kirk did not hear a word during the rest of the meeting. He kept wondering how the company could possibly have such a casual attitude toward the environment. Yet he did not know if, how, or when he could share his opinion. Soon he started reflecting on whether this was the right firm for him. What should Kirk do? Putting Corporate Responsibility first, but recognizing the politics at play, what is the most ethical thing to do? The most practical? What strategy would you suggest to Kirk if he came to you for advice?

The price of Build A Fire Corp. stock will be either $52 or $83 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of the company's stock is $60. What is the value of the call option if the exercise price is $50 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the call option $ b. Suppose the exercise price is $80 and the current price of the company's stock is $60. What is the value of the call option now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the call option $