Other things equal, which of the following bonds has the highest interest rate risk? (Hint: you do not need to do any calculation; just do pair-wise comparisons to determine which one is more sensitive to interest rate changes.)

1. A 10-year, 10% coupon bond issued by the US Department of the Treasury.
2. A 10-year, 20% coupon bond issued by the US Department of the Treasury.
3. A 10-year, 20% coupon bond issued by Microsoft.
4. A 15-year, 10% coupon bond issued by Santander.
5. A 15-year zero-coupon bond issued by the Massachusetts State Government.

explain what an efficient frontier is? do you think that the shape and the position of the frontier would be very different had we used monthly returns instead of annualized returns?

Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM will use the CCA method to depreciate the machine. This machine is included in CCA class 8 (20%). MM expects to sell the machine at the end of its 4-year operating life for $10,000. If MM’s marginal tax rate is 40%, what will be the present value of the CCA tax shield when it disposes of the machine at the end of Year 4? Assume that the relevant discount rate is 10%.

We are examining a new project, which is a scale expansion of our existing business, i.e. the nature of our new project is very similar to our existing business. We are a focused firm, operating in one industry. We expect to sell 6 million units per year at a price of $650 and a variable cost of $585. Annual fixed costs are expected to be $300 million. The project requires an initial investment of $200 million in equipment, to be depreciated on a straight-line basis over the 10 years. It also requires an investment of $100 million in working capital, which will be fully recovered at the end of the project. Our company’s equity beta is 1.2, and 30% of our capital structure is debt. However, we expect to finance the project with only 10% debt. The tax rate is 35%, the ten-year treasury bonds are yielding 4.1%, and the equity market risk premium is 7%. We expect to pay an interest rate of 5% on our debt. Assume the debt is riskless, i.e. ??" = 0.

a) The new project is a scale expansion. Why is this information relevant in order to evaluate the project? Discuss.

b) Imagine the project was significantly different from our existing business. Explain how you would obtain relevant variables for valuation

c) compute the WACC of the new project

A company has a bond issued at par K1, 000 and 2 years after being issued the bond is being sold for K1, 200.The coupon rate on the bonds is 10% and had a maturity of 10 years. Find the YTM?

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,560,000 in annual sales, with costs of $811,000. If the tax rate is 35%, what is the OCF for each year of this project?

Find.

OCF1

OCF2

OCF3

The price of Ervin Corp. stock will either be $61 or $90 at the end of the year. Call options are available with one year until expiration. Continuously compounded T-bills currently yield 5.07 %. Suppose the current price of Ervin stock is $76.

What is the value of the call option, using the risk-free approach, if the strike price is $75 per share? (Round answer to 2 decimal places. Do not round intermediate calculations).

Your boss asks you to compute your company’s cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $20,100, accounts receivable averaged $20,600, and accounts payable averaged $18,100. You also see that the company had sales of $147,000 and that cost of goods sold was $117,600. Calculate firm’s cash conversion cycle?

4.) You have ​$55,000. You put 15​% of your money in a stock with an expected return of 13​%, ​$38,000 in a stock with an expected return of 15​%, and the rest in a stock with an expected return of 23​%. What is the expected return of your​ portfolio?

12.) The​ risk-free rate is 4.9​% and you believe that the​S&P 500's excess return will be 8.5​% over the next year. If you invest in a stock with a beta of 1.4 ​(and a standard deviation of 30​%), what is your best guess as to its expected excess return over the next​ year?

13.) Suppose the​ risk-free return is 4.7% and the market portfolio has an expected return of 10.1% and a standard deviation of 16%. Johnson​ & Johnson Corporation stock has a beta of 0.30. What is its expected​ return?

16.) Suppose Autodesk stock has a beta of 2.30​, whereas Costco stock has a beta of 0.68. If the​ risk-free interest rate is 6.5% and the expected return of the market portfolio is 14.0%​, what is the expected return of a portfolio that consists of 70 % Autodesk stock and 30 % Costco​ stock, according to the​ CAPM?

After discovering a gold vein in the Colorado Mountains, CTC Mining Corporation must decide to go ahead and develop the deposit. The most cost effective method of mining gold is the sulfuric acid extraction, a process that could result in environmental damage. To begin mining CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The mining operation will net the firm an estimated $350,000 per year and the vein is expected to last for five years. CTC’s has no debt, preferred stock of $250,000 with annual dividends of $23,750. And $2.5 million in common stock with a cost of 15%. Assume that the cash flows occur at the end of each year.

a. What is the Cost of Capital that should be used on this project.

b. What is the project’s NPV, PI, IRR, PB, 7 DPB?

c. Assuming environmental impacts are not considered, should the project be undertaken?

d. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision to invest?

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $24.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.34 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.73 million per year and cost $1.62 million per year over the 10-year life of the project. Marketing estimates 18.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 30.00%. The WACC is 14.00%. Find the NPV (net present value).

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $27.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.06 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.09 million per year and cost $2.21 million per year over the 10-year life of the project. Marketing estimates 15.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 26.00%. The WACC is 14.00%. Find the IRR (internal rate of return).

Thanks!

Davis Industries must choose between a gas powered or an electric powered forklift truck for moving materials in its factory. The electric powered truck will cost more, but it will be less expensive to operate; it will cost $22,000 whereas the gas powered will cost $17,500. Davis’s pretax cost of debt 8% and their cost of equity is 18%. The target capital structure is 40% debt and 60% equity. The company’s tax rate is 22%. The life of both trucks is expected to be six years. The net cash inflows for the electric powered truck will be $6,290 per year and those for the gas powered truck will be $5,000 per year.

Calculate the WACC for the project and the NPV, PI, IRR, PB, DPB for each type of truck and decide which to recommend.