A company project has an initial cost of $40,000, expected net cash flows of $9,000 per year for 7 years. The company has a target capital structure of 10% short term debt at an interest rate of 6.0%, 50% long term debt at an interest rate of 9.0%, and 40% equity with a cost of 18%. The company’s tax rate is 28%.

a. What is the WACC to be used when evaluating this project?

b. What is the projects NPV, IRR, PB, DPB?

c. What is the projects PI?

Suppose you are interested in investigating the option price efficiency of Altria Group, Inc. (MO) listed options. You look at options expiring in January of 2020, which is close enough to one quarter for your purposes. You observe the following prices listed for the options (below). Are the options efficiently priced, how do you know (2 pts)? Hint look at a box spread with strikes at $60 and $70. If the options are not priced correctly, ignoring trading costs, what is the arbitrage profits that could be made from the trade? (2 pts) The risk-free rate is 1.5%

Strike Last Price

60.00 4.90

62.50 3.47

65.00 2.35

67.50 1.50

70.00 0.99

Puts

60.00 2.20

62.50 3.18

65.00 5.20

67.50 8.05

70.00 9.82

FoodMarkets Inc. is a grocery chain. It reported a debt to capital ratio of 10%, and a return on capital of 25%, on a book value of capital invested of $1 billion. Assume that the firm has significant operating leases. If the operating lease expense in the current year is $100 million and the present value of lease commitments is $750 million, estimate the FoodMarket's debt to capital and return on capital.

Tao Wang is considering leasing space for five years for his Chinese Buffet food establishment. He has three lease options as follows: 1. Fixed lease options: Pay $5,000 per month for sixty months beginning on the first day of the five-year lease. Pay $55,000 per year on the first day of each year for five years. 2. Mixed lease option: Pay $25,000 on the first day of each year and 3 percent of annual sales on the last day of each year for five years. The forecasted annual sales are $1,400,000 for the first year, and sales are expected to increase by 5 percent each year. Assume Tao’s cost of capital is 10 percent. Determine the annual cash rents under each option.

A stock's current price is 62. A call option with exercise price of 79 and maturity of 3 months is currently priced at $ 16.

What is the option's time value?

Carnes Cosmetics Co.'s stock price is $39, and it recently paid a $2.25 dividend. This dividend is expected to grow by 16% for the next 3 years, then grow forever at a constant rate, g; and rs = 15%. At what constant rate is the stock expected to grow after Year 3? Do not round intermediate calculations. Round your answer to two decimal places.

Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 11%. By how much would the value of the company increase if it accepted the better project (plane)? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places.

$   million

What is the equivalent annual annuity for each plane? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to three decimal places.

Plane A: $   million

Plane B: $   million

Growth​ Company's current share price is $ 20.10 and it is expected to pay a $ 0.95 dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of 4.4 % per year. a. What is an estimate of Growth​ Company's cost of​ equity? b. Growth Company also has preferred stock outstanding that pays a $ 2.25 per share fixed dividend. If this stock is currently priced at $ 28.15​, what is Growth​ Company's cost of preferred​ stock? c. Growth Company has existing debt issued three years ago with a coupon rate of 6.1 %. The firm just issued new debt at par with a coupon rate of 6.4 %. What is Growth​ Company's cost of​ debt? d. Growth Company has 5.3 million common shares outstanding and 1.4 million preferred shares​ outstanding, and its equity has a total book value of $ 49.9 million. Its liabilities have a market value of $ 19.5 million. If Growth​ Company's common and preferred shares are priced as in parts ​(a​) and ​(b​), what is the market value of Growth​ Company's assets? e. Growth Company faces a 38 % tax rate. Given the information in parts ​(a​) through ​(d​), and your answers to those​ problems, what is Growth​ Company's WACC? ​Note: Assume that the firm will always be able to utilize its full interest tax shield.

A 13.35-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 164.2 and modified duration of 12.36 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration—-12.30 years—-but considerably higher convexity of 272.9.

a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Suppose the yield to maturity on both bonds decreases to 7%. What will be the actual percentage capital gain on each bond? What percentage capital gain would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Given what you’ve learned from personal experience, from your readings, or from others’ experiences, what advice would you give to someone about to purchase a new home? You can discuss practical matters, loan-related matters, etc.

On November 1, 2009, Riley Corp. sold a $700 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of November 1, 2049. The bonds have a coupon rate of 6.00% with interest paid semiannually. Required: a) Determine the value today, November 1, 2019 of one of these bonds to an investor who requires an 8 percent return on these bonds. Why is the value today different from the par value? b) Assume that the bonds are selling for $890.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean. c) Explain what layers or textures of risk play a role in the determination of the required rate of return on Riley’s bonds.

You are considering a 3-year project of which details are summarized below. Your required rate of return for capital budgeting purposes is 20 percent.

• Annual sales = 30,000 units
• Unit sales price = $5.00
• Variable costs = $2.00 per unit
• Annual fixed costs = $18,000
• Initial capital investment = $72,000, depreciated to zero over 3 years
• Initial investment in working capital = $20,000, fully recovered at the end of the project
• The tax rate is 25%

a. What is the project’s annual net income?

b. What is the project’s annual operating cash flow?

c. What is the project’s initial capital investment?

d. What is the project’s NPV?  

e. What is the project’s IRR?  

f. Should you accept this project? Why or why not?

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow –$351,000 $66,800 $85,000 $142,000 $123,000 $82,200 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) PI Should it be accepted or rejected? Accepted Rejected