Suppose you are a capital budgeting expert in a consulting company. Your potential client,the Sun Devil Cookie Company, is considering the construction of a bakery to produce a newtype of chocolate chip cookie that is free of both cholesterol and saturated fat and has 2 caloriesper cookie. The bakery is expected to last for 25 years. Its initial cost is $80 million. This costcan be depreciated over 15 years in nominal terms using straight line depreciation to a valueof zero. After 15 years the bakery needs to be renovated. The cost of renovation will be $20million in real terms and can be depreciated (again using straight line depreciation to a valueof zero) over the remaining 10 years of the bakery’s life. The salvage value of the equipment atthe end of the project will be $1 million in real terms. The land the bakery is built on couldbe rented out for $1.25 million a year in real terms for 25 years with the rent collected at thebeginning of each year.The bakery will be able to produce 25 million packets of cookies per year. The price of apacket of cookies is currently $2.75. It is expected to grow at a rate of 5% per year in realterms for the first 2 years, then at 2% per year in real terms for 4 years, and finally at 0% peryear thereafter for the remainder of the bakery’s life. The basic ingredients for a package ofcookies currently cost $0.75. These costs are expected to grow by 1% in real terms through thelifetime of the project. The labor required to operate the bakery is expected to cost a total of$11 million dollars in nominal terms during the first year and this is expected to increase at 4%in real terms thereafter. The level of working capital for the project is $18 million at year 0 andthis is expected to increase at 3% in real terms per year. At the end of the project (year 25),the working capital can be fully recovered.The rate of inflation is expected to be 2% per year for the bakery’s life. The firm’s total taxrate including local taxes is 35%. Its opportunity cost of capital for projects of this type is 12%in nominal terms.Prepare an analysis of this capital budgeting problem, in which you compute the Net PresentValue using nominal terms. Pay special attention when converting real terms to nominal terms.Present your answer in a brief memo outlining your valuation. Make sure you state whether thefirm should build the bakery. The technical appendix should include a copy of your spreadsheet and explanations of the formulas you used in your computations.

You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 15%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

McGilla Golkf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determine the company will sell 60,000 sets per year for seven years. The marketing study also deremined that then company will lose sales of 12,000 sets of hits high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $620. The company will also increase sales of it cheap clubs by 15,000 sets. The cheap clubs sell for $400, and have variable costs of $210 per set. The fixed cost each year is $9,300,000. The company also spend $1,000,000 on R&D for the new clubs. The plant and eequitment required will cost $29,400,000 and will be depreciated on a straight-line basis over 7 years to a salvage value of $0. The new clubs will also require an increase in neot working capital of $1,400,000 that will be fully recovered at the end of the project. The tax rate is 40% and the cost of capital is 14 percent.

1. What are the incremental operating cash flows for this project?
2. What are the incremental cash flows associated with net working capital?
3. What are the incremental cash flows associated with investments?

Max and Veronica Shuman, along with their teenage sons, Terry and Thomas, live in Portland, Oregon. Max is a sales rep for a major medical firm, and Veronica is a personnel officer at a local bank. Together they earn an annual income of around $100,000. Max has just learned that his recently departed rich uncle has named him in his will to the tune of some $250,000 after taxes. Needless to say, the family is elated. Max intends to spend $50,000 of his inheritance on a number of long-overdue family items (like some badly needed remodeling of their kitchen and family room, the down payment on a new Porsche Boxster, and braces to correct Tom’s overbite). Max wants to invest the remaining $200,000 in various types of fixed-income securities.

Max and Veronica have no unusual income requirements or health problems. Their only investment objectives are that they want to achieve some capital appreciation, and they want to keep their funds fully invested for at least 20 years. They would rather not have to rely on their investments as a source of current income but want to maintain some liquidity in their portfolio just in case.

Questions

1. Describe the type of bond investment program you think the Shuman family should follow. In answering this question, give appropriate consideration to both return and risk factors.

2. List several types of bonds that you would recommend for their portfolio and briefly indicate why you would recommend each.

3. Using a recent issue of the Wall Street Journal, Barron’s, or an online source, construct a $200,000 bond portfolio for the Shuman family. Use real securities and select any bonds (or notes) you like, given the following ground rules:

   1. The portfolio must include at least one Treasury, one agency, and one corporate bond; also, in total, the portfolio must hold at least five but no more than eight bonds or notes.

   2. No more than 5% of the portfolio can be in short-term U.S. Treasury bills (but note that if you hold a T-bill, that limits your selections to just seven other notes/bonds).

   3. Ignore all transaction costs (i.e., invest the full $200,000) and assume all securities have par values of $1,000 (although they can be trading in the market at something other than par).

   4. Use the latest available quotes to determine how many bonds/notes/bills you can buy.

4. Prepare a schedule listing all the securities in your recommended portfolio. Use a form like the one shown below and include the information it calls for on each security in the portfolio.

5. In one brief paragraph, note the key investment attributes of your recommended portfolio and the investment objectives you hope to achieve with it.

You are to develop a risk management plan for the Pierce family. Your plan should incorporate insurance and noninsurance recommendations. Provide a complete explanation of your assumptions. Remember to make the work your own. Case facts: Joe, 37, self-employed carpenter, four employees, nets $60,000 per year Anita, 37, part-time nurse, earns $30,000 per year Children: Nathan (12), Isaac (10), Charlotte (6), Lydia (3) Assets, in $ Personal Cash 12,000 Mutual funds 8,000 IRAs 15,000 401(k) 28,000 Car 20,000 ATV 5,000 Boat 10,000 Personal property 95,000 Home 245,000 Business Truck 30,000 Tools & materials 60,000 Liabilities Credit cards 6,000 Car 15,000 Home 168,000 Step 1: Identify and evaluate the risks faced by this family. (1/2 page) Step 2: Explain the noninsurance risk management techniques you recommend for this family. (1/2 page) Step 3: Recommend and explain appropriate insurance coverage for this family. (1/2 page) Step 4: Explain the retirement planning options you would recommend for this family. (1/2 page) Step 5: Explain the estate planning options you would recommend for this family. (1/2 page)

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%.

1. Assume that the company pays no dividends.
   Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
   $
2. 
   
3. Why is this AFN different from the one when the company pays dividends?
   
   1. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
   2. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
   3. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.
   4. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
   5. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.

Galvatron Metals has a bond outstanding with a coupon rate of 5.8 percent and semiannual payments. The bond currently sells for $1,954 and matures in 22 years. The par value is $2,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt?

Quantitative Problem: Barton Industries expects next year's annual dividend, D₁, to be $1.70 and it expects dividends to grow at a constant rate g = 4.6%. The firm's current common stock price, P₀, is $20.50. If it needs to issue new common stock, the firm will encounter a 5.6% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.

REGRESSION AND RECEIVABLES

Edwards Industries has $320 million in sales. The company expects that its sales will increase 13% this year. Edwards' CFO uses a simple linear regression to forecast the company's receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship between receivables and sales (in millions of dollars) is as follows:

Receivables = $10.25 + 0.10(Sales)

a.Given the estimated sales forecast and the estimated relationship between receivables and sales, what are your forecasts of the company's year-end balance for receivables? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.

b. What are your forecasts of the company's year-end days sales outstanding (DSO) ratio? Assume that DSO is calculated on the basis of a 365-days year. Do not round intermediate calculations. Round your answer to two decimal places.

Currently, Atlas Tours has $6.12 million in assets. This is a peak six-month period. During the other six months, temporary current assets drop to $490,000.

Short-term rates are 4 percent. Long-term rates are 5 percent. Annual earnings before interest and taxes are $1,170,000. The tax rate is 38 percent.

a. If the assets are perfectly hedged throughout the year, what will earnings after taxes be? (Enter answers in whole dollar, not in million.)

Earnings after taxes            $

b. If short-term interest rates increase to 5 percent when assets are at their lowest level, what will earnings after taxes be? For an example of perfectly hedged plans, see Figure 6–8

Earnings after taxes            $

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

$

Now assume the company's assets totaled $3 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation?
-Select-Different or The same

LONG-TERM FINANCING NEEDED

At year-end 2016, total assets for Arrington Inc. were $1.6 million and accounts payable were $330,000. Sales, which in 2016 were $3 million, are expected to increase by 30% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $445,000 in 2016, and retained earnings were $335,000. Arrington plans to sell new common stock in the amount of $195,000. The firm's profit margin on sales is 6%; 35% of earnings will be retained.

a. What were Arrington's total liabilities in 2016? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.

b. How much new long-term debt financing will be needed in 2017? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round your intermediate calculations. Round your answer to the nearest cent. (Hint: AFN - New stock = New long-term debt.)

Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D₁, to be $2.30 and it expects dividends to grow at a constant rate g = 3.4%. The firm's current common stock price, P₀, is $28.00. The current risk-free rate, r_RF, = 4.7%; the market risk premium, RP_M, = 6%, and the firm's stock has a current beta, b, = 1.3. Assume that the firm's cost of debt, r_d, is 8.06%. The firm uses a 4% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to 2 decimal places.

Answer those three above please and thank you :)

What is your best estimate of the firm's cost of equity?

You decide to invest in a portfolio consisting of 40 percent Stock A, 40 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State Return if State Occurs of Economy Stock A Stock B Stock C Recession .18 - 18.6 % - 3.8 % - 22.7 % Normal .55 10.4 % 8.4 % 17.0 % Boom .27 28.4 % 15.7 % 31.6 .