Island Hotels, Inc. (IHI) forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$7 million (negative), but then its FCF will turn positive. At t = 2 IHI’s FCF will be $35 million, and at t = 3 IHI’s FCF will be $58 million. After Year 3, FCF is expected to grow at a constant rate of 5% forever. If IHI’s weighted average cost of capital is 16%, what is the firm's value of operations, in millions? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

1.   David Puddy is hoping to purchase a nice new car for $30,000 in two years. At that time he plans on taking out a 5-year loan with monthly payments and an APR of 4.75%. Based on his estimated earnings, Puddy thinks he will be able to afford monthly payments of $400 per month. Puddy plans on saving for the difference between the cost of the car and the amount he'll borrow by making monthly deposits over the next two years in a bank account that yields an annual rate of 3%.       

      a.   What is the amount of the down payment Puddy will need to purchase this car he wants to buy in two years?

      b.   What is the amount of the monthly savings deposits Puddy will need to make in order to save up the amount       he needs for the down payment?

The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $0 $10 B 5 5 C 10 0 a. If each stock is priced at $125, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (the effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Newman plans to retire in 25 years and plans to withdraw end of the year payments in the amount of $85,000 from

      his retirement account to allow him to enjoy the same standard of living he has enjoyed in life thus far. Newman’s

      financial planner has advised him that he should estimate his retirement will last 30 years and use a conservative

      8% annual rate of return in his financial planning. Newman does already have $75,000 already saved up for

      retirement, how much more does Newman need to save each year to reach his retirement goal?

       *Round answers to the nearest dollar

Anderson Associates is considering two mutually exclusive projects that have the following cash flows: Project A Project B Year Cash Flow Cash Flow

0 -$11,000 -$9,000

1 4,500 6,000

2 3,000 4,000

3 5,000 3,000

4 9,000 2,000

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?) Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

XYZ Corporation, an Australian based carmaker, is considering an expansion into Asia after its expansion into the US last summer was highly successful. Currently, XYZ does export cars to Asia, but the increased demand raises the question of an expansion in Asia. XYZ is trying to decide whether to establish a car manufacturing plant and office in Japan where cars would be built and then sold across Asia.

All relevant data is given in the tables below. The cost of the expansion is Yen 80,000,000, which must be immediately expended. Three-year EBITDA are 35,000,000 45,000,000 and 55,000,000 respectively. Moreover, XYZ would have to fund additional working capital of Yen 5,000,000 at the time of the expansion. Further investment in net working capital would be Yen 5,000,000, Yen 8,000,000, and Yen 10,000,000 in year 1, 2, and 3 respectively. If it builds the plant, XYZ will depreciate it at a rate of Yen 4,000,000 per year (starting in year 1) and will have to fund additional capital expenditures of Yen 8,000,000 per year to maintain and improve the plant. Although the project is assumed to have an infinite life, cash-flows are only projected up to three years and the terminal value of the project is computed based on the year 3 free cash-flow (FCF) assuming a growth rate that equals the Japanese long-run GDP growth rate.

All taxes are paid in Japan in the year the income is earned. Tax treaties are in effect so that XYZ will have no tax obligations to the Australian Tax Office (ATO). The following information applies to the valuation.

Required:

1. Calculate the cost of capital, in Australia, for the project.   
2. Calculate the forward exchange rates, F₁(AUD/Yen) through F₃(AUD/Yen), for the years 1, 2, and 3 based on the spot rate and the interest rates given in the question. (round to 5 decimal places)   
3. Calculate the Free of Cash Flows of the project in Yen from year 1 to year 3.   
4. What is the terminal value as of year 3? Use a perpetuity formula, the Free Cash Flows in Yen for year 3, and the Japanese growth rate assumption given in the question. Assume the appropriate discount rate is WACC.                              
5. Calculate the AUD value of FCF for the years 0, 1, 2 and 3 and the terminal value   using the forward rates calculated in (b).
6. What is the NPV of the project from XYZ's perceptive (in AUD)? Should XYZ expand into the Asian market?

What risks does a car company face? How can we limit these risks?

Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 50% ECB and the remainder in WCB? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Year                   ECB                    WCB

2014                   20.00%               25.00%

2015                   -10.00%              15.00%

2016                   35.00%               -5.00%

2017                  -5.00%                 -10.00%

2018                   15.00%                35.00%

For a new project of a company to increase the manufacturing capacity for five years, it will purchase new equipment for $1,500,000 and be housed in a building purchased eight years ago for $4,200,000. The building will be retooled for the new project at a cost of $500,000, including building permit fees of $25,000.

The purchased equipment will be depreciated using Modified Accelerated Cost Recovery System (MACRS) depreciation schedule, and sold for $250,000 in year 5.

The projected revenue for year 1 is $550,000. Subsequent year’s revenues will increase by eight percent of the preceding year’s revenues. This expansion project will result in an annual loss of revenues from an existing manufacturing operation of $100,000. Operating expenses (excluding depreciation and amortization) is estimated at 20 percent of net revenues.

Operating net working capital will rise by $250,000 and $300,000 in years 1 and 2, respectively. This investment in net working capital reverses in the final year of the project. Annual interest expense is $35,000.

Risk-Free Rate (10-Year U.S. Treasury) = 3%

The Equity Risk Premium = 4.5%

Tax Rate: 40%

Beta (β) = 1.2

Automaton’s Market Value of Equity / Total Capital ratio = 100%

Automaton’s Market Value of Debt / Total Capital = 0%

Calculate the cost of capital, net income for years 1 through 5, Free Cash Flows (FCF) for years 0 through 5, Net Present Value and Internal Rate of Return of this project?

Which of the following is true for a 5-year project with a 3-year payback period?

The net present value is negative.

The net present value is zero.

Initial screening reveals this to be an acceptable project.

The net present value is positive.

A firm with a 14% WACC is evaluating two projects for this years capital budget. After tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5

Project M -$30,000 $10,000 $10,000 $10,000 $10,000 $10,000

Project N -$90,000 $28,000 28,000 $28,000 $28,000 $28,000

1) What is the MIRR?

2) If the projects are mutually exclusive, which would you recommend?

3) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

Matterhorn Mountain Gear is evaluating two projects with the following cash flows:

What interest rate will make the NPV for the projects equal?

a)14.22%

b)18.31%

c)12.64%

d).26%

e)18.05%

Explain the following economic relationships: interest rates and stock prices; money supply and excess liquidity and stock price; government budget deficit and interest rates; government budget deficit and stock price; $ and trade balance; US versus foreign interest rates and the $; demographics and agin and stock prices.