The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision: Use Exhibit A.8.

Required:

Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)

1. Internal Rate of Return Method—Two Projects

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $44,209.44 and could be used to deliver an additional 40,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $54,765. The new machine would require three fewer hours of direct labor per day. Direct labor is $15 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 9%. However, Munch N’ Crunch has funds to invest in only one of the projects.

a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

2.

Net Present Value Method and Present Value Index

Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 110 baseballs per hour to sewing 198 per hour. The contribution margin per unit is $0.38 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to $20 per hour. The sewing machine will cost $167,400, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $85,800, have a six-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 12% on its investments.

a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above. Round to the nearest dollar.

b. Determine the present value index for the two machines. If required, round your answers to two decimal places.

3.

Net Present Value—Unequal Lives

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $625,304. The net cash flows estimated for the two proposals are as follows:

The estimated residual value of the processing mill at the end of Year 4 is $270,000.

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.

Describe how someone’s risk tolerance directly impacts their retirement planning. Use an example to illustrate how much difference it would make if someone was a conservative investor who averaged a 7% return over 32 years on their savings versus another more aggressive investor who averages 11% over the same period. Interpret your results: advantages and disadvantages of the two investment strategies

ou are given the following information on Parrothead Enterprises: Debt: 9,200 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. These bonds pay interest semiannually and have a par value of $2,000. Common stock: 315,000 shares of common stock selling for $66.30 per share. The stock has a beta of 1.08 and will pay a dividend of $4.50 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 9,800 shares of 4.65 percent preferred stock selling at $95.80 per share. The par value is $100 per share. Market: 10.2 percent expected return, risk-free rate of 4.5 percent, and a 23 percent tax rate. Calculate the company's WACC.

Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume the company has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.) %ΔROE Recession % Expansion % Assume the firm goes through with the proposed recapitalization and no taxes. c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % d. Calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) %ΔROE Recession % Expansion % Assume the firm has a tax rate of 35 percent. e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion % f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion %

You work in the treasury department of a global consulting company that typically invoices its customer bills in local currency. One of your company’s consulting teams has been working on a project in Australia that you expect will be completed within six months, at which time you expect to bill your client AUD1,160,000.

It is now May, 2020, and you are concerned that the Australian dollar will depreciate over the next six months. You decide to consider using currency futures contracts as a hedge. You collect the following data:

S[USD/AUD] = .7742

AUD futures contract prices: .7736 Open interest (# of contracts:) 62,000

June ‘20

Sept. ‘20

.7707 7,300

Contract notional amount: AUD 100,000
Minimum tick size: .0001 per Australian dollar increment

(a) Using the September contract, calculate the amount of contracts you would use if you employed (i) a naive hedge and (ii) a delta hedge approach to minimize the difference in the change in the value of this hedge with the change in the value of the AUD1,160,000 receivable. Specify if you would buy or sell these contracts.

(b) Assume the six month period described above extends at least one month beyond the maturity date of the September 2020 contract. Give two reasons why you might still choose to use the June contract instead of the September contract and describe what transactions you would execute in early June assuming you still wanted to maintain the hedge.

3. Use the information in the table below (related to Tostitos Corp.) to answer the following questions

   Economic State	Probability (%) Return (%)
   Deep Recession	10	-15
   Recession	20	-10
   Normal Economy	50	2
   Economic Expansion	20	15

4. What is the expected return for Tostitos Corp.’s stock? [3 points]

5. What is the Tostitos Corp’s standard deviation of returns? [4 points]

6. What is the 95% confidence interval associated with the returns of Tostitos Corp.’s

   stock? [3 points]

7. You form a two-stock portfolio by combining Tostitos Corp.’s stock (from Question 3 above) along with the stock of TD Bank. TD Bank has a marginal tax rate of 25% and a cost of debt of 3.25%. TD Bank’s stock has an expected return of 9%, a standard deviation of returns of 25%, and a correlation coefficient with Tostitos Corp.’s returns of 0.65

8. 1. If you wish to create a portfolio with an expected return of 5%, what is the weight of each of Tostitos Corp. and TD Bank that you would hold? [4 points]

   2. What is the standard deviation of returns of this portfolio? [3 points]

   3. What is the 95% confidence interval associated with this portfolio? [3 points]

4 Scenarios with the use of call options when the investor believes the foreign currency may appreciate. tell me how the investor can use options if he believes the currency may depreciate. What options should the investor buy or sell? Tell me what happens if the investor buys this option and the option finishes 1) in the money, and 2) out of the money. Additionally, tell me what happens if the investor sells this option and the option ends both in the money and out of the money.

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3,130,000 this year. Depreciation, the increase in net working capital, and capital spending were $239,000, $104,000, and $485,000, respectively. You expect that over the next five years, EBIT will grow at 20 percent per year, depreciation and capital spending will grow at 25 per year, and NWC will grow at 15 per year. The company currently has $17,900,000 in debt and 515,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.7 percent and the tax rate is 35 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price $

1. please include calculations/explanations to all answersYou are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 14% with a volatility of 20%. Currently, the risk-free rate of interest is 3.8%. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an expected return of 20%, a volatility of 60%, and a correlation of 0 with the Natasha Fund.

1. Is your broker right?
2. You follow your broker’s advice and make a substantial investment in Hannah stock so that, considering only your risky investments, 60% is in the Natasha Fund and 40% is in Hannah stock. When you tell your finance professor about your investment, he says that you made a mistake and should reduce your investment in Hannah. Is your finance professor right?
3. You decide to follow your finance professor’s advice and reduce your exposure to Hannah. Now Hannah represents 15% of your risky portfolio, with the rest in the Natasha fund. Is this the correct amount of Hannah stock to hold?
4. Calculate the Sharpe ratio of each of the three portfolios. What portfolio weight in Hannah stock maximizes the Sharpe ratio?

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the​ drug's profits will be $2 million in its first year and that this amount will grow at a rate of 5% per year for the next 17 years. Once the patent​ expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is10% per​ year?

Calculate the CPR and SMM using the 350% PSA schedule for months t=1 through t=30. Display your results in a table below with four columns labeled, from left to right, t, PSA, CPR, SMM.

Question 16 A stock currently trades at $52. It is expected that dividends of $1.00/share will be paid to owners of the stock at 1 month and at 4 months from the current date. Consider these dates as ex-dividend dates as well. The continuously compounded risk free rate is 5%. European call and put options on the stock with exercise prices of $50 and 6 months to the expiration date are currently trading. a) Calculate the lower bound for the value of the European call. (1 mark) b) How would you arbitrage if the European call option has a market price (premium) of $1.00? In your answer clearly identify your position in each relevant instrument. (1 mark) c) If the European call option has a market price (premium) of $2.00, based on put-call parity, what should be the price of a European put on the stock with the same exercise price and time to expiration? (1 mark) d) Calculate the lower bound for the value of an American call option on the stock with an exercise price of $50 and a time to expiration of 6 months. (1 mark)

ABCDEF Corp. currently pays $3.80 in dividend as of this year. ABCDEF’s dividends will grow by 4.1% each year for next 15 years, and then grow by 3.8% each year afterward. What’ the present value of the firm’ tock given this information assuming that the required rate of return for the firm’ industry is 10.1%?

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $29,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $370,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $1,250,000 to his nephew Frodo. He can afford to save $3,100 per month for the next 10 years. If he can earn an EAR of 10 percent before he retires and an EAR of 7 percent after he retires, how much will he have to save each month in Years 11 through 30? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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