BC Co.’s assets consist of $20 thousands in cash and three investment projects. The firm hasno debt outstanding. The company can borrow and lend at 12% per year. Each project lasts foronly one year. The table below lists the cash flows from the projects at the initial date (t= 0)and at the end of the year (t= 1). Cash outflows are listed as negative numbers, while cashinflows are listed as positive. All figures are in thousands of dollars.

0 1

Project x -200 +240

Project y +100 -134

Project z -100 +108

1. Calculate the Internal Rate of Return (IRR) of each project.

2. Which projects should the firm invest in and why?

3. How much would you pay today, before any investments have been made, to buy this

firm?

Old World Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering inventory every other month (which is 6 times per year). A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, what is the extra total cost of the current policy compared with the total cost of the optimal policy? 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. Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $15 per unit Total sales for year = 1,000 units Safety stock = 0

1.What is Capital Asset Pricing Model (CAPM)? What is it used for ?

a) There have been discussions about how useful the Capital Asset Pricing Model (CAPM), does it actually work or is "beta dead"?

b) Why is the model important in Finance ?

Multiple Choice

• $59.73

• $64.71

• $18.67

• $59.32

• $62.22

Examine the key reasons why a business may not want to hold too much or too little working capital. Provide examples that illustrate the consequences of either situation.

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,850,000 this year. Depreciation, the increase in net working capital, and capital spending were $225,000, $90,000, and $415,000, respectively. You expect that over the next five years, EBIT will grow at 16 percent per year, depreciation and capital spending will grow at 21 percent per year, and NWC will grow at 11 percent per year. The company has $15,100,000 in debt and 345,000 shares outstanding. You believe that sales in five years will be $22,600,000 and the price-sales ratio will be 2.4. The company’s WACC is 8.5 percent and the tax rate is 21 percent.

The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 5 percent preferred stock, and 55 percent common equity. Initially, common equity will be in the form of retained earnings (K_e) and then new common stock (K_n). The costs of the various sources of financing are as follows: debt, 5.6 percent; preferred stock, 11.0 percent; retained earnings, 8.0 percent; and new common stock, 9.4 percent.

a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, K_e.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

  
  b. If the firm has $22.0 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

Capital Structure Size (X) _______ million

c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 55 percent of the capital structure, but will all be in the form of new common stock, K_n.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Marginal Cost of Capital ______%

d. The 5.6 percent cost of debt referred to above applies only to the first $40 million of debt. After that, the cost of debt will be 7.6 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

Capital Structure Size _____ million

e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Marginal Cost of Capital _____%

The table provides the prices of 5 zero-coupon bonds:

Determine the value of the annual effective forward rate applicable from time 2 to time 3.

A. 12.3%

B. 11.9%

C. 23.7%

D. 19.2%

E. 17.8%

J.D. Dorian just finished a residency in internal medicine and wants to go into practice with Dr. Gregory House, Dr. John Zoidberg, Dr. Nick, Dr. Julius Hibbert, and Dr. Leonard “Bones” McCoy. J.D. tells you that while he needs to practice with other physicians for call coverage and for other reasons, he does not want to be personally liable should the other physicians be found guilty of malpractice (and he is particularly worried about this due to their reputation). You discuss various incorporation options with him, but he tells you that he would like to form a partnership. What business form would you recommend to him and why?

Problem # 2

Each of two mutually exclusive projects involves an investment of $ 75,000.  

The cash flows for the projects are as follows:

                                         Year              Project “A”                  Project "B"

                                            1                      29,000                        42,000

                                            2                      29,000                        42,000

                                            3                      29,000                        42,000

                                            4                      29,000

               Note: Project "A" covers 4 years and project "B" covers 3 years.                              

        A.   Calculate each project's payback period.          1 point        

                    B.   Compute the IRR of each project. 1 Point

Problem 1- Schedule of Cash Receipts

Watt’s Lighting Stores made the following sales projection for the next six months. All sales are credit sales.

March……. $35,000 June……. $34,000

April…… $42,000 July……. $42000

May……. $25,000 August…. $48,000

Sales in January and February were $32,000 and $36,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale.

Prepare a monthly cash receipts schedule for the firm for March through August. Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is to be collected later?

(Related to Checkpoint 13.2 and Checkpoint​ 13.3) ​ (Comprehensive risk​ analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of ​$105 each, and the company analysts performing the analysis expect that the firm can sell 101,000 units per year at this price for a period of five​ years, after which time they expect demand for the product to end as a result of new technology. In​ addition, variable costs are expected to be $19 per unit and fixed​ costs, not including​ depreciation, are forecast to be ​$1,060,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $9.3 million that has no residual or salvage​ value, and will have an expected life of five years. In​ addition, the firm expects it will have to invest an additional $306000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here: 

a.  Calculate the​ project's NPV.

b.Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the number of units sold.

c.Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the price per unit.

d.Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the variable cost per unit.

e.Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the annual fixed operating costs.

f.  Use scenario analysis to evaluate the​ project's NPV under​ worst- and​ best-case scenarios for the​ project's value drivers. The values for the expected or​ base-case along with the​ worst- and​ best-case scenarios are listed​ here: 

a. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. What is the duration of the bond?

b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years)

1. Why do firms set upper and lower limits on their cash balance? What factors affect these limits?

2. How is WACC different from the expected rate of return calculated using CAPM?

3. Firm A and Firm B have the same betas but Firm A has a much higher total risk (standard deviation of returns) than the Firm B. The dividends and dividend growth rates for both firms are the same. Do we expect Firm A’s price to be greater or less than Firm B’s price?

4. What is the relationship between the expected rate of return and the rate used to discount cash flows? Re-write the formula for stock price P=D/(r-g) to provide an expression for the expected rate of return.

5. Is it true that if a stock possesses a higher expected rate of return then it must be a better investment?