Acme Inc. may replace an old machine with a new, more efficient model. The old machine was purchased 5 years ago for $96,000. It is being depreciated over 8 years to zero book value using the straight-line method. Its current book value is $36,000. Its current market value is $30,000. The new machine costs $180,000. It will be depreciated over 6 years to zero book value using the straight-line method. After its useful life of 10 years it is expected to have a scrap value of $50,000. The new machine will increase Earnings before Depreciation and Taxes by $40,000 per year for 10 years. The company’s tax rate is 30% and the appropriate discount rate for this project is 10%. List all 11 after-tax cash flows for this project (0 is the initial investment). Compute the NPV. Compute the IRR and payback.

A company is considering producing long telephoto zoom lens, iLongLens, attachment for the iPhone 5. The initial investment for this project will be $3 million. This amount is for depreciable equipment, which will be depreciated over 5 years using the straight-line method to zero book value. The iLongLens is expected to generate Earnings before Depreciation and Taxes of $1.5 million per year for 6 years. At the end of the sixth year the equipment will be scrapped for $300,000. The company’s tax rate is 40% and the appropriate discount rate for this project is 15%.  

1. List all 7 after-tax cash flows for this project (0 is the initial investment).  

2. Compute the NPV.

3. Compute the IRR and payback.

Compute the Equivalent Annual Cost for the two machines described below. Assume that both do identical jobs, both will be depreciated over their useful lives using the straight line method to zero salvage value, will have zero scrap value at the end of their useful lives. Use a 10% discount rate and a 30% tax rate. Machine A Useful life 8 years Initial cost $80,000 Annual operating costs $6,500 after-tax Machine B Useful life 5 years Initial cost $35,000 Annual operating costs $8,200 after-tax

A mutual fund manager has a $90.0 million portfolio with a beta of 1.25. The risk-free rate is 3.50%, and the market risk premium is 6.00%. The manager expects to receive an additional $30.0 million which she plans to invest in a number of stocks. After investing the additional funds, she wants to reduce the portfolio’s risk level so that once the additional funds are invested the portfolio’s required return will be 11.75%. What must the average beta of the new stocks added to the portfolio be to achieve the desired required rate of return?

A $1,000 face value has a 7% annual coupon rate. The next coupon is due in one year and the bond matures in 17 years. The current YTM on the bond is 4.6%. What is the dollar value of the price change if the bond's YTM increases to 5.9%? Round to the nearest cent. ​[Hint: 1) If the price drops, the change is a negative number. 2) Do not compute duration. You can calculate the precise impact of a yield change on the bond's price by comparing the prices under the two scenarios.] --> please show how to do this by hand

1. Suppose you have a 10% bond that pays annual coupon and with mature in 10 years. The face value is $1,000, and the yield to maturity on a similar bond is 8%.         The bond is also convertible with a conversion price of 100. The stock is currently selling for $120. What is the minimum price of the bond?

2. You are considering a project that will require an initial outlay of $200,000. This project has an expected life of five years and will generate after-tax cash flows to the company as a whole of $60,000 at the end of each year over its five-year life. Thus, the free cash flows associated with this project look like this.

Given a required rate of return of 10% percent, calculate the IRR.

1. Complete below.

Sales                                           153,000

Costs                                          81,900

Other Expenses                        5,200

Depreciation                         10,900

Interest Expense                      8,400

Taxes                                          16,330

Dividends                                    7,200

New Equity                                 2,600

Redeemed LT Debt                 3,900

What is the operating cash flow?

What is the cash flow to creditors?

What is the cash flow to stockholders?

If net fixed assets increased by $20,250 during the year, what was the addition to NWC?

A 7% semiannual coupon bond matures in 6 years. The bond has a face value of $1,000 and a current yield of 7.7608%.

What is the bond's price? Do not round intermediate calculations. Round your answer to the nearest cent.


What is the bond's YTM? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.

Financing Deficit

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Income Statement for January 1 - December 31, 2016 (Thousands of Dollars)

1. Suppose 2017 sales are projected to increase by 20% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as a line of credit. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations.

   AFN	$

2. What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.
   Line of credit     $
3. 
   

Bond #1: US Treasury note with a 2% coupon due in 5 years issued at a price of par ($100).
Bond #2: ABC Corp note with a 4% coupon issued at a yield to maturity of 4.2%. ABC’s credit is rated BBB.

 Both bonds were issued and will mature on the same date.
 Coupons on both bonds are stated in annual terms above, but paid semi-annually.
 The Fed Funds rate is 0.75%.
 Below is the “benchmark” US Treasury “on-the-run” Yield Curve on date of issuance:

1y 1.00% 2y 1.25% 3y 1.50% 5y 2.00% 7y 2.50% 10y 3.00%

1. What is the Yield to Maturity of Bond #1?

2. Was Bond #2 issued (sold) at a par, premium or discount price? (You can answer this without knowing

   the specific price.)

3. What do bond market participants call the “difference” between the yields to maturity of Bond #2 and

   Bond #1?

4. What type of risk is most likely the largest component of this “yield difference?”

1. 2%
2. Discount price
3. Spread
4. Default Risk

Assume you purchased Bond #1 and held it for 3 years and the treasury yield curve is unchanged (rates are exactly the same as those listed above), and answer the following questions (36 points): a. What is the new number of years to maturity for bond #1? b. How many cash flow payment dates are left? c. What is the discount rate we should use to value Bond #1 in this new environment? d. Using the same Present Value of Future Cash Flows Model shown above to compute the new price of Bond #1 (show your work).

Financing Deficit Garlington Technologies Inc.'s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Income Statement for December 31, 2016 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre-tax earnings $ 302,000 Taxes (40%) 120,800 Net income 181,200 Dividends $ 108,000 Suppose that in 2017 sales increase by 5% over 2016 sales and that 2017 dividends will increase to $148,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017 Sales $ Operating costs $ EBIT $ Interest $ Pre-tax earnings $ Taxes (40%) $ Net income $ Dividends: $ Addition to RE: $ Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017 Cash $ Receivables $ Inventories $ Total current assets $ Fixed assets $ Total assets $ Accounts payable $ Notes payable $ Accruals $ Total current liabilities $ Common stock $ Retained earnings $ Total liabilities and equity $

A Foreign currency trader at the bank’s FX desk calls to inform you that Bank of America is quoting $1.12/€1, and Citibank is offering $1.28/£1. The trader also noticed that Credit Agricole is making market in pound sterling and Euro at €1.18/£1.

a. What is the implied €/£ cross-rate for the two European currencies? Show this trader how you would use $1 million to conduct a triangular arbitrage to profit from the deviation (if any) of the implied cross rate of the €/£, from the rate quoted by Credit Agricole.

b. Suppose you observed that the 3-month forward rate quote from Bank of America is $1.21/€1, calculate the forward premium (discount) implied by the quote.

c. What do investors expect to happen to the value dollar in the next three months?

PIB wants to offer a $40 million, 6-months Eurodollar deposit to one of its major clients at 6-months LIBOR less 2.5%. 6-month LIBOR is 5.3%. The bank intends to use the proceeds of this deposit to buy a 5.0% 3-months grade AAA commercial paper and to rollover the investment for another three months at the end of the first three months cycle. To protect itself from interest rate exposure, the bank also buys a “3 against 6” $40 million, FRA for a three month period beginning three months from the day of receipt of the deposit and ending six months from the day of receipt of the deposit. The agreement rate with the seller is 5.0%. There are 94 days in the first three months and 92 days in the remaining three months period.

a. Calculate the banks interest expense on the 6-month Eurodollar deposit.

b. Calculate the bank interest income on the first three month commercial paper loan.

c. Calculate the value of the FRA from the last three months of the investment period if 3-months LIBOR (SR) for that period is 5.3%.

Sutter Lakeside Hospital, a taxpaying entity, is considering a new ambulatory surgical center (ASC). The building and equipment for the new ASC will cost $5,500,000. The equipment and building will be depreciated on a straight-line basis over the project’s five-year life to a $2,500,000 salvage value. The new ASC’s projected net revenue and expenses are as follows. Net revenues are expected to be $5,000,000 the first year and will grow by 9 percent each year thereafter. The operating expenses, which exclude interest and depreciation expenses, will be $4,500,000 the first year and are expected to grow annually by 3 percent for every year after that. Interest expense will be $700,000 per year, and principal payments on the loan will be $1,000,000 a year. In the first year of operation, the new ASC is expected to generate additional after-tax cash flows of $600,000 from radiology and other ancillary services, which will grow at an annual rate of 5 percent per year for every year after that. Starting in year 1, net working capital will increase by $350,000 per year for the first four years, but during the last year of the project, net working capital will decrease by $250,000. The tax rate for the hospital is 40 percent, and its cost of capital is 15 percent. Use both the NPV and IRR approaches to determine if this project should be undertaken. (Hint: see Appendices C, D, and E.)