Assume that the M&M with Corporate Taxes theory is true. New Schools expects an EBIT of $79 every year forever. The firm currently has no debt, and its cost of equity is 12.2 percent. The firm can borrow at 4.8 percent and the corporate tax rate is 23 percent. What will the value of the firm be if it issues $200 in debt to buy back equity? Show your answer to the nearest $.01. Do not use the $ or , signs in your answer.

Which of the following situations does not lead to default of a loan contract?

Multiple Choice

• Failure to pay other debts when due

• Impairment of capital

• Paying interest and principal when due

• Failure to abide by a covenant

Research evidence suggests that:

Multiple Choice

• companies increase their provision for doubtful accounts when earnings are otherwise low and then decrease the provision when earnings are high.

• companies reduce their provision for doubtful accounts when earnings are otherwise low and then increase the provision when earnings are high.

• companies increase their provision for doubtful accounts when earnings are otherwise high and then decrease the provision when earnings are low.

• companies reduce their provision for doubtful accounts when earnings are otherwise high and then increase the provision when earnings are low.

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:

Multiple Choice

• direct write-off method.

• percent of gross receivables method only.

• percent of sales method only.

• percent of sales or the percent of gross receivables method.

Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the:

Multiple Choice

• transfer was with or without recourse.

• transferor surrenders control over the receivable.

• customer ultimately defaults.

• transferor collects payments directly from the customer.

You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent.

  Debt:

10,000 7.1 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m. on January 14, 2016, these shares sold for $21.85 per share. The volatility on the returns of Suncor shares is approximately 24%. The following call and put option contracts were available for the months of January, February, and March:

Each option contract involves 100 shares. The risk-free rates for these three expiration dates are 0.6%, 1%, and 1.2%. All three rates are continuously compounded.  

a. Construct a box-spread using the March option contracts with exercise prices of 24 and 25.

b. Construct a profitable riskless arbitrage opportunity using this box-spread, with the requirement of $0 investment today. Calculate the NPV of the riskless profit.

Which of the following does not properly describe the Altman Z-score?

Multiple Choice

• The Z-score is a multiple discriminant analysis using five financial ratios to estimate default risk.

• A high score is an indication of default risk.

• The Z-score was originally designed only for publicly traded manufacturing firms.

• Each ratio has its own unique weight in calculating the final score.

Cash flow assessment plays a central role in analyzing:

Multiple Choice

• the future earnings potential of a company.

• the credit risk of a company.

• management’s effectiveness.

• the firm’s investment potential.

Which of the following statements is false regarding the business valuation process?

Multiple Choice

• FASB contends that current accrual earnings are a proxy for free cash flow.

• A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This approach is best applied to growth companies with stable cash flow patterns.

• If a company is currently generating a sustainable free cash flow of $10 per share and the discount rate is 10%, the estimated share price is $100.

• One popular approach to estimate a firm’s equity cost of capital is the capital asset pricing model.

Under the abnormal earnings approach of equity valuation, investors willingly pay a premium for those firms that:

Multiple Choice

• earn less than the cost of equity capital.

• produce negative abnormal earnings.

• produce positive abnormal earnings.

• earn an amount equal to the equity cost of capital.

You are considering a 3-year project of which details are summarized below. Your required rate of return for capital budgeting purposes is 20 percent.

• Annual sales = 30,000 units
• Unit sales price = $5.00
• Variable costs = $2.00 per unit
• Annual fixed costs = $18,000
• Initial capital investment = $72,000, depreciated to zero over 3 years
• Initial investment in working capital = $20,000, fully recovered at the end of the project
• The tax rate is 25%

a. What is the project’s annual net income?

b. What is the project’s annual operating cash flow?

c. What is the project’s initial capital investment?

d. What is the project’s NPV?  

e. What is the project’s IRR?  

f. Should you accept this project? Why or why not?

Assignment #2 For each of the following topics: (a) Explain to management how it can be put to use in your business.

• Correlation and regression

• Time series

• Capital budgeting

• Linear programming

Remember to clearly indicate the benefits and drawbacks of the method/s and make recommendations for your preferred method/s.

answer question

AAA Corp. currently has one​ product, high-priced lawn mowers. AAA Corp. has decided to sell a new line of​ medium-priced lawn mowers. The building and machinery for producing this new line is estimated to cost ​$12,000,000 and it will be depreciated down to zero over 30 years using​ straight-line depreciation.​ Also, an investment today on working capital in the amount of ​$2,000,000 is needed. The working capital will be recovered at the end of the project. Sales for the new line of lawn mowers are estimated at ​$16 million a year. Annual variable costs are 60% of sales. The project is expected to last 10 years. In addition to the production variable​ costs, the fixed costs each year will be ​$2,000,000. The company has spent ​$1,500,000 in a marketing study that determined the company will lose ​$10 million in sales a year of its existing​ high-priced lawn mowers. The production variable cost of these sales is ​$8 million a year. It is expected that at the end of the​ project, the building and machinery can be sold for 8,000,000. The tax rate is 30 percent and the cost of capital is 8%

a. What is the initial outlay​ (IO) for this​ project?

b. What is the operating cash flows​ (OCF) for each of the years for this​ project?

c. What is the termination value​ (TV) cash flow​ (aka recovery cost or​ after-tax salvage​ value, or liquidation value of the​ assets) at the end of the​ project?

d. What is the NPV of this​ project?

Miller Corporation has two bonds outstanding. Both bonds have coupon rates of 10% and one has a maturity of 10 years, while the other has a maturity of 20 years. Interest is paid semi-annually. Calculate the following for both bonds.

A) If market rates for bonds of equal risk fell to 8% what would be the maximum price an investor would be willing to pay for these bonds?
B) If market rates for bonds of equal risk remained at 10%, what would be the bonds' current worth?
C) If market rates for bonds of equal risk rose to 12%, what would be the bonds' theoretical value?

Bond A: 10 years semiannually = 20 periods
Bond B: 20 years semiannually = 40 periods

please need detail answers with workings

Open-end Fund A has 191 shares of ATT valued at $48 each and 43 shares of Toro valued at $88 each. Closed-end Fund B has 88 shares of ATT and 85 shares of Toro. Both funds have 1,000 shares outstanding.

a. What is the NAV of each fund using these prices? (Round your answers to 3 decimal places. (e.g., 32.161))
b. If the price of ATT stock increases to $49.25 and the price of Toro stock declines to $85.292, how does that impact the NAV of both funds? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))
c. Assume that another 168 shares of ATT valued at $48 are added to Fund A. The funds needed to buy the new shares are obtained by selling 623 more shares in Fund A. What is the effect on Fund A’s NAV if the prices remain unchanged from the original prices?

A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the internal rate of return of project B?

a) List and describe 4 out-of-court settlement alternatives for financially distressed firms.

b) Define private placement and explain the advantages and disadvantages