A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset's 4-year life. Ignore bonus depreciation. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the combined tax rate is 23 percent, and the required rate of return is 12 percent. What is the net present value of the project?

You have just deposited $13,000 into an account that promises to pay you an annual interest rate of 6.9 percent each year for the next 5 years. You will leave the money invested in the account and 15 years from today, you need to have $43,590 in the account. What annual interest rate must you earn over the last 10 years to accomplish this goal?

XYZ used an investment bank to do IPO. In IPO, XYZ sold 1 million shares at $68 each. The investment bank charged 7% spread. At the end of the 1st day of trading, XYZ stock price closed at $80. Calculate the total cost of IPO. That is, what is the sum of direct and indirect cost?

Describe the components of working capital and how firms manage them in at least 200 words

You are considering a stock A that pays a dividend of $1. The beta coefficient of A is 1.3. The risk free return is 6%, while the market average return is 13%.

a.What is the required return for Stock A?

b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $104,000, and shipping and installation costs would add another $20,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $57,200. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $54,000 per year. The marginal tax rate is 35%, and the WACC is 13%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Only the tax effect of the research expenses should be included in the analysis.
   2. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   3. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   4. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   5. The cost of research is an incremental cash flow and should be included in the analysis.
   
   =______?

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $_____?

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $____?

   Year 2 $____?

   Year 3 $____?

4. Should the machine be purchased?
   =YES/NO?

NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $210,000, and it would cost another $31,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $94,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $57,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $_____?

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $_____?

   In Year 2 $_____?

   In Year 3 $_____?

3. If the WACC is 10%, should the spectrometer be purchased?
   =YES/NO?

Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,600,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $250 per ton. Further, the accounting department will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life and estimate a salvage value of $450,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $340 per ton. The engineering department estimates you will need an initial net working capital investment of $560,000. You require a return of 13 percent and face a marginal tax rate of 24 percent on this project. Suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirements. a. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of NPV to changes in quantity supplied? c. Given the sensitivity number you calculated, is there some minimum level of output below which you wouldn’t want to operate? Show step by step

The dividend for Should I, Inc., is currently $1.70 per share. It is expected to grow at 12 percent next year and then decline linearly to a perpetual rate of 3 percent beginning in four years. If you required a return of 16 percent on the stock, what is the most you would pay per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Kevin Hall just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Wildhorse Corp. that pays an annual coupon rate of 4.5 percent. If the current market rate is 8.50 percent, what is the maximum amount Kevin should be willing to pay for this bond?

Cullumber Corp is issuing a 10-year bond with a coupon rate of 11 percent. The interest rate for similar bonds is currently 5 percent. Assuming annual payments, what is the value of the bond?

You own three​ stocks:

1 comma 000

shares of Apple​ Computer,

10 comma 000

shares of Cisco​ Systems, and

5 comma 000

shares of Goldman Sachs. The current share prices and expected returns of​ Apple, Cisco, and Goldman Sachs​ are, respectively,

$ 136

​,

$ 22

​,

$ 122

and

12 %

​,

10 %

​,

10.5 %

.

a. What are the portfolio weights of the three stocks in your​ portfolio?

b. What is the expected return of your​ portfolio?

c. Suppose the price of Apple stock goes up by

$ 5

​,

Cisco rises by

$ 3

​,

and Goldman Sachs falls by

$ 9

.

What are the new portfolio​ weights?

d. Assuming the​ stocks' expected returns remain the​ same, what is the expected return of the portfolio at the new​ prices?

DEF Corporation is considering purchasing a new production machine at a cost of $10,000,000. The machine is 7-year MACRS property. The corporate tax rate is a flat 21%, and the applicable discount rate is 6%.

a. Compute the after-tax cost of the machine to DEF.

b. Compute the after-tax cost of the machine to DEF, assuming that the machine qualifies for immediate expensing.

c. Comment.

MACRS percentages for depreciation each year are as follows:

   Year      %

     1     14.29
     2     24.49
     3     17.49
     4     12.49
     5      8.93
     6      8.92
     7      8.93
     8      4.46

Case Study on Managing an Investment Portfolio

As a recently hired CFA financial analyst for Horizon Investments you have been asked to make portfolio recommendation and setup an investment policy statement for three clients of the firm.

1) John Lambert has recently received his MBA and currently works for Oracle. He is 26 and recently married. He and hid wife have saved nearly $100,000 for a down payment on a home. He contributes 10% of his salary to a 401K and Oracle provides a 10% match.   The investments are made in mutual funds run by Fidelity Investment. The 401K offered by Oracle has access to all of the funds offered by Fidelity. John Lambert needs to have a detailed investment plan set up for his 401K including the name of the funds and percentage of portfolio to be invested in the funds.

2) Elizabeth Yeo, aged 60, is managing director of USX and plans to retire in one year. Yeo will receive a lump sum severance payment of $500,000 from the company and plans to close out her company 401K which is entirely invested in USX stock where she has currently about 35,00 shares. Yeo is widowed and has a son who is married and who has a high-level position at an investment bank. Yeo maintains a money market fund currently value at $1.1 million and earns about 1.2% annually. She has a home, zero mortgage, currently valued at about $1 million and plans to continue living there. She also plans to begin to collect social security at the age of 62. Her living expenses, including maintaining the home, are about $80,000 a year. Her living expenses are expected to grow at an annual rate of 3 percent throughout her retirement period, which is expected to be 25 years given her family’s mortality history. You are requested to prepare an investment policy statement for Yeo and make some investment recommendations.    

3) Christopher Maclin, aged 40 is a supervisor at Barnett Co. and earns an annual salary of $100,000. Louise Maclin, aged 38, stays home to care for their newborn twins. She recently inherited $1.3 million (after taxes) in cash from her father’s estate. In addition, the Maclins have $20,000 in cash and $150,000 in Barnett common stock. They are unhappy about portfolio volatility and do not want to suffer a loss of more than 12% in one year. They recently purchased a new home. They need sufficient funds to fund their children’s college education and Christopher plans to retirement at age 65. Christopher is not very knowledgeable about finance but read that small cap and emerging market stocks provide the highest return over the long run. He plans to invest 50% of the inherited money in a small cap fund and the other in an emerging market fund. His wife is concerned about the decision. She requested Horizon review her husband’s decision and, if needed, provide an alternative investment strategy.