You are given the following information concerning options on a particular stock: Stock price = $61 Exercise price = $60 Risk-free rate = 4% per year, compounded continuously Maturity = 3 months Standard deviation = 46% per year

Call option? and Put option?

In what ways can the IRR make you give a flawed decision and what relationship the NVP have with the IRR?

Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)

The conventional payback period ignores the time value of money, and this concerns Cold Goose’s CFO. He has now asked you to compute Delta’s discounted payback period, assuming the company has a 7% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)

Which version of a project’s payback period should the CFO use when evaluating Project Delta, given its theoretical superiority?

a)The discounted payback period

b)The regular payback period

One theoretical disadvantage of both payback methods—compared to the net present value method—is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period.

How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency?

$2,411,755

$6,168,764

$3,957,217

$1,714,226

9. Stocks that don't pay dividends yet

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $5.50000 dividend at that time (D₃ = $5.50000) and believes that the dividend will grow by 28.60000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 4.38000% per year.

Goodwin’s required return is 14.60000%. Fill in the following chart to determine Goodwin’s horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places.

The following are two independent projects that you are evaluating. The first project has cash flows of −$161,900, $60,800, $162,300, and -$75,000 for Years 0 to 3, respectively. The second project has cash flows of −$175,600, $261,800, -$165,000, $145,000 and -$75,000. Which of these, best summarizes your situation?

A. Project 1 has 2 IRRs and Project 2 has 2 IRRs. Therefore, we should not use IRR to evaluate the projects.

B. Project 1 has 1 IRR and Project 2 has 2 IRRs. Therefore, we should use IRR only to evaluate Project 1.

C. Project 1 has 2 IRRs and Project 2 has 3 IRRs. Therefore, we should not use IRR to evaluate the projects.

D. Project 1 has 3 IRRs and Project 2 has 4 IRRs. Therefore, we should not use IRR to evaluate the projects.

E. None of the above is correct.

Explain the relative merits of equity financing versus debt financing.

Calculate the Macaulay duration of an 8%, $1,000 par bond that matures in three years if the bond's YTM is 14% and interest is paid semiannually. You may use Appendix C(https://cnow.apps.ng.cengage.com/ilrn/books/reia11h/appendix_c.jpg) to answer the questions.

1. Calculate this bond's modified duration. Do not round intermediate calculations. Round your answer to two decimal places.

     years

2. Assuming the bond's YTM goes from 14% to 13.0%, calculate an estimate of the price change. Do not round intermediate calculations. Round your answer to three decimal places. Use a minus sign to enter negative value, if any.

     %

Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 11% and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year Project A Project B

1 5 20

2 10 10

3 15 8

4 20 6

a. What is the regular payback period for each of the projects? Round your answers to two decimal places.

Project A: (years)

Project B: (years)

b. What is the discounted payback period for each of the projects? Round your answers to two decimal places.

Project A: (years)

Project B: (years)

c. If the two projects are independent and the cost of capital is 11%, which project or projects should the firm undertake?

d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

f. What is the crossover rate? Round your answer to two decimal places.

e. If the cost of capital is 11%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.

Project A: (%)

Project B: (%)

Car Lease

use the information to answer the following questions.

You have decided to acquire a new car that costs $30,000. You are considering whether to lease it for three years or to purchase it and financing the purchase with a three year installment loan. The lease requires no down payment and lasts for three years. Lease payments are $400 monthly starting immediately, whereas the installment loan will require monthly payments starting a month from now at an annual percentage rate (APR) of 8%. The discount rate (APR) is also 8%.

1) If you expect the resale value of the car to be $20,000 three years from now, should you buy or lease it?

2) What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

3. Car lease, Q1-1.

What is the value of the lease payment?

Hint:

• model the lease payment as an annuity due.
• use Excel PV function to calculate the present value.

(A) 12764.72 (B) 12849.82 (C) 13489.90 (D) 12953.80

4. Car lease, Q1-2

What is the present value of the resale value of $20,000 in three years?

(A) 17549.09 (B) 15745.09 (C) 15769.04 (D) 14759.08

5. Car lease: Q1-3

Following the car installment plan, the car would be brought now at $30000, and sold in three years at 20,000.

Estimate the loss in value as measured by the difference in their present values. This is the net cost of purchasing and reselling the car.

Compare the cost with leasing, should you buy or lease?

(A) Lease (B) buy

6. Care lease, Q2

What is the break-even resale price of the care three years from now, such that you would be indifferent between buying and leasing it?

(A) 18357 (B) 22987 (C) 19385 (D) 21785

Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2000 and a cash inflow the following year of $2400. Sandrine estimates that its risk-adjusted cost of capital is 13%. Currently, 1 U.S. dollar will buy 0.73 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 6.75%, while similar securities in Switzerland are yielding 3%.

1. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round your answers to two decimal places.

   NPV = $  

   Rate of return = %

2. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places.

   SF per U.S. $

3. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine? Do not round intermediate calculations. Round your answers to two decimal places.

   NPV = Swiss Francs

   Rate of return = %

5. The cost of new common stock True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings.

True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm’s existing common equity, while the cost of new common stock is based on the value of the firm’s share price net of its flotation cost.

False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings.

Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is _____(I think)22.81% (rounded to two decimal places).

Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company’s earnings’ and dividends’ growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny Day expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be_____(I think)15.49% . Alpha Moose Transporters Co.’s addition to earnings for this year is expected to be $857,000. Its target capital structure consists of 40% debt, 5% preferred, and 55% equity. Determine Alpha Moose Transporters’s retained earnings breakpoint:

$2,142,500 $1,869,818 $1,791,909 $1,558,182

6. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk.

Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address.

Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%.

If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%.

If its current tax rate is 25%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places.)

0.96% 1.34% 1.07% 1.28%

Turnbull Co. is considering a project that requires an initial investment of $570,000. The firm will raise the $570,000 in capital by issuing $230,000 of debt at a before-tax cost of 8.7%, $20,000 of preferred stock at a cost of 9.9%, and $320,000 of equity at a cost of 13.2%. The firm faces a tax rate of 25%. What will be the WACC for this project? ________________(Note: Round your intermediate calculations to three decimal places.)

Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1555.38. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share.

Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 8.7%, and they face a tax rate of 25%. What will be the WACC for this project? ______________(Note: Round your intermediate calculations to two decimal places.)

Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities.

If the bank earns $120,000 in noninterest income, incurs $80,000 in noninterest expenses, and pays $2,500,000 in taxes, what is its net income? (Enter your answer in dollars, not thousands of dollars.

You are evaluating a project that will cost $ 547 ,000​, but is expected to produce cash flows of $ 127,000 per year for 10 ​years, with the first cash flow in one year. Your cost of capital is 10.7 % and your​ company's preferred payback period is three years or less.

a. What is the payback period of this​ project?

b. Should you take the project if you want to increase the value of the​ company?

If you want to increase the value of the company you?(will not or will)

take the project since the NPV is? (negative or positive)