1. Ace Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%.

Instructions

a.  

Compute the cash payback period for each project. (Round to two decimals.)

b.  

Compute the net present value for each project. (Round to nearest dollar.)

c.  

Compute the annual rate of return for each project. (Round to two decimals.)

d.  

Rank the projects on each of the foregoing bases. Which project do you recommend?

On Monday, November 11, a financial advisor pitches you an investment opportunity for 10 years at a guaranteed 5% rate of return. You have until Friday to decide whether to invest or turn the offer down. What is your decision? Do you have any concerns? You must support your answer.

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a 3-month call option at an exercise price of $100 is $10.

1. If the risk-free interest rate is 10% per year,what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.)

2. What would be a simple options strategy to exploit your conviction about the stock price’s future movements? How far would it have to move in either direction for you to make a profit on your initial investment?

Warren Buffett recently said it’s a 'terrible mistake' for long-term investors to be in bonds – why?

A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.51 that consumers will love Happy Forever, and in this case, annual sales will be 1.09 million bottles; a probability of 0.39 that consumers will find the smell acceptable and annual sales will be 193,000 bottles; and a probability of 0.10 that consumers will find the smell unpleasant and annual sales will be only 45,000 bottles. The selling price is $36, and the variable cost is $11 per bottle. Fixed production costs will be $1.00 million per year, and depreciation will be $1.21 million. Assume that the marginal tax rate is 40 percent.

What are the expected annual incremental after-tax free cash flows from the new fragrance?

12.

Investors require an 8% rate of return on Mather Company's stock (i.e., r_s = 8%).

1. What is its value if the previous dividend was D₀ = $1.50 and investors expect dividends to grow at a constant annual rate of (1) -3%, (2) 0%, (3) 3%, or (4) 6%? Do not round intermediate calculations. Round your answers to the nearest cent.

   (1) $  

   (2) $  

   (3) $  

   (4) $  

2. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Round your answers to the nearest cent. If the value is undefined, enter N/A.

   (1) $  

   (2) $  

   Are these reasonable results?

   1. These results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate.
   2. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return.
   3. These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate.
   4. These results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate.
   5. These results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate.
   
   -Select
   
3. Is it reasonable to think that a constant growth stock could have g > r_s?
   
   1. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.
   2. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return.
   3. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return.
   4. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return.
   5. It is reasonable for a firm to grow indefinitely at a rate higher than its required return.
   
   -Select-
   

For this question ask for the expected return -beta relationship .

Must I repeat the E(R) formula for Beta F1 & F2 and then compare the answers?

pg. 139 of Investments 11th edition thanks!

There's the question:

4. Suppose the there are two independent economic factors F1 and F2. The risk free rate is 6% and all the stocks have independent firm specific components with a standard deviation of 45%. Portfolios A and B are both well diversified with the properties:

Portfolio

A 1.5 (Beta F1) 2.0 (Beta F2) 31% (Expected Return)

B 2.2 (Beta F1)  -0.2 (Beta F2) 27% (Expected Return)

What is the expected return beta-relationship in this economy?

thanks again.

Caddie Manufacturing has a target debt-equity ratio of .60. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 22 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

                                                                                          E(R)

                                                                                          Stock A                    Stock B

State                                           p(i)                             E(Ra)                         E(Rb)

Recession                                30%                          -30%                         -20%

Normal                                     40%                          10%                          10%                          

Expansion                               30%                          50%                          30%

Beta                                                                                1.4                             1.25

R_f                                                                                      3%

R_M                                                                                    8%

1. What is the expected return on Stock A across all market situations?

What is the expected return on Stock B across all market situations?

2. What is the standard deviation of Stock A’s return?

What is the standard deviation of Stock B’s return?

3. With a mix of 75% Stock A and 25% Stock B what is the portfolio return?

With a mix of 75% Stock A and 25% Stock B what is the portfolio standard deviation?

4. Which of the two stocks has higher total risk?

Which of the two stocks has higher systematic risk?

5. Which of the two stocks has a higher Reward-to-Risk Ratio?

Are the two stocks under or over-valued based on the Capital asset Pricing Model?

6. What return would you expect on each stock based on the Capital Asset Pricing Model?

Identify the intermediate objectives for macro prudential policy that have been put forward by the European Systemic Risk Board. Provide a rationale for each of these objectives. Provide detailed examples of their introduction in Basel 3 and by regulatory authorities.

Project L requires an initial outlay at t = 0 of $45,000, its expected cash inflows are $11,000 per year for 9 years, and its WACC is 8%. What is the project's discounted payback? Do not round intermediate calculations. Round your answer to two decimal places. (in years)

Project L requires an initial outlay at t = 0 of $48,273, its expected cash inflows are $10,000 per year for 8 years, and its WACC is 9%. What is the project's IRR? Round your answer to two decimal places.

The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thriller—it ​doesn't have the production space to make both. The comedy is expected to cost $25 million up front​ (at t​ = 0). After​ that, it is expected to make 16 million in the first year​ (at t​ = 1) and $44 million in each of the following two years​ (at t​ = 2 and t​ = 3). In the fourth year​ (at t​ = 5), it is expected that the movie can be sold into syndication for ​$22 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost ​$40 million up front​ (at t​ = 0). After​ that, it is expected to make $20 million in the first year​ (at t​ = 1) and $44 million in each of the following four years​ (at t​ = 2,​ 3, 4, and​ 5). In the sixth year​ (at t​ = 6), it is expected that the movie can be sold into syndication for $30 million with no further cash flows back to Garneau Cinemas. The cost of capital is 11​%,and Garneau usually requires projects to have a payback within four years. Determine each​ project's payback and​ NPV, and advise the CEO what she should do.

a) The payback for the comedy is _____ ​years, and the NPV of the comedy is $_____?

b) The payback for the thriller is _____ ​years, and the NPV of the thriller is $_____?

Please respond to the following: The catering theory of dividends suggests that managers pay dividends because of investor demand. Using knowledge gained from this chapter, conduct a search for an article on this theory. Indicate the article you found and briefly provide an opinion on this theory. Propose alternative ways, covered in the reading material this week, in which investors can receive cash returns from their investment in the equity of a company.