2. (a) (i) What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting?

(ii) What organizational characteristics create likely candidates for

zero-based budgeting?

(b) (i) What is variance analysis?

(ii) Explain the relationships among the static budget, flexible budget, and actual results.

​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following:

a. A bond that has a ​$1 comma 000 par value​ (face value) and a contract or coupon interest rate of 10.9 percent. Interest payments are ​$54.50 and are paid semiannually. The bonds have a current market value of ​$1 comma 126 and will mature in 10 years. The​ firm's marginal tax rate is 34 percent.

b. A new common stock issue that paid a ​$1.78 dividend last year. The​ firm's dividends are expected to continue to grow at 7.5 percent per​ year, forever. The price of the​ firm's common stock is now ​$27.87.

c. A preferred stock that sells for ​$146​, pays a dividend of 8.8 ​percent, and has a​ $100 par value.  

d. A bond selling to yield 12.4 percent where the​ firm's tax rate is 34 percent.

416. Hedge fund AlphaBeta has a NAV of $1 million and a zero balance in its cumulative loss account on January 1, 2016.  Now suppose AlphaBeta’s annual performance (net of management fees) is + 13.9% in 2016, +12.6% in 2017, and -19.1% in 2018.  AlphaBeta charges a 20% performance fee.  Based on the high water mark reached in 2017, what minimum percentage gain the does the fund need to achieve in 2019 before performance fees can be taken again?

5. Assume that it is now Jan. 2017. AZDT Inc. (US) expects to receive cash dividends from a joint venture in India over the next five years. The first dividend of Rs 2 million will be paid in Dec. 2017. The dividend is then expected to grow at an annual rate of 10% over the following four years.

Current exchange rate (Rs/$) is 45 (65.25) and AZDT’s average weighted cost of capital is 10%.

a. Compute the dollar present value of the expected rupee dividend stream if the dollar is expected to depreciate by 5% per year against the rupee over the investment period.

b. Obtain the dollar present value of the expected rupee dividend stream if the rupee is expected to depreciate by 10% per year against the dollar over the investment period

c. What is the dollar present value of the expected rupee dividend stream if the exchange rate remains constant over the investment period?

6. You are interested in an International Portfolio made up of US and Canadian securities. The return on US is 15% and the return on Canada is 20%. The standard deviation of returns for US is 30% while that of Canada is 20%. If the correlation between US and Canada is -1, obtain the relevant weights for US and Canada to construct an international portfolio with zero risk. Compute the expected return on such a portfolio.

How finance companies are distinguishable from savings institutions and credit unions?

Two major risks faced by finance companies based on their uses and sources of funds

Growth Rate 4%

Required Return 11%

Year 1 Rent 20,000

Years Stable Rent 3

Years Growing Rent 7

Year Sold 10

Sale Price in 10 Years 325,000

Ask Price Today 200,000cash flows

Determine cash flows period 0-10

XXY Corp.’s has a target debt-to-equity ratio of 0.30, an equity beta of 1.10, has a marginal tax rate of 21%, and its debtholders require a return of 6%. Assuming that the current risk-free rate of interest is 2% and the expected return on the market portfolio is 12%, What is XXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Conch Republic Electronics

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Conch Republic is a personal digital assistant (PDA). Conch Republic currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $4.1 million.

As previously stated, Conch Republic currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new PDA, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If Conch Republic does introduce the new PDA, sales of the existing PDA will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year’s sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return.

Shelly has asked Jay to prepare a report that answers the following questions.

Questions

1.            What is the payback period of the project?

2.            What is the profitability index of the project?

3.            What is the IRR of the project?

4.            What is the NPV of the project?

WRX Corp. has an equity beta of 1.20, a market value debt-to-equity ratio of 0.50, debt that is rated AAA, and a tax rate of 21%. Compute WRX Corp’s weighed average cost of capital (WACC) assuming that the current risk-free rate is 5%, the expected return on the market portfolio is 12%, and the current market price of 7.5% AAA bonds, with par values of $1000 maturing in 12 years is $1200. Assume that the bond makes annual coupon payments. Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Provide several criticisms of relative valuation. Which method of valuation do you think is more accurate, relative or discounted present value (DCF or intrinsic value) ? Why? How would rising risks or rising interest rates affect multiples? DCF? Be specific about how rising risks or interest rates influence multiplers? DCF? How important to valuation is classifying a firm into the correct industry? In what industry would you classify Amazon (past and future)?

If you were asked to graph or quantify the risk of owning IBM stock, how would you do it? What is your preferred measure of risk? How would you demonstrate that your metric captures risk adequately? Identify several S&P listed companies that you consider to be risky investments? How does rising global turmoil influence risk? The price of gold? The price of U.S. Treasury bonds? U.S. equities? Which is a riskier asset, a 3-month U.S. Treasury bond or a 10-year U.S. Treasury bond? Explain. What factors could push the yield on 6-month U.S. Treasury higher than the 10-year U.S. Treasury bond.

You are the financial manager of a multinational corporation and you are contemplating new investments in production facilities in China. What are the risks and/or concerns of investing in production facilities in China amidst the US-China trade war that began early in 2018?

1. In the context of the “international debt crisis”, why were MNCs, international banks and national governments of less developed countries eager to utilize debt-for-equity swaps?