It is now January 1, 2019, and you are considering the purchase of an outstanding bond that was issued on January 1, 2017. It has an 8.5% annual coupon and had a 15-year original maturity. (It matures on December 31, 2031.) There is 5 years of call protection (until December 31, 2021), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 111.55% of par, or $1,115.50.

a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

What is the yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

b. If you bought this bond, which return would you actually earn?

I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

II.Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

III. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?

I. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

II. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

III. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:

BPC has decided to evaluate the riskier project at 11% and the less-risky project at 8%.

1. What is each project's expected annual cash flow? Round your answers to the nearest cent.

   Project A:	$
   Project B:	$

   
   Project B's standard deviation (σ_B) is $5,798 and its coefficient of variation (CV_B) is 0.76. What are the values of (σ_A) and (CV_A)? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.

   σA:	$
   CVA:

2. 
   
3. Based on their risk-adjusted NPVs, which project should BPC choose?
   -Select-Project AProject BItem 5
4. 
   
5. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, how might this affect the decision?
   -Select-This would make Project B more appealing.This would make Project B less appealing.Item 6
   
   If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence your risk assessment?
   -Select-This would make Project B more appealing.This would make Project B less appealing.

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   1. $858? Round your answer to two decimal places.

          %

   2. $1,087? Round your answer to two decimal places.

          %

2. Would you pay $858 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if r_d = 12%?
   1. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   3. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   4. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

6. Assume that commercial paper maturing in 75 days, with a par value of $1,000,000, currently sells for a price of $995,000.

A. If you purchase this commercial paper today:

• What is your expected holding period return? • What is your (expected) annualized yield? What is the effective annual return on this investment?

B) When comparing the annualized yield on this security to the annualized yield on a 75-day T-Bill:

• What is one reason why you would expect the commercial paper yield to be higher than the T-Bill yield? Explain (but in one sentence).

• What is one reason why you would expect the commercial paper yield to be only slightly higher than the T-Bill yield? Explain (but in one sentence).

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 smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Page 349Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone.

Conch Republic can manufacture the new smartphones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smartphone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million.

As previously stated, Conch Republic currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smartphones 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 21 percent corporate tax rate and a required return of 12 percent.

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

QUESTIONS

What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?

What is the NPV of the project?

How JOBS act affect private equity investment in the near future?

What are some changes that could be made to improve the law or the legal system? The improvements could be aimed at specific laws or procedures, or even at the basic business of law.

Explain the importance of Time Value of Money concept.

Detail about how the value of money changes in relation to time.

Also explain the change is purchasing power of the money in relation to time.

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision: Use Exhibit A.8.

Required:

Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)

1. Internal Rate of Return Method—Two Projects

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $44,209.44 and could be used to deliver an additional 40,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $54,765. The new machine would require three fewer hours of direct labor per day. Direct labor is $15 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 9%. However, Munch N’ Crunch has funds to invest in only one of the projects.

a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

2.

Net Present Value Method and Present Value Index

Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 110 baseballs per hour to sewing 198 per hour. The contribution margin per unit is $0.38 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to $20 per hour. The sewing machine will cost $167,400, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $85,800, have a six-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 12% on its investments.

a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above. Round to the nearest dollar.

b. Determine the present value index for the two machines. If required, round your answers to two decimal places.

3.

Net Present Value—Unequal Lives

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $625,304. The net cash flows estimated for the two proposals are as follows:

The estimated residual value of the processing mill at the end of Year 4 is $270,000.

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.

Describe how someone’s risk tolerance directly impacts their retirement planning. Use an example to illustrate how much difference it would make if someone was a conservative investor who averaged a 7% return over 32 years on their savings versus another more aggressive investor who averages 11% over the same period. Interpret your results: advantages and disadvantages of the two investment strategies

ou are given the following information on Parrothead Enterprises: Debt: 9,200 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. These bonds pay interest semiannually and have a par value of $2,000. Common stock: 315,000 shares of common stock selling for $66.30 per share. The stock has a beta of 1.08 and will pay a dividend of $4.50 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 9,800 shares of 4.65 percent preferred stock selling at $95.80 per share. The par value is $100 per share. Market: 10.2 percent expected return, risk-free rate of 4.5 percent, and a 23 percent tax rate. Calculate the company's WACC.

Kaelea, Inc., has no debt outstanding and a total market value of $75,000. Earnings before interest and taxes, EBIT, are projected to be $9,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 24 percent higher. If there is a recession, then EBIT will be 31 percent lower. The company is considering a $22,500 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Assume the company has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.) %ΔROE Recession % Expansion % Assume the firm goes through with the proposed recapitalization and no taxes. c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % d. Calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) %ΔROE Recession % Expansion % Assume the firm has a tax rate of 35 percent. e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion % f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % %ΔROE Recession % Expansion %

You work in the treasury department of a global consulting company that typically invoices its customer bills in local currency. One of your company’s consulting teams has been working on a project in Australia that you expect will be completed within six months, at which time you expect to bill your client AUD1,160,000.

It is now May, 2020, and you are concerned that the Australian dollar will depreciate over the next six months. You decide to consider using currency futures contracts as a hedge. You collect the following data:

S[USD/AUD] = .7742

AUD futures contract prices: .7736 Open interest (# of contracts:) 62,000

June ‘20

Sept. ‘20

.7707 7,300

Contract notional amount: AUD 100,000
Minimum tick size: .0001 per Australian dollar increment

(a) Using the September contract, calculate the amount of contracts you would use if you employed (i) a naive hedge and (ii) a delta hedge approach to minimize the difference in the change in the value of this hedge with the change in the value of the AUD1,160,000 receivable. Specify if you would buy or sell these contracts.

(b) Assume the six month period described above extends at least one month beyond the maturity date of the September 2020 contract. Give two reasons why you might still choose to use the June contract instead of the September contract and describe what transactions you would execute in early June assuming you still wanted to maintain the hedge.

3. Use the information in the table below (related to Tostitos Corp.) to answer the following questions

   Economic State	Probability (%) Return (%)
   Deep Recession	10	-15
   Recession	20	-10
   Normal Economy	50	2
   Economic Expansion	20	15

4. What is the expected return for Tostitos Corp.’s stock? [3 points]

5. What is the Tostitos Corp’s standard deviation of returns? [4 points]

6. What is the 95% confidence interval associated with the returns of Tostitos Corp.’s

   stock? [3 points]

7. You form a two-stock portfolio by combining Tostitos Corp.’s stock (from Question 3 above) along with the stock of TD Bank. TD Bank has a marginal tax rate of 25% and a cost of debt of 3.25%. TD Bank’s stock has an expected return of 9%, a standard deviation of returns of 25%, and a correlation coefficient with Tostitos Corp.’s returns of 0.65

8. 1. If you wish to create a portfolio with an expected return of 5%, what is the weight of each of Tostitos Corp. and TD Bank that you would hold? [4 points]

   2. What is the standard deviation of returns of this portfolio? [3 points]

   3. What is the 95% confidence interval associated with this portfolio? [3 points]