1. Whatisdefaultrisk?

2. A bond trades at above its face value of $1,000 and has a yield to maturity below the coupon rate. What would the yield to maturityonthisbondhavetobeforthebondtotradeatpar?

3. AssumenowthatBoeingisviewedasariskierfirm,andthatits rating drops. What will happen to the return required by bondholdersofBoeing?Whatistheimpactonthebondprice

This week we discuss capital budgeting methods and process. Could you apply the knowledge your learn this week to make better decisions in your personal life or professional duties? Please elaborate your answer with examples.

Any idea on what personal or professional experiences this could relate to? Just examples and why would be nice so that I can relate it to my life somehow. Thank you!

It is time for the renewal of existing machinery at Blackstone Ltd. New machinery will cost $95,000 and this amount can be borrowed from the local bank at 8 percent interest with annual payments at the end of the year. The CCA rate on the machinery would be 20 percent. The machinery will be salvaged in 5 years for $22,000. The current machinery is worth $12,500. Blackstone could also lease the machinery with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the machinery. Cost of capital is 13 percent. The tax rate is 40 percent.

Should Blackstone Ltd. lease or borrow to purchase the machinery?

SALES INCREASE

Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.7 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.85 for every $1.00 increase in sales. Paladin's profit margin is 5%, and its retention ratio is 45%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

$

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $300 for 6 years. Its current book value is $1,800, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $1,800/6=$300 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.

Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $7,800, and has an estimated useful life of 6 years with an estimated salvage value of $900. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,400 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and the project cost of capital is 12%.

Should it replace the old steamer?

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

Suppose a project financed via an issue of debt requires five annual interest payments of $ 22 million each year. If the tax rate is 35​% and the cost of debt is 5​%, what is the value of the interest rate tax​ shield?

A.$ 26.7 million

B.$ 66.7 million

C.$ 33.3 million

D. $ 40.0 million

3.2     You put $1000 in a savings account at 10% annually compounded interest.                                                                                                                                      

a. How much could you take out each year and still keep the original $1000 in the account? Complete the table below to support your conclusion.

b. If you left half of the interest earnings in the account, at what rate would the balance grow from year to year? Complete the table to show your calculations.

c. If you took out 80% of the interest earnings in the account, at what rate would the balance grow each year? Complete the table to show calculations.

The bursting of the housing bubble in 2007 and 2008 caused many personal and corporate bankruptcies. Many individuals lost their homes, and many banks went bankrupt. The tax payers spent around $1 trillion dollar bailing out many banks. Many things have been blamed for the housing bubble – fear and greed, corruption in the banking sector, too little regulation, too much regulation, and the Federal Reserve printing too much money. What caused the housing bubble and what changes to US laws or banking structure could prevent future problems?

Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights 40​% ​long-term debt, 10​% preferred​ stock, and 50​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 21​%.

Debt: The firm can sell for ​$1020 a 10​-year, ​$1,000​-par-value bond paying annual interest at a 7.00​% coupon rate. A flotation cost of 3​% of the par value is required.

Preferred stock: 8.00​% ​(annual dividend) preferred stock having a par value of ​$100 can be sold for ​$98. An additional fee of ​$2 per share must be paid to the underwriters.

Common stock: The​ firm's common stock is currently selling for $59.43 per share. The stock has paid a dividend that has gradually increased for many​ years, rising from ​$2.70 ten years ago to the $4.00 dividend​payment, Upper D0​, that the company just recently made. If the company wants to issue new new common​ stock, it will sell them $1.50 below the current market price to attract investors, and the company will pay $2.00 per share in flotation costs.  

a.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

The​ after-tax cost of debt using the approximation formula is

b.  The cost of preferred stock is

c.  The cost of retained earnings is

The cost of new common stock is

d.  Using the cost of retained​ earnings, the​ firm's WACC is

Using the cost of new common​ stock, the​ firm's WACC is

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

The company’s discount rate is 21%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product.

2. Calculate the net present value for each product.

3. Calculate the internal rate of return for each product.

4. Calculate the project profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, Lou Barlow would likely:

(Discounted payback period) Gio's Restaurants is considering a project with the following expected cash​ flows (see below). If the​ project's appropriate discount rate is 12 percent, what is the​ project's discounted payback​ period?

The​ project's discounted payback period is ____years. ​(Round to two decimal​ places.)

One year​ ago, your company purchased a machine used in manufacturing for $ 105000. You have learned that a new machine is available that offers many​ advantages; you can purchase it for $ 160000 today. It will be depreciated on a​ straight-line basis over ten​ years, after which it has no salvage value. You expect that the new machine will contribute EBITDA​ (earnings before​ interest, taxes,​ depreciation, and​ amortization) of $ 40000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 21000 per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, after which it will have no salvage​ value, so depreciation expense for the current machine is $ 9545 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50000. Your​ company's tax rate is 42 %​, and the opportunity cost of capital for this type of equipment is 10 %. Is it profitable to replace the​ year-old machine?