Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over six years using the straight-line method. The new cars are expected to generate $160,000 per year in earnings before taxes and depreciation for six years. The company is entirely financed by equity and has a 40 percent tax rate. The required return on the company’s unlevered equity is 11 percent, and the new fleet will not change the risk of the company.

a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Healthcare Financing:

How can an organization reduce the value of inventory and the number of items in inventory?

Tapley Inc. currently has total capital equal to $5 million, has zero debt is in the 40% federal-plus-state tax bracket, has a net income of $1 million and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5% per year, 200000 shares of stock are outstanding and the current WACC is 13.40%

The company is considering a recapitalization where it will issue $1 million un debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 11% and its cost of equity will rise to 14.5%.

assuming that the company maintains the same payout ratio, what will be its stock price after recapitalisation?

You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance):

(i) Describe and interpret the assumptions related to the problem.

(ii) Apply the appropriate mathematical model to solve the problem.

(iii) Calculate the correct solution to the problem. Submit all answers as percentages and round to two decimal places.

QUESTION: CosaNostra Pizza is undergoing a major expansion. The expansion will be financed by issuing new 26-year, $1,000 par, 9% semiannual coupon bonds. The market price of the bonds is $775 each. Flotation expense on the new bonds will be $90 per bond. The marginal tax rate is 35%. What is the post-tax cost of debt for the newly-issued bonds?

1. TRUE OR FALSE The two assets A and B have expected returns and volatilities: E(Ra), SD(Ra) and E(Rb), SD(Rb). Suppose we construct an equally weighted portfolio using these two assets. Then,SD(Rp)<12SD(Ra)+12(SDrs) to diversification benefit.

Problem 11-19 Dropping or Retaining a Segment [LO11-2]

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last year’s net operating income of $39,100 to be unsatisfactory; therefore, she is considering the possibility of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

1-b. Should the Housekeeping program be discontinued?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

What should drive someone's decision as to whether to choose a Roth option or a traditional option? Do you think people make good decisions on these lines? Is offering both alternatives a good idea or does it just make the choices too complex?

Choosing a career in business finance means that you will have an opportunity to work in just about any field you can imagine. Your compensation would vary depending on your education, certifications, specialization, and experience. Go to a job posting or career site and research jobs that require a degree or experience in business financial management. The following questions will be addressed in our discussion:

• What kind of jobs can you get with a financial degree?
• What salary would you expect to receive?
• What are other non-traditional jobs besides business finance that someone with an accounting background could do?
• What salary would you expect to receive?
• What are the pros of choosing a career in business finance?
• What are the cons of choosing a career in business finance?

26. The graphical relationship among interest rates on bonds with identical default risk but different maturities is called the
    A. risk structure of interest rates.
    B. liquidity structure of interest rates.

    C. yield curve.
    D. bond demand curve.

27. Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
    A. more; lower
    B. less; lower

    C. more; higher D. less; higher

28. The term structure of interest rates is

    1. the relationship among interest rates of different bonds with the same risk and

       maturity.

    2. the structure of how interest rates of the same maturity move over time.

    3. the relationship among the terms to maturity of different bonds from different

       types of issuers (municipal, corporate, treasury, etc.)

    4. the relationship among interest rates on bonds with different maturities but

       similar credit and liquidity risk.

29. Which of the following bonds usually trades at the highest market interest rate? A. 1 year C U.S. Treasury bonds
    B. 5 year U.S. Treasury bonds
    C. 10 year U.S. Treasury bonds

    D. 30 year U.S. Treasury bonds

30. According to the expectations theory of the term structure,

    1. when the yield curve is steeply upward-sloping, short-term interest rates are

       expected to rise in the future.

    2. when the yield curve is downward-sloping, short-term interest rates are expected

       to decline in the future.

    3. buyers of bonds prefer short-term to long-term bonds.

    4. all of the above.

    5. only A and B of the above.

31. The market consensus of the expected path of one-year interest rates over the next four years is:

    5% in Year 1 (current 1 year rate) 4% in Year 2
    2% in Year 3
    1% in Year 4

    Considering this projection, what would the current yield of the current bond maturing in four-years be under the pure expectations theory?
    A. 2 percent.
    B. 3 percent.

    C. 4 percent. D. 5 percent. E. 6 percent.

32. The current market interest rate of a 4 year bond is 9% and the forecasted path of 1- year interest rates over the next 3 years is:

    6% in Year 1 (current 1 year rate) 7% in Year 2
    8% in Year 3

    Considering this projection, what would the projected 1-year rate be 3 years from today (the fourth year of the rate forecast above) under the pure expectations theory?
    A. 7%
    B. 7.25%

    C. 15%
    D. 15.25%

33. According to the market segmentation theory of the term structure,

    1. the interest rate for bonds of one maturity is determined by the supply and

       demand for bonds of that maturity.

    2. bonds of one maturity are not substitutes for bonds of other maturities;

       therefore, interest rates on bonds of different maturities do not move together

       over time.

    3. investors' strong preference for short-term relative to long-term bonds explains

       why yield curves typically slope upward.

    4. all of the above.

    5. none of the above.

34. The liquidity premium theory of the term structure

    1. indicates that today's long-term interest rate equals the average of short-term

       interest rates that people expect to occur over the life of the long-term bond.

    2. assumes that bonds of different maturities are perfect substitutes.

    3. suggests that markets for bonds of different maturities are completely separate

       because people have different preferences.

    4. none of the above.

35. Under the _____________________ a flat yield curve is an indication that the market is expecting short term rates to __________ in the future.
    A. Liquidity Premium Theory | decrease
    B. Liquidity Premium Theory | stay the same

    C. Pure Expectations Theory | decrease
    D. Pure Expectations Theory | stay the same E. AandC
    F. AandD
    G. BandC
    I. BandD

36. If the yield curve has a mild upward slope, the liquidity premium theory indicates that the market is predicting

    1. a rise in short-term interest rates in the near future and a decline further out in

       the future.

    2. constant short-term interest rates in the near future and further out in the

       future.

    3. a decline in short-term interest rates in the near future and a rise further out in

       the future.

    4. a decline in short-term interest rates in the near future and an even steeper

       decline further out in the future.

37. Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?
    A. market segmentation theory
    B. expectations theory

    C. liquidity premium theory D. separable markets theory

38. Since yield curves are usually upward sloping, the ______________ indicates that, on average, people tend to prefer holding short-term bonds to long-term bonds.
    A. market segmentation theory
    B. expectations theory

    C. liquidity premium theory D. both A and B of the above E. both A and C of the above

There are various financial instruments that could be used as a form of post retirement income.
Assess the pros and cons of using:
(a) an annuity

(b) coupons from long term bonds

(c) dividends from stocks

Retirement Planning is not all about estimating and meeting a number. Discuss two (2) other qualitative aspects of retirement planning one should consider.

14. Interest rates are important to financial institutions, like banks, since an increase in interest rates ________ the cost of acquiring funds and ________ the income from financial assets.
    A. decreases; decreases

    B. increases; increases C. decreases; increases D. increases; decreases

15. (I) Debt markets are often referred to generically and collectively as the bond market. (II) A bond is a security that is a claim on the residual earnings and assets of a corporation after contractual payments are made to stockholders.
    A. (I) is true | (II) false.

    B. (I) is false | (II) true. C. Both are true.
    D. Both are false.

16. Financial markets have the basic function of

    1. bringing together people with funds to lend and people who want to borrow

       funds.

    2. assuring that the swings in the business cycle are less pronounced.

    3. assuring that governments need never resort to printing money.

    4. both A and B of the above.

    5. both B and C of the above.

17. Which of the following securities would be classified as a money market instrument? A. Stock

    B. Long Term Bond
    C. Commercial Paper
    D. Mortgage Backed Security

18. IPOs are launched in the _________ market. A. Debt

    B. Residual C. Primary D. Secondary

19. The agency problem called Empire-Building occurs when

    1. A firm’s CEO is more interested in increasing the size of the corporation, rather than the

       size of its profits.

    2. The CEO increases the scope of a business in order to limit competition.

    3. The CEO is granted maximum compensation with a minimum "strings."

    4. The CEO expands the firm’s footprint in order to increase economies of scale.

20. When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.
    A. asymmetric information
    B. adverse selection

    C. moral hazard D. fraud

21. If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
    A. 7%
    B. 22%.

    C. -15% D. -8%

22. A decrease in the expected rate of inflation will ________ the expected return on bonds relative to returns on ________ assets.
    A. reduce | financial
    B. reduce | real

    C. increase | financial D. increase | real

23. The interest rate that is adjusted for actual changes in the price level is called the A. ex post real interest rate.
    B. expected interest rate.
    C. ex ante real interest rate.

    D. none of the above.

24. When the demand for bonds ________ or the supply of bonds ________, interest rates fall.

    1. Increases | increases

    2. Increases | decreases

    3. Decreases | decreases

    4. Decreases | increases

25. The demand for an asset rises if ________ falls. A. risk relative to other assets
    B. expected return relative to other assets C. liquidity relative to other assets

    D. wealth

If Moody's or Standard and Poor's downgrades its rating on a corporate bond, typically the demand for that bond ________ and its yield ________.
A. Increases | decreases
B. Decreases | increases

26. C. Increases | increases D. Decreases | decreases

Taxation

a) Define the tax wedge. What does full shifting mean?

b) Why does taxation generate welfare losses?

Machalo Limited is a fashion company. Michael, one of the ‘bright young things’ who works in the design department, has come up with a new style of a T-shirt – the D’urberville. The product is not expected to have a long sales run but will be popular whilst it lasts.
Two methods of promoting the T-shirt are available:
Method 1: ‘swamping the market’ – this would involve an initial advertising campaign costing K100,000 and would result in net cash inflows after one year of K230,000. However, commission of K132,000 would have to be paid one year after the inflows.
Method 2: waiting for the market to develop gradually. This would involve an initial advertising campaign costing K70,000 and would result in net cash inflows of zero after one year and K38,000 at the end of each of the subsequent three years.
Mrs Kangwa, a director of Machalo Limited, has commented: ‘Method 1 can’t be acceptable since the net receipts of K230,000 are less than the total outflows of K232,000. Method 2 can’t be adopted since the expense of K70,000 in a year with no revenue to show for it will mean that we won’t have enough money to pay the dividend which our shareholders require.’
Machalo Limited’s cost of capital is 15%. The directors do not expect capital to be in short supply during the next four years.
Page 3 of 13
Required:
a) Calculate the net present values and estimate the internal rates of return of the two methods of promoting the new product.
b) Advise the directors of Machalo Limited which method they should adopt, explaining the reasons for your advice and noting any additional information you think would be helpful in making the decision.
c) Comment on the views expressed by Mrs Kangwa.

Explain Five (5) limitations of financial ratios.