Bee LLC is considering purchasing equipment to boost its business. Given the information below, conduct the required capital budgeting analysis to offer your recommendation. Use five of the following seven methods. Please detail any assumptions made and show your calculations for your recommendation.

• Net Present Value
• Internal Rate of Return
• Modified Internal Rate of Return
• Profitability Index
• Payback Period
• Discounted Payback Period
• Average Accounting Return

Finally, calculate DeltaNPV/DeltaPrice.

Case     

To purchase the equipment, Bee LLC incurs the following costs:

Equipment purchase price          $35,700,000    

Equipment useful life           5 years, Straight Line Depreciation Rate 20% per year

Equipment Salvage value       $4,670,000       

Required R&D                  $1,200,000, to choose the right equipment

Marketing study                $450,000, to ascertain market potential                          

Bee LLC intends to produce a unique gadget with the following cost structure:

Unit Price                                                   $525

Unit Variable Cost                                          $310

Fixed Cost                                              6,200,000

Tax Rate                                                      30%

Estimate of the Annual Net Working Capital of Sales      25%

Required Return                                             15%

The company’s projections for sales are shown below:

Projected Sales    Year +1             Year +2             Year +3             Year +4             Year +5

Sales(units)           75,000             98,000              115,000             105,000              65,000

Two years ago, you invested $2,650. Today, it is worth $3,450. What rate of interest did you earn?

a) 4.31 percent

b)14.10 percent

c)7.05 percent

d)1.18 percent

(a) Explain TWO(2) features of corporate bonds as a long-term debt instrument.

(b) Milkot Berhad issues a 15-year bond of RM1,000 that pays RM85 annually. The market price for the bond is RM960. Your required rate of return is 9%. Calculate the following:

    (i) What is the value of the bond to you?

    (ii) What is the value if your required rate of return increases to 11%?

    (iii) What will be the value if your required rate of return decreases to 7%?

   (iv) Based on (ii) & (iii) above, under which circumstances should you purchase the bond.

You need to have $33,250 in 11 years. You can earn an annual interest rate of 4 percent for the first 6 years, and 4.6 percent for the next 5 years. How much do you have to deposit today?

Which is true for a firm’s overall cost of equity:

Select one:

a.  It is generally less than a leveraged firm’s WACC

b. Ii is unaffected by changes in the market risk premium

c.  It is generally less than the firm’s after-tax cost of debt

d. It is dependent on growth rate and risk level of the firm

a. Denny and Janice (and their dog Chewy) have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20% down payment, and they must pay 2 points on the loan. Closing costs should be 3% of the purchase price. What is the total dollar amount they will need at closing? (Show all work.)

b. Benny and Sally want to calculate the difference in monthly payments on a $110,000 home as a result of a $5,000 down payment or a $10,000 down payment. Use your financial calculator to figure the monthly payments, assuming they get a 6.5%, 30-year mortgage.

c. If a lender requires that mortgage payments cannot exceed 30% of gross income and total loan payments cannot exceed 38% of gross income, calculate the monthly payment for which a person with the following financial data could qualify.

Gross Income $5,500
Stereo loan payment 250
Furniture loan payment 200
Auto loan 400

A firm's cost of capital:

Select one:

a. depends on source of funds used for a project

b. is independent of firm's capital structure

c. depends on how funds are going to be spent

d. will decrease as the firm-risk increases

1). Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier?

2). Suppose everything else equal; a) the Central Bank raises the reserve requirement to 20 percent, b) the currency deposit ratio rises to 60 percent. Which development, a) or b) will affect the money multiplier more? Why?

3). Suppose the Central Bank of Turkey starts to pay interest on reserves. Under what circumstances this would affect the short term policy interest rate?

2. An investor plans to retire in 10 years. As part of the retirement portfolio, the investor buys a newly issued, 12-year, 8% annual coupon payment bond. The bond is purchased at par value, so its yield-to-maturity is 8.00% stated as an effective annual rate.

a. Calculate the approximate Macaulay duration for the bond, using a 1 bp (0.01%) increase and decrease in the yield-to-maturity and calculating the new prices per 100 of par value to six decimal places.

b. Calculate the duration gap at the time of purchase. (Hint: An investor plans to retire in 10 years. So, this investor’s investment horizon is 10 years.)

c. Does this bond at purchase entail the risk of higher or lower interest rates?

d. A bond is currently trading for 98.722 per 100 of par value. If the bond’s yield-to-maturity (YTM) rises by 10 basis points, the bond’s full price is expected to fall to 98.669. If the bond’s YTM decreases by 10 basis points, the bond’s full price is expected to increase to 98.782. What is the bond’s approximate convexity?

1. Abdul Inc., wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. Its investment banker states that investors would use an 11.4 percent discount rate to value such bonds. At what price would these bonds sell in the marketplace? How many bonds would the firm have to issue to raise $1 million? Assume semi-annual interest payments.

(b) Investor A holds a 15-year bond, while investor B has an 7-year bond. If interest rate increases by 1 percent, which investor will have the higher interest rate risk? Explain.

(c) Investor A holds a 10-year bond paying 8 percent a year, while investor B also has a 10-year bond that pays a 6 percent coupon. Which investor will have the higher interest rate risk? Explain.

2.Assume the following for a one-year rate adjustable rate mortgage loan that is tied to the one-year Treasury rate: Loan amount: $200,000 Annual rate cap: 1% Life-of-loan cap: 4% Margin : 2.50% First-year teaser rate: 5.50% One-year Treasury rate at end of year 1: 5.25% One-year Treasury rate at end of year 2: 5.50% Loan term in years: 15 Given these assumptions, calculate the following: a.Initial monthly payment b.Loan balance end of year 1 c.Year 2 contract rate d.Year 2 monthly payment e.Loan balance end of year 2 f.Year 3 contract rate g.Year 3 payment

Use the geometric series to derive the present value of an annuity due.

Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. Dog Days is considering a proposal to produce and market a caviar-flavored dog food. It will involve an initial investment of $90,000 that can be depreciated for tax straight- line over 10 years. In each of years 1 to 10, the project is forecast to produce sales of $100,000 and to incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%, and the cost of capital is 10%.

1. a) Calculate the NPV and accounting break-even levels of fixed costs.

2. b) Suppose that you are worried that the corporate tax rate will be increased immediately after you commit

   to the project. Calculate the break-even rate of taxes.

3. c) How would a rise in the tax rate affect the accounting break-even point?

AAPL paid $4.68 in dividend last year. The company has EPS of 15.6, ROE of 16% and required 12.7% rate of return. What is the forward P/E ratio for AAPL?

Please do this in excel and show formulas.

In 300 words, Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC were used as a hurdle rate for all divisions, would the riskier divisions or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are the two techniques you would use to develop a rough estimate for each division’s cost of capital?