1. a) Explain how savings institutions could use interest rate futures to reduce interest rate risk.

b) Explain why many savings institutions experience financial problems at the same time.

Question 1:   The marketing department for your electronics company has determined the relationship between price and demand for a new smartphone: Price ($) = 150 – 0.01 x (Monthly Demand) The fixed costs for this item are $50,000 per month, and the variable cost per unit is $40.   Determine: a) What is the optimal production volume per month for this product? b) What is the maximum profit per month? c) What is the domain of profitable demand? d) Prepare a spreadsheet and chart that shows cost, revenue, and profit. (Use the chart type scatter with smooth lines, over a range of demand from 0 to 12,000 units per month. The chart must include axis titles and a legend that identifies the three curves.

Question 2: You hope to sell a product for $575 that has a variable cost per unit of $335.  Your fixed cost is from rent on the fully‐furnished factory in which your product is manufactured. a) If you sell 9000 units per year, what is the maximum monthly rent you can afford to pay in order to break even? b) If the rent was actually $58,000 per month, then what is your annual profit if you sell 7000 units per year?

Question 3: A regional airline is considering the addition of winglets to its CRJ200 aircraft, at a cost of $375,000 per plane. The winglets improve fuel economy from 3150 lbs of fuel per hour to 3020 lbs/hr. Assuming a fuel cost of $0.27 per lb, and an interest rate of 1% per month, how many hours each month must be flown in order for this upgrade to break even within 3 years?

Question 4: Your company has been renting forklifts at a cost of $7500 (each) per year.  If your company upgrades the warehouse to an integrated robotic system, then forklifts would no longer be needed. The upgraded warehouse costs $208,000 to construct, $11,000 each year to maintain, and will have a useful life of 25 years.  For an interest rate of 5% per year, how many forklifts could be rented each year and break even with the cost of the upgraded warehouse?  

Question 5: You have invested $26,500 to obtain equipment that enables you to generate $4550 in revenue each month, with monthly costs of $1725. For a monthly interest rate of 3%, how many months are required for you to pay off your initial investment?

Question 6: Your company has purchased surveying equipment for $43,500, and will utilize it for 8 years before selling it for $3250.  How much new revenue must this equipment generate each year in order to pay off the equipment and realize a return of 6% per year?  Note: solve this problem with the factor method or equation method, and then also set up a spreadsheet illustration of ‘Unrecovered Investment Balance’.  (Hint: we’ve done spreadsheets like this before, on HW 7 and ICE 12).

Sia Dance Studios has an annual cash dividend policy that raises the dividend each year by 3​%. Last​ year's dividend, Div 0Div0​, was $8 per share. The company will be in business for 40 years with no liquidating dividend. What is the price of this stock if

 a. an investor wants a return of 9​%?

b. an investor wants a return of 10​%?

c.  an investor wants a return of 13​%?

d.  an investor wants a return of 15​%?

e.  an investor wants a return of 18​%?

round to the nearest cent

WACC

Information extracted from XYZ firm are as follow:

Common Shares issued: 1 million shares

Share Price: $5 per share

Bonds issued: 10,000 bonds

Face Value of Bond: $1,000

Price of Bond: $1,044.52

Coupon rate of bond: 5%

Maturity of Bond: 5 years

Information extracted from Factset are as follow:

XYZ’s beta: 1.2 times of market beta

10-year Treasury Bond yield: 3%

5-year AA bond yield: 3.5%

5-year A bonds have a spread of 0.5% above AA bond yields

Expected Return of the stock market: 9%

Tax Rate: 20%

Calculate XYZ’s WACC.

National Business Machine Co. (NBM) has $2 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in either Treasury bills yielding 2 percent or a 4 percent preferred stock. IRS regulations allow the company to exclude from taxable income 70 percent of the dividends received from investing in another company’s stock. Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield, or in preferred stock. The corporate tax rate is 36 percent. Assume the investor has a 32 percent personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15 percent on common stock dividends.

Suppose the company reinvests the $2 million and pays a dividend in three years.

What is the total aftertax cash flow to shareholders if the company invests in T-bills? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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.