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?

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?