Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7.5%.

1. Which unit would you recommend?
   1. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV.
   2. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR.
   3. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCC's NPV of costs is lower than HCC's, LCC would be chosen.
   4. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC's NPV of costs is lower than LCC's, HCC would be chosen.
   5. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed.
2. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him?
   1. There are multiple IRR's for each project.
   2. The IRR of each project is negative and therefore not useful for decision-making.
   3. The IRR cannot be calculated because the cash flows are all one sign. A change of sign would be needed in order to calculate the IRR.
   4. The IRR cannot be calculated because the cash flows are in the form of an annuity.
   5. The IRR of each project will be positive at a lower WACC.
3. If the WACC rose to 15% would this affect your recommendation?
   1. When the WACC increases to 15%, the NPV of costs are now lower for HCC than LCC.
   2. When the WACC increases to 15%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen.
   3. When the WACC increases to 15%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen.
   4. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV.
   5. When the WACC increases to 15%, the NPV of costs are now lower for LCC than HCC.
   
   
   Explain your answer and the reason this result occurred.
   1. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV.
   2. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR.
   3. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV.
   4. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV.
   5. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV.
   
   

Your division is considering two projects with the following cash flows (in millions):

1. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

2. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 10.72%.)
   -Select-Project A Project B Neither A, nor B

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 10.72%.)
   -Select-Project A Project B Neither A, nor B

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 10.72%.)
   -Select-Project A Project B Neither A, nor B

a. A coupon payment bond has a face value of $100 and sells at $94. The bond has a coupon rate of 7.5% and pays semi-annual coupons. The bond has a maturity of 30 years. What is the YTM?

b. What is the YTM if the same bond in a sells at $101?

c. What is the general relationship between bond price and market interest rate? (i.e. what does discount bond imply about market interest rate and coupon rate? What does premium bond imply about market interest rate and coupon rate?)

You are managing a portfolio of $1.0 million. Your target duration is 18 years, and you can choose from two bonds: a zero-coupon bond with maturity five years, and a perpetuity, each currently yielding 4%.

a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. How will these fractions change next year if target duration is now seventeen years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Wolfrum Technology​ (WT) has no debt. Its assets will be worth ​$451 million one year from now if the economy is​ strong, but only ​$213 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is ​$258 million. a. What is the expected return of WT stock without​ leverage? b. Suppose the​ risk-free interest rate is 5 %. If WT borrows ​$104 million today at this rate and uses the proceeds to pay an immediate cash​ dividend, what will be the market value of its equity just after the dividend is​ paid, according to​ MM? c. What is the expected return of WT stock after the dividend is paid in part ​(b​)d

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.93.

Calculate Jensen’s alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.)

Jensen’s alpha %

Information ratio

a. A stock has an annual return of 14 percent and a standard deviation of 62 percent. What is the smallest expected loss over the next year with a probability of 1 percent? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round the z-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places.)

b. Does this number make sense?

• Yes

• No

a. A stock has an annual return of 11 percent and a standard deviation of 44 percent. What is the smallest expected gain over the next year with a probability of 1 percent? (Do not round intermediate calculations. Round the z-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places.)

b. Does this number make sense?

• Yes

• No

You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:

Assume that the correlation of returns on Portfolio Y to returns on the market is 0.84. What is the percentage of Portfolio Y’s return that is driven by the market? (Round your answer to 4 decimal places.)

R-squared _____

Pharoah Chiropractic Clinic produces $260,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to repurchase $520,000 of its equity by borrowing $520,000 at a rate of 9 percent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Pharoah after it changes its capital structure. Assume that Modigliani and Miller Proposition 1 assumptions hold. (Round answer to 2 decimal places, e.g. 17.54%.)

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.4 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.68 million. Under Plan B, cash flows would be $2.0257 million per year for 20 years. The firm's WACC is 12%. Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero, enter "0". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. Discount Rate NPV Plan A NPV Plan B 0 % $ million $ million 5 million million 10 million million 12 million million 15 million million 17 million million 20 million million Identify each project's IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % Find the crossover rate. Do not round intermediate calculations. Round your answer to two decimal places. % Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12%? If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12%, because all the company can do with these cash flows is to replace money that has a cost of 12%? Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

Problem 12-09 Financing Deficit Garlington Technologies Inc.'s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Income Statement for December 31, 2016 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre-tax earnings $ 302,000 Taxes (40%) 120,800 Net income 181,200 Dividends $ 108,000 Suppose that in 2017 sales increase by 15% over 2016 sales and that 2017 dividends will increase to $136,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 10%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017 Sales $ Operating costs $ EBIT $ Interest $ Pre-tax earnings $ Taxes (40%) $ Net income $ Dividends: $ Addition to RE: $ Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017 Cash $ Receivables $ Inventories $ Total current assets $ Fixed assets $ Total assets $ Accounts payable $ Notes payable $ Accruals $ Total current liabilities $ Common stock $ Retained earnings $ Total liabilities and equity

Pharoah Security Company produces a cash flow of $240 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Pharoah is 20 percent, and the firm is financed entirely with equity. Management would like to repurchase $200 in shares by borrowing $200 at a 8 percent annual rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1 answer the following questions.

What is the value of the firm today?

What is the value of equity after the repurchase?

What will be the rate of return on common stock required by investors after the stock repurchase? (Round answer to 2 decimal places, e.g. 17.54%.)

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6.7 percent and a standard deviation of 9.7 percent. The risk-free rate is 3.7 percent, and the expected return on the market portfolio is 11.7 percent. Assume the capital asset pricing model holds.

What expected rate of return would a security earn if it had a .42 correlation with the market portfolio and a standard deviation of 54.7 percent? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected rate of return             %

In 525 words the challenges and risks you may face in starting a business in a foreign country including the following:
cultural, business, and political risks
How you plan to avoid operational, transaction, and translation exposure.