You must evaluate a proposal to buy a new milling machine. The base price is $173,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $86,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $56,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. The cost of research is an incremental cash flow and should be included in the analysis.
   3. Only the tax effect of the research expenses should be included in the analysis.
   4. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   5. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   
   -Select-1

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-Yes or No

Brown Enterprises' bonds earn a 7.60 percent yield to maturity. They have a 20-year maturity, and an annual coupon rate of 8 percent. Coupons are paid semiannually. What is their current yield?

Assume sales for Peach Street Industries are expected to increase by 8.00% from 2015 to 2016. Peach Street is operating at full capacity currently and expected assets-to-sales and spontaneous liabilities-to-sales to remain the same. Additionally, the firm is looking to maintain their 2015 net profit margin and dividend payout ratios for 2016. The firm’s tax rate is 37.00% and selected income statement and balance sheet information for 2015 is provided below:

The firm is projecting sales growth of 10% from 2015 to 2016. If the firm did not have access to or did not want to use external capital sources to grow sales, what is the maximum rate of sales growth (self-sustaining growth rate) could the firm could achieve under these conditions?

Part C The long-run

Assume that the 4-A Clinic is at capacity with the workers you hired above. To expand further, some adjacent office space would need to be leased and new equipment would need to be added. The fixed costs associated with this are shown below. The patient-equivalents are total patients seen, not the increase in patient.

Other assumptions (so that wrong answer from 1-7 don’t effect your answers below):

The marginal cost (labor, operating costs, and consumables, but not the fixed costs) of seeing another patient-equivalent is $150.

The revenue from a patient-equivalent is fixed at $300.

Calculate the average incremental fixed cost per patient for

1. An increase from 50 to 70 patients
2. An increase from 70 to 90 patients
3. An increase from 90 to 100 patients
4. In expanding the clinic, which is most profitable?

1. Stay at 50 patients.
2. Expand to 70 patients
3. Expand to 90 patients
4. Expand to 100 patients.

National​ Steel's 15-year, $1,000 par value bonds pay 9 percent interest annually. The market price of the bonds is $900​, and your required rate of return is 12 percent.

a. Compute the​ bond's expected rate of return.

b. Determine the value of the bond to​ you, given your required rate of return.

c. Should you purchase the​ bond?

Thatcher Corporation's bonds will mature in 13 years. The bonds have a face value of $1,000 and a 9% coupon rate, paid semiannually. The price of the bonds is $1,150. The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity? What is their yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

The mortgage on your house is five years old. It required monthly payments of

$1,450​,

had an original term of 30​ years, and had an interest rate of

10 %10%

​(APR). In the intervening five​ years, interest rates have fallen and so you have decided to

refinance long dash—that

​is, you will roll over the outstanding balance into a new mortgage. The new mortgage has a​ 30-year term, requires monthly​ payments, and has an interest rate of

6.125 %6.125%

​(APR).

a. What monthly repayments will be required with the new​ loan?

b. If you still want to pay off the mortgage in 25​ years, what monthly payment should you make after you​ refinance?

c. Suppose you are willing to continue making monthly payments of

$ 1450$1,450.

How long will it take you to pay off the mortgage after​ refinancing?d. Suppose you are willing to continue making monthly payments of

$ 1450$1,450​,

and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the​ refinancing?

​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

a. What monthly repayments will be required with the new​ loan?

The monthly repayments with the new loan will be

​$969.55969.55.

​(Round to the nearest​ cent.)

b. If you still want to pay off the mortgage in 25​ years, what monthly payment should you make after you​ refinance?

If you still want to pay off the mortgage in 25​ years, the monthly repayments will be

​$1040.331040.33.

​(Round to the nearest​ cent.)c. Suppose you are willing to continue making monthly payments of

$ 1 comma 450$1,450.

How long will it take you to pay off the mortgage after​ refinancing?It will take approximately

162162

months.  ​(Round to the nearest​ integer.)d. Suppose you are willing to continue making monthly payments of

$ 1 comma 450$1,450

and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the​ refinancing? You can borrow an additional

​$6283662836.

​(Round to the nearest​ dollar.)

A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond's current yield? Do not round intermediate calculations. Round your answer to two decimal places.

Charles Dow was the original editor of the Wall Street Journal. He was the originator of​ "Dow Theory," which holds that the prices of transportation​ stocks, such as Heartland​ Express, can predict changes in the price of industrial​ stocks, such as ExxonMobil. An article in the Wall Street Journal refers to Dow Theory as the​ "granddaddy of technical​ analysis."

​Source: Spencer​ Jakab, "Keep on Trucking Despite Dow​ Theory," Wall Street Journal​, July​ 16, 2012.

Dow Theory is considered technical analysis rather than fundamental analysis because it​ _______.

A. requires complicated computer programs to generate its results

B. requires analysis of multiple stocks to generate its results

C. relies on forecasting future profits of firms in order to forecast future stock prices

D. relies on patterns of past stock prices to predict future stock prices

Would an investor be able to earn an​ above-average return on her stock investments by selling industrial stocks whenever she saw declines in transportation stocks and buying industrial stocks whenever she saw increases in transportation​ stocks?

A. ​Yes, the long history associated with this theory illustrates its ability to guarantee​ above-average returns.

B. ​No, this strategy neglects all available information except for past stock prices.

C. ​No, this strategy only focuses on expected future returns and neglects past performance.

D. ​Yes, rational expectations theory predicts that investors employing technical analysis are likely to earn​ above-average returns

​?[Related to the Chapter Opener​] The chapter opener states that​ "many investors who bought stocks in 2000 and held them through 2010 found that they had received a negative real return on their investment over the​ 10-year period." Why would investors have invested in stocks during those years if they received a negative real​ return?

A. Investors may have used rational expectations to predict continued growth in the markets.

B. Investors may have believed the high rate of returns from the 1980s would continue.

C. Investors may have used adaptive expectations to formulate their future stock price forecasts.

D. All of the above.

An article in the Economist noted that while economic growth in China was​ slowing, stocks have more than doubled in value. The article stated that unlike in developed countries where large institutional investors buy the overwhelming majority of the stock​ purchased, in China​ 90% of buying is done by individual investors. It described the demand for stock by these investors as a mania.

​Source: A Crazy ​Casino, Economist​, May​ 26, 2015.

What does the article mean when it describes stock buying by individual investors as a​ mania?

A. Investors are purchasing stock irrationally.

B. Investors are crazy.

C. Investors are enthusiastic about purchasing stock.

D. The demand for stock is incredibly high.

? Individual investors would be More likely to exhibit this behavior than institutional investors.

An article in the Economist in 2016 noted that since​ 2000, an investor in the United Kingdom would have earned a higher return from buying British government bonds than from buying stock issued by British firms. The article concluded​ that: There has been a negative equity risk premium this century.

​Source: Stocks for the Long ​Run? Economist​, January​ 13, 2016.

?Equity premium represents the additional return investors must receive in order to invest in stocks.

?Why might the equity risk premium in the United Kingdom have been negative during this​ period?

A. Banks were paying high interest rates on bonds.

B. The returns on bonds outpaced the returns on stocks.

C. Investors fled to other countries.

D. The returns on stocks outpaced the returns on bonds.

​?[Related to Making the​ Connection] Economist Peter Temin of MIT argues​ that, If the crash of 1929 was an important independent shock to the​ economy, then the crash of 1987 should have been equally disastrous.

​Source: Peter​ Temin, Lessons from the Great Depression​, ​Cambridge, MA: MIT University​ Press, 1989 p. 41.

Which of the following events would be considered important independent shock to an economy​?

A. A stock market crash.

B. The breakout of war in the Europe.

C. Inflation.

D. An increase in the Federal Funds rate.

?What reason might Temin give to support his argument that what happened to the economy following the crash of 1987 is evidence against the crash of 1929 being an important shock to the​ economy?

A. Economic conditions were more severe after the crash of 1929 even though the decline in the market in 1987 was twice as large as the decline in the market in 1929.

B. The market decline in 1929 was twice as large as the market decline in 1987.

C. The market decline in 1987 was twice as large as the market decline in 1987.

D. Economic conditions were more severe after the crash of 1987 because the decline in the market was twice as large as in 1929.

Christina Romer would argue that the impact of the crash of 1929 was more severe because of its effect on consumer confidence as well as the lack of regulations in place at the time.

The business writer Michael Lewis has quoted Michael​ Burry, a fund​ manager, as​ saying: "I also immediately internalized the idea that no school could teach someone how to be a great investor. If that were​ true, it'd be the most popular school in the​ world, with an impossibly high tuition. So it must not be​ true." Do you agree with​ Burry's reasoning?

Source​: Michael​ Lewis, The Big​ Short: Inside the Doomsday Machine​, New​ York: W.W.​ Norton, 2010, p. 35.

A. ​No, according to the adaptive markets​ hypothesis, attempting to beat average market returns is a futile exercise.

B. ​Yes, according to the adaptive markets​ hypothesis, if you could derive an adaptive model to forecast stock​ returns, it is possible to earn infinitely high profits.

C. ​No, according to the efficient markets​ hypothesis, attempting to beat average market returns is a futile exercise.

D. ​Yes, according to the efficient markets​ hypothesis, if you could derive an efficient model to forecast stock​ returns, it is possible to earn infinitely high profits.

[Related to Making the​ Connection] A column in the Wall Street Journal​, asks the​ question: Are capital gains so different from earned income that they should be taxed at a different ​rate?

​Source: Scott Sumner and Leonard E.​ Burman, It Fair to Tax Capital Gains at Lower Rates Than Earned ​Income? Wall Street Journal​, March​ 1, 2015.

What is a capital​ gain?

A. A distribution of profit to investors.

B. The increase in capital from one year to the next.

C. An increase in the price of a stock.

D. A profit from the sale of an investment.

In what way are capital gains taxed differently than salary and wage​ income?

A. Capital gains are adjusted to account for inflation.

B. Salary and wage income is subject to deductibles.

C. Salary and wage income is taxed at a lower rate than capital gains.

D. Capital gains are taxed at a lower rate than salary and wage income.

One economic argument for taxing capital gains differently than other income is that investors have to pay taxes on their nominal gain without an adjustment for inflation.

You are trying to get an idea of how predictable a firm future FCF’s will be so you look at the last 10 years FCF’s and find that the average was 25 million and that the standard deviation was 18 million. You decide to find the range of outcomes 95% of the time. How should you interpret this?

a. The range of outcomes are from 7 to 43 million

b. The range of outcomes are from -11 to 61 million and the smaller the standard deviation the lower the total risk

c. The range of outcomes are from -11 to 61 million and the smaller the standard deviation the higher the total risk

d. The range of outcomes are from 5 to 45 million

NPVlong dashMutually exclusive projects   Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table: LOADING.... The​ firm's cost of capital is 12​%. a.  Calculate the net present value ​(NPV​) of each press. b.  Using​ NPV, evaluate the acceptability of each press. c.  Rank the presses from best to worst using NPV. d.  Calculate the profitability index​ (PI) for each press. e.  Rank the presses from best to worst using PI.

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

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

   Project A:    $   million

   Project B:    $   million

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

   Project A:  $   million

   Project B:  $   million

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

   Project A:  $   million

   Project B:  $   million

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

   Project A:    %

   Project B:    %

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

   Project A:    %

   Project B:    %

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

   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 90.37%.)

   -Select-Project AProject BNeither A nor BItem 13

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)

   -Select-Project AProject BNeither A nor BItem 14

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)

   -Select-Project AProject BNeither A nor B

Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$62.48. The firm just recently paid a dividend of ​$4.01. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.01. After underpricing and flotation​ costs, the firm expects to net ​$57.48 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you expect the company to pay next​ year? b. Determine the net​ proceeds, Nn​, that the firm will actually receive. c.  Using the​ constant-growth valuation​ model, determine the required return on the​ company's stock, r Subscript s​, which should equal the cost of retained​ earnings, r Subscript r. d.  Using the​ constant-growth valuation​ model, determine the cost of new common​ stock, r Subscript n.

Two projects, Alpha and Beta, are being considered using the payback method. Each has an initial cost of $100,000. The annual cash flows for each project are listed below. a) What is the pay back period in years for Alpha? (round to two decimal places)b) What is the pay back period in years for Beta? (round to two decimal places)