Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

R_A = 3.60% + 1.20R_M + e_A

R_B = -1.60% + 1.50R_M + e_B

σ_M = 16%; R-square_A = 0.25; R-square_B = 0.15

Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.
a. What is the standard deviation of the portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

b. What is the beta of your portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.)

d. What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round your answer to 3 decimal places.)

1. For a stock with a beta coefficient of b = 1.50, it is: more volatile than the average stock. about the same volatility of an average stock. less volatile than the average stock. Cannot determine. 2. For a stock with a beta coefficient of b = 1.50, in a year when the market return is 20%, we expect, in this particular example, the stock's return to be: about 20%. about 25%. about 30%. not enough information to determine. 3. For a stock with a beta coefficient of b = 1.50, in a year when the market return is -10%, we expect, in this particular example, the stock's return to be: about 0%. about -10%. about -20%. about -30%. 4. For a stock with a beta coefficient of b = 0, which of these statements is true in this particular example? The line in the graph is flat It is like a riskless asset with a guaranteed return of 10% no matter what the market does There is no chance of lower performance than the market but also no chance of better performance. All of the above.

Zippen Industries 10.750% bonds mature December 12, 2026. The bond is callable December 12, 2022 at 5.125 call premium. The offer on the bond to settle December 12, 2015 is currently 86.374.

calculate The Yield to Maturity?

and the Yield to Call?

The Archer family raises cattle on their farm in West Midlands. They also have a large garden in which they grow ingredients for making two types of relish - SauceA and SauceB. These they sell at local stores.

The profit per kilogram of SauceA is £4 and the profit per kilogram of SauceB is £4. The ingredients in each relish are cabbage, tomatoes, onions, and oil. One kilogram of SauceA must contain at least 65% but no more than 73% cabbage, and at least 6% onion, and at least 8% oil. One kilogram of SauceB must contain at least 60% but no more than 75% tomatoes, and at least 7% onion, and at least 7% oil. Both relishes contain no more than 11% onion and no more than 10% oil.

The family has enough time to make no more than 870 kilograms of relish. They know also that they will sell at least 40% more SauceA than SauceB. They will have this year 390 kilograms of cabbage, 370 kilograms of tomatoes, and 130 kilograms of onion. They can use any amount of oil needed.

What is the maximal profit that the family can gain by producing and selling the relish?

Suppose an individual invests $25,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.90 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 5 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual fund over the two-year investment period. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

Question 5 (a) Modigliani and Miller showed that when firms have to pay taxes, a firm’s value increases with leverage. Briefly discuss what prevents a firm from taking on high levels of debt. (b) Maturity Rating Features Bond A 10 years AA Put provision Bond B 10 years A Call provision Appraise which bond has the higher yield to maturity. (c) Your company buys from a supplier who offers credit terms of 3/10 net 130. Discuss whether your company should or should not pay cash for the goods it buys if it can borrow funds from the bank at 10% per annum. (Use a 360-day year for your computations.)

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3 million and will last for six years. Variable costs are 31% of sales, and fixed costs are $1,966,298 per year. Machine B costs $4.96 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,360,602 per year. The sales for each machine will be $9.2 million per year. The required return is 8 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the EAC for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3.1 million and will last for six years. Variable costs are 30% of sales, and fixed costs are $1,945,921 per year. Machine B costs $4.9 million and will last for nine years. Variable costs for this machine are 23% of sales and fixed costs are $1,315,442 per year. The sales for each machine will be $9.3 million per year. The required return is 8 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the EAC for machine B. (Round answer to 2 decimal places. Do not round intermediate calculations)

Use data below for questions 17-23 in this section and the data in the MS Excel attachment to calculate a budget for 2019. Hint: You may find it helpful to create a “standard” P&L which states all data as a percent of sales. Some “planning” questions will provide all needed data in the questions themselves.

Mr. Moore believes that roughly 8% more meals can be served in 2019 (due to the new strategy kicking into high gear) so he plans to serve 272,514 meals in 2019. He also plans to adjust prices so an average meal will be $7.35 per meal. Hint: “Sales” have been calculated as number of meals served x average price per meal.

The consulting team believes that the cost of product (calculated as a percent of sales) can be 35% of sales in 2019. Mr. Moore wants to keep the good staff he hires and so is planning to give “cost of living raises” of 2.5% over 2018 in the next year. Benefits will remain at the current 35% of the labor cost next year. The utility companies have advised all business customers that rates will increase by 15% next year.

According to the loan agreement, there will be no repayment of principle on the revolving line of credit (since we are currently in the draw period). Hence payments being made are just interest payments which are expected to be $3,000 total in 2019.* Because of agreements with the city and the insurance company (from whom he received his loan) taxes and insurance will remain the same in 2019.* Likewise depreciation expense will remain the same as in 2014.*

Service costs are expected to grow by 15% next year plus an added $55,000 is to be budgeted for extra accounting services. Other Expenses (GSA, advertising and promotion and other) are expected to increase by 10% from 2018. The heavy advertising of the new restaurant should not be necessary and there’s been time to plan for some other efficiencies. The income tax rate is expected to be 28% of EBITD which is reduced for interest and depreciation, the same percent of EBITD as in 2018.

* These values have been entered on the worksheet; there is no need to calculate these amounts. Calculate and enter only those amounts on the exam with question numbers’ shown.

1. What is to be the Sales budget for 2019?
2. What is to be the Cost of Product for 2019?
3. What is to be the Labor budget for 2019?
4. What is to be the Benefits budget for 2019?
5. What is to be the Cost of Services for 2019?
6. What are Total Costs to be budgeted for 2019?
7. What are Earnings before Interest, Taxes and Depreciation (EBITD) to be for 2019?

You are considering how to invest part of your retirement savings.You have decided to put $ 500,000 into three​ stocks: 66 % of the money in GoldFinger​ (currently $ 27​/share), 14 % of the money in Moosehead​ (currently $ 80​/share), and the remainder in Venture Associates​ (currently $ 4​/share). Suppose GoldFinger stock goes up to $ 36​/share, Moosehead stock drops to $ 69​/share, and Venture Associates stock rises to $ 9 per share.

a. What is the new value of the​ portfolio?

b. What return did the portfolio​ earn?

c. If you​ don't buy or sell any shares after the price​ change, what are your new portfolio​ weights?

On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt.

New bonds will have an 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 40%.

1. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. Round your answer to the nearest dollar. Do not round intermediate calculations.

   $  

2. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. Do not round intermediate calculations.

   %

3. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC?

   _____IIIIIIIVV

   I. r_s and the WACC will decrease due to the flotation costs of new equity.
   II. r_s will increase and the WACC will decrease due to the flotation costs of new equity.
   III. r_s will decrease and the WACC will increase due to the flotation costs of new equity.
   IV. r_s and the WACC will not be affected by flotation costs of new equity.
   V. r_s and the WACC will increase due to the flotation costs of new equity.

Jefferson qualifies for an income-adjusted monthly payment of $485. If Jefferson has a subsidized student loan of $46,000 at an annual interest rate of 4% (compounded monthly), how many months are required to repay the loan? (Round your answer up to the nearest month.) You must use technology to solve this problem.

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.89 million and will last for six years. Variable costs are 33% of sales, and fixed costs are $1,981,139 per year. Machine B costs $5.1 million and will last for nine years. Variable costs for this machine are 22% of sales and fixed costs are $1,427,870 per year. The sales for each machine will be $10.9 million per year. The required return is 10 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

parts a-c

Coupon Bond

Note: You need to use a financial calculator or Excel to solve c. and g. in this problem. Provide the direct answer

to the question

and be sure to list all of the inputs to the calculator or Excel that were necessary to arrive at

your answer.

Consider a $6,000 8-yr coupon bond with a 3.5% coupon rate.

a.

What price can this bond be purchased for if the market interest rate is 5%? (answer in long form)

b.

If this bond is purchased for $5,000, what is the current yield?

c.

If this bond is purchased for $5,000, what is its yield to maturity (YTM)?

d.

Explain why the Current Yield is either greater than or less than the coupon rate.

e.

Explain why the YTM is either greater than or less than the current yield.

f.

After five years, the market interest rate has fallen to 2%. How much can this bond be sold for? (Answer in

long form.)

g.

Compute the original owner’s holding period return if the bond is originally purchased for $4,700.

4. Calculating taxable income

For 2016, the personal exemption amount is $4,050. The 2016 standard deduction is $6,300 for unmarried taxpayers or married taxpayers filing separately, $12,600 for married taxpayers filing jointly, and $9,300 for taxpayers filing as head of household.

Calculating Heidi’s Taxable Income

Heidi is an unmarried person filing single. Calculate Heidi’s 2016 taxable income by filling in the worksheet. Enter adjustments, deductions, and exemptions as negative numbers. If your answer is zero, enter "0".

• Heidi will earn $90,965 in wages this year.

• She contributed $4,000 to an IRA.

• She received a gift from her parents to put a down payment on a new car totaling $5,000.

• She uses the standard deduction.

• She donated $1,000 to charity.

• She is entitled to one exemption.

Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 28 percent per year during the next three years, 18 percent over the following year, and then 5 percent per year, indefinitely. The required return on this stock is 11 percent and the stock currently sells for $82 per share. What is the projected dividend for the coming year?