IBM is considering a new expansion project and the finance staff has received information summarized below:

- The project require IBM to purchase $1,000,000 of equipment in 2013 (t=0) - Inventory will increase by $100,000 and accounts payable will rise by $50,000

- The project will last for four years. The company forecasts that they will sell 1,000,000 units in 2014, 2,000,000 units in 2015, 3,000,000 units in 2016, and 4,000,000 units in 2017. Each unit will sell for $3.00

- The fixed cost of producing the product is $2 million each year

- The variable cost of producing each unit is $1.00 each year

- The equipment will be depreciated under the MACRS system using the applicable rates of 33%, 45%, 15%, and 7% respectively

- When the project is completed in 2017 (t=4), the company expects that it will be able to salvage the equipment for $100,000, and it expects that it will fully recover the NWC.

- The estimated tax rate is 40% - Based on the perceived risk, the project's WACC is estimated to be 12%

1. Create the projected Free Cash Flow Schedule for the project

2. Use the capital budgeting techniques to evaluate free cash flows

Through the use of turnover rates, explain why a firm might seek to increase the volume of its sales even though such an increase can be secured only at reduced prices. Please explain

Compute the NPV statistic for Project Y if the appropriate cost of capital is 11 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)

Should the project be accepted or rejected?

17. Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable discounted payback is 3 years.

You are a bond portfolio manager who is in the business of providing a guaranteed rate of return to your clients over a given investment horizon. The following information has been provided to you on bonds X and Y

                                       Bond          Coupon          Maturity               Price

                                          X                  8%               10 Years                96.72

                                          Y                  9%              30 Years              105.37

1.   What fractions should be invested in X and Y to obtain a portfolio with duration of a) 8 years b) 9 years c) 10 years?

Alanya Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? IRR?

Has to be done by hand! Not excel

a.True or false. The Federal Insurance Office of the U.S. Treasury offers insurance companies the opportunity of an optional federal charter, which allows them to be regulated at the federal level rather than by multiple states.

b.A stock with a 5% dividend yield is priced at $100. If the projected growth rate of dividends is 3% (forever), what is the company’s cost of equity according to the dividend discount model?

c. Suppose the exchange rate with the United Kingdom is 25 dollars per UK pound, and that the US one year interest rate is 2% while the UK one year interest rate is 0.5%. What is the expected exchange rate in one year if interest parity holds?

Quantitative Problem 1: Beasley Industries' sales are expected to increase from $4 million in 2019 to $5 million in 2020, or by 25%. Its assets totaled $2 million at the end of 2019. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, current liabilities are $780,000, consisting of $160,000 of accounts payable, $450,000 of notes payable, and $170,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 70%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Do not round intermediate calculations. Round your answer to the nearest dollar.
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The AFN equation assumes that ratios remain constant. However, firms are not always operating at full capacity so adjustments need to be made to the existing asset forecast. Excess capacity adjustments are changes made to the existing asset forecast because the firm is not operating at full capacity. For example, a firm may not be at full capacity with respect to its fixed assets. First, the firm's management must find out the firm's full capacity sales as follows:

Next, management would calculate the firm's target fixed assets ratio as follows:

Finally, management would use the target fixed assets ratio with the projected sales to calculate the firm's required level of fixed assets as follows:

Required level of fixed assets = (Target fixed assets/Sales) × Projected sales

Quantitative Problem 2: Mitchell Manufacturing Company has $1,700,000,000 in sales and $350,000,000 in fixed assets. Currently, the company's fixed assets are operating at 70% of capacity.

1. What level of sales could Mitchell have obtained if it had been operating at full capacity? Do not round intermediate calculations. Round your answer to the nearest dollar.
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2. What is Mitchell's Target fixed assets/Sales ratio? Do not round intermediate calculations. Round your answer to two decimal places.
   %
3. If Mitchell's sales increase by 60%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Do not round intermediate calculations. Round your answer to the nearest dollar.
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1. According to Signaling theory, why does the stock price decline when a new stock offering is announced?

2. According to Modigliani and Miller theory, what happens to the value of a company when additional debt is issued? (assume corporate taxes exist)

3. With an optimal capital structure, what is maximized and what is minimized?

4. According to Windows of Opportunity theory, when will a company issue stock?

General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation).

a. Compute the mean, standard deviation, and coefficient of variation for both investments. (Do not round intermediate calculations. Enter your answers in millions. Round "Coefficient of variation" to 3 decimal places and "Standard deviation" to 2 decimal places.)

Merger A    Merger B

Mean

Standard Deviation

Coefficient of Variation

b. Assuming investors are risk-averse, which alternative can be expected to bring the higher valuation?

• Merger A

• Merger B

Dinklage Corp. has 10.1 million shares of common stock outstanding. The current share price is $58, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a 7 percent coupon, and sells for 91 percent of par. The second issue has a face value of $64.64 million, has a 7 percent coupon, and sells for 94.1 percent of par. The first issue matures in 10 years, the second in 7 years.

a. What is the company's capital structure weight of equity on a book value basis?

b. What is the company's capital structure weight of debt on a book value basis?

c. What is the company's capital structure weight of equity on a market value basis?

d. What is the company's capital structure weight of debt on a market value basis?

Dividends

Name five factors that influence a company's dividend policy. Discuss the basis

of each of these.

In 2017, Congress enacted a bill that 1) reduced the corporate tax rate from 35% to 21% and 2) allowed the immediate write-off of capital spending. 3) disallowed the expensing of interest paid on debt. Discuss at a high level, how each of these changes will likely affect your valuations. (e.g. stock price, P/E ratio, ROR, WACC).