Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.7 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $285,600 after 3 years. The project requires an initial investment in net working capital of $408,000. The project is estimated to generate $3,264,000 in annual sales, with costs of $1,305,600. The tax rate is 24 percent and the required return on the project is 17 percent.

What is the project's year 0 net cash flow?

What is the project's year 1 net cash flow?

What is the project's year 2 net cash flow?

What is the project's year 3 net cash flow?

What is the NPV?

1. What type of relationship would you expect to see between the following variables? Fully explain.

A. Delinquency rate on credit card loans at all commercial banks and percentage change in HouseHold Net Worth?

B. Delinquency rate on credit card loans at all commercial banks and RGDP Growth?

Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (14 %) (39 %) 0.2 3 0 0.4 10 19 0.2 20 27 0.1 40 48 Calculate the expected rate of return, , for Stock B ( = 11.20%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 21.90%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places. Stock A: Stock B: Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. In a stand-alone risk sense A is less risky than B. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.

Think about the concepts of risk and return in the context of the size of a firm. Would these change if the firm were large? Small? Medium-sized? Why or why not? (Provide 300 original analysis, perfect grammer)

Financial statements reflect only book values of the data that analysts use to evaluate a company’s performance. To determine if a firm’s earnings, after taxes but before the payment of interest and dividends, are sufficient to compensate both the firm’s bondholders and shareholders, Stern Stewart Management Services developed an analytical technique called economic value added (EVA). EVA effectively measures the amount of shareholder wealth that the firm’s management has added to the value of the firm during a period of time. If EVA is positive, then management has added value, while a negative value indicates that the firm’s managers reduced the firm’s value and shareholders might have earned more value by investing in some other investment with the same level of risk.

Consider this case: Last year, Jackson Tires reported net sales of $80,000,000 and total operating costs (including depreciation) of $52,000,000. Jackson Tires has $83,500,000 of investor-supplied capital, which has an after-tax cost of 12.5%. If Jackson Tires’s tax rate is 40%, how much value did its management create or lose for the firm during the year (rounded to the nearest whole dollar)? $6,362,500 $37,562,500 $1,749,688 $39,662,500

14.

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   1. $846? Round your answer to two decimal places.

          %

   2. $1,164? Round your answer to two decimal places.

          %

2. Would you pay $846 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if r_d = 12%?
   1. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   2. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   3. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   4. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   5. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household applia nces. The company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $42.50 per share. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department. One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market, and sales have been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phones for $185 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new smart phone will be $480. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.4 million. As previously stated, Conch Republic currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smart phone, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing smart phone is $310 per unit, with variable costs of $125 each and fixed costs of $1,800,000 per year. If Conch Republic does introduce the new smart phone, sales of the existing smart phone will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $275 each. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return. Company can obtain a debt by issuing bond carrying coupon rate of 8%. It is established at debt equity ratio can be 70:30. Beyond this financial distress risk will arise. Shelley has asked Jay to prepare a report that answers the following questions. QUESTIONS – Capital budgeting 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? o How sensitive is the NPV to changes in the price of the new smart phone? o How sensitive is the NPV to changes in the quantity sold of the new smart phone? QUESTIONS – Capital Structure 5. What is market value of firm before undertaking project 6. Company intend to use equity only to finance the project o Calculate companies market value after it announces that the firm will finance the project using equity. o What would be the new price per share of the firm’s stock? o How many shares need to be issued to finance the purchase? o Please explain hypothesis used. 7. Suppose the company decides to issue debt to finance the purchase. o What will the market value of the Company be if the purchase is financed with debt? o What will be the new Required return on equity ? o Construct Company’s market value balance sheet after both the debt issue and the land purchase. o What is the price per share of the firm’s stock? 8. Does financing with debt affect projects NPV? 9. Which method of financing maximizes the per-share stock price of Company’s equity? And how. 10. What would be risks of having a higher Debt equity ratio of assuming 80:20? Would it impact WACC ? Assignment need to be in 2000-2500 words you need to write you reasoning for answers. Just answers will not be sufficient

16.

Calculate free cash flow for 2017 for Monarch Textiles, Inc., based on the financial information that follows. Assume that all current liabilities are non-interest-bearing liabilities and that no fixed assets were sold or disposed of during 2017. (Enter your answer in 1000s.) Monarch Textiles, Inc. ($ thousands) Income statement Selected balance sheet items 2017 2016 2017 Sales 1,430 Current assets 410 565 Cost of sales 810 Net fixed assets 144 288 Operating expenses 155 Current liabilities 255 335 Depreciation 72 Interest expense 50 Earnings before taxes 343.00 Tax 137.20 Net income 205.80

10.

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 17 years, while Bond S matures in 1 year.

1. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 13%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent.

   	7%	8%	13%
   Bond L	$	$	$
   Bond S	$	$	$

2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   1. Long-term bonds have greater interest rate risk than do short-term bonds.
   2. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   3. Long-term bonds have lower interest rate risk than do short-term bonds.
   4. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
   5. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $300,000, has a 4-year life, and requires $101,000 in pretax annual operating costs. System B costs $380,000, has a 6-year life, and requires $95,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 22 percent and the discount rate is 10 percent.

Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

9.

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 7 years at $1,230.20, and currently sell at a price of $1,394.19. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

YTM:   %

YTC:   %

What return should investors expect to earn on these bonds?

1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
3. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
4. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $120 million and a YTM of 10 percent. The company’s market capitalization is $260 million, and the required return on equity is 15 percent. Joe’s currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe’s next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe’s has 2.15 million shares outstanding, and the tax rate for both companies is 35 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe’s? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price $

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8.

b. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price $