A stock price is currently $50. A stock price is currently $50. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. Use two-period binomial models to value the six-month options on this stock. Remember to show detailed calculations of the option value at each node.

(a) What is the value of a six-month European call option with a strike price of $51?

(b) What is the value of a six-month European put option with a strike price of $51? Verify that the European call and European put prices satisfy put–call parity.

(c) If the put option in part (b) of this question were American, would it ever be optimal to exercise it early at any of the nodes on the tree?

Olsen Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $3 million of retained earnings with a cost of rs = 12%. New common stock in an amount up to $6 million would have a cost of re = 15%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $3 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $5.3 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

Aerotron Electronics is considering the purchase of a water filtration system to assist in circuit board manufacturing. The system costs $60,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow 1/2 of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the 1st payment due at the end of year 2. The loan interest rate is 11.0% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. What is the future worth of this investment? $

Given the preceding data, the average realized return on FF’s stock is _______ .

The preceding data series represents _________ of FF’s historical returns. Based on this conclusion, the standard deviation of FF’s historical returns is _______ .

If investors expect the average realized return from 2012 to 2016 on FF’s stock to continue into the future, its coefficient of variation (CV) will be _______.

Here is a simplified balance sheet for Locust Farming:

Locust has 657 million shares outstanding with a market price of $83 a share.

a. Calculate the company’s market value added. (Enter your answers in millions.)

b. Calculate the market-to-book ratio. (Round your answer to 2 decimal places.)

c. How much value has the company created for its shareholders as a percent of the investment of the equity holders?

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $25.50 per share, its last dividend was $1.50, and the company will pay a dividend of $1.62 at the end of the current year.

1. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.
   _______ %
   
2. If the firm's beta is 1.3, the risk-free rate is 4%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.
   _______ %
   
3. If the firm's bonds earn a return of 10%, then what would be your estimate of r_s using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range.)
   _____ %
   
4. On the basis of the results of parts a through c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.
   ______ %

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment's basic price is $77,000, and it would cost another $16,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $26,700. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $2,880. The machine would have no effect on revenues, but it is expected to save the firm $25,210 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.

1. What is the Year-0 net cash flow?

   $  

2. What are the net operating cash flows in Years 1, 2, and 3? Do not include recovery of NWC or salvage value in Year 3's calculation here.

   Year 1:	$
   Year 2:	$
   Year 3:	$

3. What is the additional cash flow in Year 3 from NWC and salvage?

   $  

4. If the project's cost of capital is 10%, what is the NPV of the project? .

   $  

   Should the chromatograph be purchased?

   -Select-YesNoItem 7

Suppose you want to start a business. What are some of the costs you would look at? For Eg you may have to look at -

Labor costs: salaries, stipends, fringe benefits
Operating costs: rent, supplies and materials, minor equipment and furniture, contracted services, postage, telephone, staff training, local travel
Indirect costs: depreciation - capital equipment, custodial services
Societal costs: positive or negative impact on society
By wed: Break the costs and market structure by

a) Economic and Accounting costs (2 points)

b) Short Run cost - Fixed costs and Variable Costs (2 points)

c) Long Run Costs (1 point)

d) Barrier to entry/exit (1 point)

e) Now- Where would you fit Health Care for your employees? What would be the short run and long run impact? (2 points)

DEPRECIATION METHODS

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $275,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 11%, and its tax rate is 40%.

1. What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

Year 1:

Year 2:

Year 3:

Year 4:

Which depreciation method would produce the higher NPV?
Straight-Line or MACRS?

How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.26 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.80 million per year and cost $1.77 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 11.00%. Find the NPV (net present value).

Answer format: Currency: Round to: 2 decimal places.

PROBLEM The following costs are associated with three tomato-peeling machines being considered for use in a food canning plan. Machine A Machine B Machine C First cost $52,000 $67,000 $63,000 Annual Maintenance & Operating costs Annual increase starting in year 2 15,000 12,000 9,000 250 Annual benefit 38,000 37,000 31,000 Salvage value 13,000 22,000 19,000 Useful life, in years 4 12 6 If the canning company uses a MARR of 12%, which is the best alternative? Show your analysis using each of the following methods:

(a) Present worth

(b) Annual equivalence

(c) Rate of return

Please perform in excel and show the procedure.

Google has cash flows of $29.10, $36.93, and $45.03 billion for the next three years. After that Google’s cash flows is $47.51 billion and its cash flow will grow at 5.5% forever. The cost of capital is 10.20%. Google has 700 million shares outstanding. What is the price of Google stock today?