We are evaluating a project that costs $1,950,000, has a life of 7 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,800 units per year. Price per unit is $38.49, variable cost per unit is $23.65, and fixed costs are $842,000 per year. The tax rate is 24 percent, and we require a return of 12 percent on this project.

Question:

Please respond to the following:

Why might the constant dividend growth model (CDGM) and capital asset pricing model (CAPM) produce different estimates of the cost of equity capital used in the weighted average cost of capital (WACC)? Describe the difference between permanent and temporary working capital. What are some factors an organization considers when it chooses the mix of long- and short-term capital to finance the organization’s activities?

The capital budgeting committee for Laroche Industries is meeting. Laroche is a North American conglomerate that has several divisions. Schoeman Products, a division of Laroche, has evaluated several investment projects and now must choose the subset of them that fits within its C$40 million capital budget. The outlays and NPVs for the six projects follow. Schoeman cannot buy fractional projects and must buy all or none of a project. The currency amounts are in millions of Canadian dollars.

Schoeman wants to determine which subset of the projects is optimal.

A proposal comes from the division Society Services. The cash flows relating to the project is as follow:

An outlay pf C$190 million at time 0.

Cash flows of C$40 million per year for years 1-10 if demand is high.

Cash flows of C$20 million per year for years 1-10 if demand is low.

The probability of high demand is 0.50, and the probability of low demand is 0.50.

The required rate of return is 10 percent.

The internal auditor for Laroche Industries has made several suggestions for improving capital budgeting processes at the company. The internal audito's suggestions are as follows:

Suggestion:1 "In order to put all capital budgeting proposalson an equal footing, the projects should all use the risk-free rate for the required rate of retun."

Suggestion: 2 "When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR."

1. The optimal subset of the six projects that Schoeman is considering consits of which projects?

a. 1 and 5

b. 2, 3, and 4

c. 2, 3, and 5

d. 2, 4, 5, and 6

2. What is the NPV (C$ millions) of the project for Society Services?

a. -6.11

b. -5.66

c. 2.33

d. 5.58

3. Should the capital budgeting committee accept the internal auditor's first and second suggestions?

Suggestions 1 Suggestion 2

a. No No

b. No Yes

c. Yes No

d. Yes Yes

Explain/Show How You Got Each Answer.

John Jones, CFA, is head of the research department at Peninsular Research. Peninsular has a client who has inquired about the valuation method best suited for comparing companies in an industry with the following characteristics:
• Principal competitors within the industry are located in the United States, France, Japan, and Brazil.

• The industry is currently operating at a cyclical low, with many companies reporting losses. Jones recommends that the client consider the following valuation ratios:

1. P/E.

2. P/B.

3. EV/S.

Determine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with one reason that makes that ratio superior to either of the other two ratios in this case.

"IPO's are like hors d'oeuvers at a cocktail party. When the tray comes around, take some wether you are hungry or not." What does he mean by this statement? Does the IPO market provide evidence for or against the efficient market hypothesis? Explain.

a) Use the information below to calculate the bid cross rate between C$ and € in the "C$/€ " format.

Answer Format: Keep four decimals; use the price currency as the unit. Example:  4.1234(C$) or 4.1234( € )

b) An English business man just received €187,039 payment from a European company. He obtained currency quotes from his bank: €1.116/£ --  €1.1256/£. Estimate his £ cash flow.

Answer format: keep four decimal places; include the price currency only; do not use thousand separator. Example: 2122.1345 (£) or  2122.1345 (€)

c) On May 1 of a certain year the pound to euro exchange rate was £0.1.1245/€. On July 15 the exchange rate was  £0.1.1298/€ . Therefore during the two and half months period, euro appreciated against pound.  

True or False

d) Suppose you obtained quotes for euro from your bank: $1.1265/€ --  $1.1305/€. Calculate the bid ask spread.

Answer format: use four decimals; do not report percentages. Example: 0.0011.

• Check My Work (1 remaining)

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

c. Should the project be accepted?
  

You are buying a house and the mortgage company offers to let you pay a​ "point" ​(1.0 % of the total amount of the​ loan) to reduce your APR from 6.50 % to 6.25 % on your $ 400000​, 30​-year mortgage with monthly payments. If you plan to be in the house for at least five​ years, should you do​ it? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Fey Fashions expects the following dividend pattern over the next seven​ years:

. The company will then have a constant dividend of​$2.60 forever. What is the​ stock's price today if an investor wants to earn

a.  

16​%?

b.  

23%?

What is finance? Briefly discuss how the study of finance is essential to business today. There are other areas of business, such as marketing, human resources, and management. How does finance impact them? In other words, can a business efficiently run without everyone having some knowledge of the field? Explain.

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight- line to zero over its three-year tax life. The project is estimated to generate $1,725,000 in annual sales, with costs of $635,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project.

a. If the tax rate is 23 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)

b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. Year 0 cash flow =

Year 1 cash flow =

Year 2 cash flow =

Year 3 cash flow =

b. NPV =

St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. The new welder will cost $180,000 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $29,000 to $81,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the project cost of capital is 14%. Should the old welder be replaced by the new one? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

The NPV of the project is $????

Assume the CAPM holds and the market is efficient. Given the following information about the true market portfolio and stock S:

State    Probability      Return (Market)                      Return (S)

1          0.2                   0.25                                         0.4

2          0.5                   0.1                                         -0.085

3          0.3                 -0.05                                          0.12    

1. You are given enough information to determine the beta of S. (True / False)

2. Calculate the expected rate of return on the market portfolio and the expected return on stock S.

3. It turns out that stock S has a beta of about 0.7. Find the risk-free rate of return.

A call that is $2 in-the-money trades for $4 today. A put written on the same stock that is $2 out-of-the-money trades for $2.25 today. Both options expire in 6 months and the risk free rate is 10% p.a. continuously compounded while the stock trades for $40. Are there any arbitrage opportunities available? If yes state the arbitrage strategy and prove

that it works.