Topeka Corporation uses special strapping equipment in its packaging business. The equipment was purchased at the beginning of 2010 for $800,000 and had an estimated useful life of 8 years with no salvage value. Topeka uses the straight-line depreciation method.

At the end of 2010, new technology was introduced that would accelerate the obsolescence of the equipment. Topeka’s controller gathered the following information:   

14. Assume Topeka will continue to use the equipment and that it tests the asset for impairment under IFRS. Based on this test, which of the following statements is MOST correct?

15. Assume Topeka will continue to use the equipment and that it tests the asset for impairment under GAAP. Based on this test, which of the following statements is MOST correct?

A stock is trading at $40. There are 3 three-month European calls on the stock with strikes of 35, 40 and 45. The prices of these calls are, respectively, 5.50, 3.85, and 1.50. Consider pursuing the butterfly spread strategy (buy the low and the high strike call and write 2 intermediate strike calls) and find the break-even points of the strategy as well as maximum losses and maximum gains. Any issues -comments? What is happening here?

(Analyzing liquidity) (Related to Checkpoint 4.1 on page 87 ) Apex Fabricating, Inc., manufactures fenders and other after-market body panels for older automobiles. At the close of last year, the firm had $10,381,800 in current assets and $4,152,720 in current liabilities. The company’s managers want to increase its inventory, which will be financed using short-term debt. How much can the firm increase its inventory, financing it with short-term borrowing, without its current ratio falling below 2.0 (assuming all other current assets and current liabilities remain constant)?

Even Quik Trip has a pet e-mouse. Quik Trip has been selling its pet e-mouse for $49 each. Quik Trip's variable cost per unit is $25. Quik Trip is thinking about raising its price by $5 per unit. By what percent must Quantity demanded change so that Quik Trip will have the same total contribution before and after the change in price? (Rounding: tenth of a percent. Report 36.5%, for example, as "35.6". Use a negative sign if your answer is negative.)

ANS: -17.2

A firm is currently priced at P₀ = $30 per share. Beta is 1.25, expected rate of return on the market portfolio is 12%, and the risk-free rate of return is 4%. The firm has Jensen’s alpha of (-2%).

1. Find the expected rate of return the firm should have from the CAPM equation.

2. Find the expected rate of return the firm happens to have, given your answer in part (a) and given alpha

3. Is the firm’s stock priced correctly, overpriced, or underpriced?

4. If the firm is priced at $30 today, and given also your answer in part (b), what is the expected price of the stock next year?

Problem 9-20 MIRR [LO6]

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

R_A = 3.0% + 1.05R_M + e_A

R_B = -1.2% + 1.2R_M + e_B

σ_M = 29%; R-square_A = 0.29; R-square_B = 0.14

What is the covariance between each stock and the market index? (Calculate using numbers in decimal form, not percentages. Do not round your intermediate calculations. Round your answers to 3 decimal places.)

Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.8 on the market index. Firm-specific returns all have a standard deviation of 35%.

Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.6%, and the other half have an alpha of −2.6%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.

a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

b. How does your answer change if the analyst examines 40 stocks instead of 20 stocks? 80 stocks? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

We are evaluating a project that costs $835,201, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 55,236 units per year. Price per unit is $37, variable cost per unit is $16, and fixed costs are $421,600 per year. The tax rate is 35%, and we require a return of 17% on this project. In percentage terms, what is the sensitivity of NPV to changes in the units sold projection?

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecast sales figures:

THIS IS ALL OF THE INFORMATION I WAS GIVEN FOR THIS QUESTION, I ACTUALLY PLUGGED IN THE NUMBERS FOR THE SALES MY SELF! Of the firm’s sales, 50 percent are for cash and the remaining 50 percent are on credit. Of credit sales, 45 percent are paid in the month after sale and 55 percent are paid in the second month after the sale. Materials cost 30 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 40 percent of sales and is paid for in the month of sales. Selling and administrative expense is 20 percent of sales and is paid in the month of sales. Overhead expense is $46,000 in cash per month.

Depreciation expense is $12,500 per month. Taxes of $10,500 will be paid in January, and dividends of $14,500 will be paid in March. Cash at the beginning of January is $130,000, and the minimum desired cash balance is $125,000.

a. Prepare a schedule of monthly cash receipts for January, February, and March.

b. Prepare a schedule of monthly cash payments for January, February, and March.
  

3. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

Suppose that General Electric has a bond issue that has 8 years until maturity. The bond pays a 6.00% annual coupon rate with semi-annual coupons, and has a face value of $1,000. The bond currently trades at $980.00. What is the yield to maturity on this bond? (express as an effective annual rate)

. The “beta” value of Amazon shares is about 1.7. The “beta” value of WalMart shares is about 0.3. According to Standard and Poors, WalMart’s bond rating is AA and Amazon’s rating is AA!.

1. What does the difference in beta values indicate?
2. What does the difference in bond ratings indicate?
3. What is meant by the riskiness of a stock? Can you determine, from the information provided, which of the two stocks is “riskier”?
4. Based on the information provided, do you expect Amazon stock or WalMart stock to produce a higher rate of return for the stockholder, or are the indications ambiguous?
5. Suppose that you had private information indicating that the economy is about to go into recession, information that you believe has not yet been incorporated into stock prices. How could this change your answer to part (d)?

The Shield Corporation has BB-rated bonds with a yield to maturity of 6.40% APR. A U.S Treasury, with the same maturity, currently has a yield to maturity of 4.02% APR. Both bonds pay semi-annual coupons at a 6.76% APR and have 5.00 years until maturity. (assume $1,000 face value)

What is the current price of the Treasury bond?

We are evaluating a project that costs $837,715, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 64,349 units per year. Price per unit is $38, variable cost per unit is $21, and fixed costs are $421,878 per year. The tax rate is 35%, and we require a return of 20% on this project.

What is the NPV of this base-case?

We are evaluating a project that costs $837,367, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 61,080 units per year. Price per unit is $39, variable cost per unit is $18, and fixed costs are $419,261 per year. The tax rate is 35%, and we require a return of 21% on this project. In dollar terms, what is the sensitivity of NPV to changes in the units sold projection?