Assume that Camilles Jewelry Corp. recently paid an annual dividend of $2.00 per share (or D0) on its common stock. Because of exceptionally positive operating results, the firm expects dividends to grow at a supernormal growth rate of 20% (or Gs) over the next three years. After the end of the three year supernormal growth period, dividend growth is expected to return to the firms normal rate of 6% (or Gn). The investors required return for Camilles Jewelry Corp. common stock is 12% (or Ke). Using the two-stage growth model solve for the firm's current stock price (or P0)

Show all your work.

Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 12%. New common stock in an amount up to $10 million would have a cost of re = 14%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 9% and an additional $4 million of debt at rd = 10%. The CFO estimates that a proposed expansion would require an investment of $8.5 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

E.

You deposit $7,000 in an account in 4 years from today earning 5% APR. After 12 years from today, you

make another deposit into the same account.

Twenty-five years from today, the account balance is

$38,952.18. Assuming

quarterly

compounding, what was the amount of the deposit at the end of year 12? (8

points)

F.

You bought a house for 200,000. The bank required a 25% down payment and gave you a 30-year mortgage

loan for the remainder. Assume an annual interest rate of 5% and a monthly repayment schedule (9 points).

a.

What is the amount of the mortgage?

b.

What is your monthly payment?

c.

After 19 years of payments, how much do you still owe?

G.

You bought an expensive TV last year for $900 and charged it to your credit card that charged 22% APR. You

will be diligent in sending monthly payments in an amount that would retire the card balance in exactly 5

years. After 3 years of payments, you plan to refinance the then remaining balance to a new card that

charges an APR of 12%. After that 3 years, you can afford a higher monthly payment of $40. (9 points)

a.

What is the amount of the initial monthly payments?

b.

What is the balance that will get transferred to the new card after 3 years?

c.

How many months will it take to pay off the credit card balance with the

new $40 payment assuming no other purchases?

The treasurer of a Dutch company operating in Thailand considers a one-year bank loan of $350,000 (US) with an interest rate of 8.885% (dollar based). The current spot rate is B42.84/$ and a local loan in Thai Baht (B) would carry a rate of 14%. Expected inflation rates are 4.5% and 2.2% in Thailand and the United States, respectively, for the coming year. If Thailand devalues the baht by 5%, what is the effective cost of funds in Thai baht terms?

8.30%

9.00%

11.50%

12.50%

With $2,000,000 to invest, a spot rate of 71.635kr/$, a three-month forward rate of 72.9127kr/$, an expected spot of 70kr/$, a US$ three-month interest rate of 4.80%, and an Icelandic krona three-month interest rate of 12.020%, using uncovered interest arbitrage, can a position yield a return in excess of 4%?

No, it is not possible.

Yes, the yield is 4.21%

Yes, the yield is 4.80%

Yes, the yield is 5.41%

Explain the difference between a parallel and non-parallel shift in interest rates. Then explain whether the duration matching hedging approach works for both a non-parallel and parallel shift interest rates.

Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $150,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $865,000 per year. The fixed costs associated with this will be $216,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $910,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 21 percent and a required return of 14 percent.

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.