“Good leaders are not necessarily good managers, and good managers are not necessarily good leaders.” (Kinicki text, p. 327) Most people confuse leadership and management. We have learned that leadership and management are different skills. Demonstrate that you understand the difference in this case study.

Think of someone you know personally (not a public figure), and consider to be a good leader..

1. Table 10.1 on page 326 of your text summarizes the many theories used to understand good leadership. Select one theory you believe best explains this person’s leadership. (Select from theories listed in approaches 2-7, but not Trait Approaches (1).) Provide examples to support your choice of theory. Explain all aspects of the theory as they relate to this person.

Consider a 2-year bond with a principal of $100 that provides coupons at the rate of 3.8% per annum semiannually. Suppose the yield on this bond is 6.1% per annum with continuous compounding.

(a) What is the duration of this bond?

(b) Suppose the yield on this bond increases by 0.1%.

i. Calculate the new bond price exactly.

ii. Estimate the new bond price approximately using duration.

A US airline company will purchase 400,000 gallons of jet fuel after one month and the company wants to

do cross hedging using heating oil futures. The standard deviation of monthly changes in the spot price of

jet fuel is (in cents per gallon) 300; the standard deviation of monthly changes in the futures price for the

heating oil futures contract is (in cents per gallon) 407. The coefficient of correlation between the jet fuel

price changes and the futures price changes is 0.75. Each heating oil futures contract is for delivery of 2,000

gallons of heating oil. The current spot price of jet fuel is $1.55 per gallon and the futures price of heating oil is

$1.97 per gallon. What is the optimal number of contracts with tailing adjustment?

Question 1:

a. Your company is planning to borrow $2.5 million on a 3-year, 8%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? Round your answer to two decimal places.

b. Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $40,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%, but it calls for payments every 6 months, beginning on June 30, and is to be amortized over 15 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year?

The Walt Disney Company just issued $195,000 of perpetual 9% debt and used the proceeds to

repurchase stock. The company expects to generate $83,000 of EBIT in perpetuity. The company

distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of

capital is 15 percent, and the corporate tax rate is 40 percent.

a. What is the value of the company as an unlevered firm?

b. Use the APV method to calculate the value of the company with leverage.

c. What is the required return on the firm’s levered equity assuming a debt-to-equity ratio of

0.9070?

d. Use the FTE method to calculate the value of the company’s equity.

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)