You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover’s basic price is $200,000, and it would cost another $30,000 to modify it for special use. Assume that the mover falls into the MACRS 5-year class, it would be sold after 4 years for $60,000, and it would require an increase in net operating working capital (spare parts inventory) of $10,000. The earth mover would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40 percent and the project’s cost of capital is 10 percent. Evaluate the project using the NPV rule and the IRR rule. Evaluating a Cost Saving Project Year 0 Year 1 Year 2 Year 3 Year 4 Acquisition - 5 Year Life Earth Mover ?? Installation Costs ?? Total Initial Investment $ - Savings in Costs ?? ?? ?? ?? Depreciation Rate (5 Year) ?? ?? ?? ?? Total Depreciation Costs ?? ?? ?? ?? Earnings Before Income Tax (EBIT) ?? ?? ?? ?? Tax Rate ?? ?? ?? ?? Total Taxes ?? ?? ?? ?? Net Operating Profits (NOPAT) ?? ?? ?? ?? Add Back Depreciation ?? ?? ?? ?? Operating Cash Flow ?? ?? ?? ?? Net Operating Working Capital ?? ?? ?? ?? ?? Increase in NOWC ?? ?? ?? ?? ?? Total Annual Project Cash Flow ?? ?? ?? ?? ?? Terminal Year Cash Flow Machine Sale ?? Less: Book Value of Machine ?? Profit on Sale ?? Tax on Profit (40%) ?? Net Salvage Value on Equipment ?? Free Cash Flow ?? ?? ?? ?? ?? Required Rate of Return (WACC) ?? NPV ?? IRR ??

Use the bond term's below to answer the question
Maturity 7 years
Coupon Rate 4%
Face value $1,000
Annual Coupons
YTM 3% (interest rate)

Assuming the YTM remains constant throughout the bond's life, what is the bond's price in year 4?

A) $1,062.30 B) $1,028.29 C) $1,083.55 D)$1,008.12

George, the automotive manufacturer, had a beta of 1.05 in 1995. It had $13 billion in debt outstanding in that year and 355 million shares trading at $50 per share. The marginal tax was 36%

1. Estimate the unlevered beta of the firm

2. Suppose the firm paid out a special dividend of $5 billion, what is the new beta for George after the special dividend? Hint: dividend reduces equity

3. How does the dividend payout affect the cost of equity and cost of debt for George?

Briefly describe how analysts typically forecast each of the following items: Sales, Cost of Sales, Inventory, and Tax expense.

The stock of Arbor Pet Trees (APT) is priced based on the given systematic risk factors. Estimated sensitivities to these risk factors are given by the betas of the regression

R_APT – R_rf = β_creditR_credit + β_value R_value + α + ε

If the actual return is 9.7%, what is the value of alpha?

Compare and contrast the corporate form of organization with sole proprietorships and partnerships. (must be typed out, not in a Chart).

The expected return and standard deviation of a portfolio that is 40 percent invested in 3 Doors, Inc., and 60 percent invested in Down Co. are the following:

What is the standard deviation if the correlation is +1? 0? −1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. )

You are required to produce an amortisation table for a home loan and a diagram demonstrating the link between loan repayments and principal outstanding. Please see slide 34 from Topic 2 (or p146 from textbook) for an example of the layout of the table.

The home loan is for $250,000 and is to be amortised over a time period of 15 years requiring annual payments. All calculations should be executed in excel. From your table produce a diagram that demonstrates the relationship between the outstanding principal and the number of years into the loan.

The interest rate to be used is 8% Assume that interest rates do not change over the life of the loan.

The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for the next three years and then level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per year.

a. What is your estimate of the intrinsic value of a share of stock?

b. If the market price of a share is equal to the intrinsic value, what is the expected dividend yield?

c. What do you expect its price to be one year from now?

d. Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate?

The proposed costs to operate this new facility are as follows:

Expected Monthly Revenue (Membership Fee): $125 per person

Monthly Fixed Costs

• Utilities: $590

• Health/Wellness Staff: $2,500

• Arts/Crafts Staff: $2,000

• Supplies: $800

• Fitness Equipment Maintenance Contract: $200

Variable Costs

• Monthly Lunch Cost: $25

• Monthly Breakfast Cost: $15

Based on the information above, once the minimum threshold of participants is reached, the initial investment to establish the center is $317,880. The organization anticipates that it will generate $46,920 of net revenues in the first year, $68,166 in the second year, $93,404 in the third year, $123,287 in the fourth year, and $158,573 in the fifth year.

1. Calculate the payback period to determine how long it will take for the organization to recover its initial investment of establishing the senior multipurpose center.

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five- year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

a. The book value of the existing asset is ________.
b. The tax effect on the sale of the existing asset results in ________.
c. The initial outlay equals ________.
d. The incremental depreciation expense for year 1 is ________.
e. The annual incremental after-tax cash flow from operations for year 1 is ________.

PLEASE SHOW WORK thank you

Stock A has an expected return of 18% and a standard deviation of 26%. Stock B has an expected return of 13% and a standard deviation of 20%. The risk-free rate is 6.7% and the correlation between Stock A and Stock B is 0.6. Build the optimal risky portfolio of Stock A and Stock B. What is the standard deviation of this portfolio?

In 1971, the American firm Lockheed found itself in Congressional hearings seeking a $250- million federal guarantee to secure bank credit required for the completion of the L-1011 Tri Star program. The L-1011 Tri Star Airbus is a wide-bodied commercial jet aircraft with a capacity of up to 400 passengers, competing with the DC-10 trijet and the A-300B airbus.

Spokesmen for Lockheed claimed that the Tri Star program was economically sound and that their problem was merely a liquidity crisis caused by some unrelated military contracts. Opposing the guarantee, other parties argued that the Tri Star program had been economically unsound and doomed to financial failure from the very beginning.

The debate over the viability of the program centered on estimated “break-even sales” the number of jets that would need to be sold for total revenue to cover all accumulated costs. Lockheed’s CEO, in his July 1971 testimony before Congress, asserted that this break-even point would be reached at sales somewhere between 195 and 205 aircraft. At this point, Lockheed had secured only 103 firm orders plus 75 options-to-buy, but they testified that sales would eventually exceed the break-even point and that the project would thus become “a commercially viable endeavor.”

Costs

The preproduction phases of the Tri Star project began at the end of 1967 and lasted four years, after running about six months behind schedule. Various estimates of the up-front costs ranged between $800 million and $1 billion. A reasonable approximation of these cash outflows would be $900 million, occurring as follows:

According to Lockheed testimony, the production phase was to run from the end of 1971 to the end of 1977, with about 210 Tri Stars as the planned output. At that production rate, the average unit production cost2 would be about $14 million per aircraft. The inventory-intensive production costs would be relatively front-loaded, so that the $490 million ($14 million per plane, 35 planes per year) annual production costs can be assumed to occur in six equal increments at the end of years 1971-1976 (t=4 through t=9).

Revenues

In 1968, the expected price to be received for the L-1011 Tri Star was about $16 million per aircraft. These revenue flows would be characterized by a lag of a year to the production cost outflows; annual revenues of $560 million can be assumed to occur in six equal increments at the end of years 1972-1977 (t=5 through t=10). Inflation-escalation terms in the contracts ensured that any future inflation-based cost and revenue increases offset each other nearly exactly, thus providing no incremental net cash flows.

Deposits toward future deliveries were received from Lockheed customers. Roughly one- quarter of the price of the aircraft was actually received two years early. For example, for a single Tri Star delivered at the end of 1972, $4 million of the price is received at the end of 1970, leaving $12 million of the $16 million price as cash flow at the end of 1972. So, for the 35 planes built (and presumably, sold) in a year, $140 million of the $560 million in total annual revenue is actually received as a cash flow two years earlier.

Discount Rate

Experts estimated that the cost of capital applicable to Lockheed’s assets (prior to Tri Star) was in the 9%-10% range. Since the Tri Star project was quite a bit riskier (by any measure) than the typical Lockheed operation, the appropriate discount rate was almost certainly higher than that. Using 10% should give a reasonable (although possibly generous) estimate of the project’s value.

Break-Even Revisited

In an August 1972 Time magazine article, Lockheed (after receiving government loan guarantees) revised its break-even sales volume: “[Lockheed] claims that it can get back its development costs [about $960 million] and start making a profit by selling 275 Tri Stars.”3 Industry analysts had predicted this (actually, they had estimated 300 units to be the break-even volume) even prior to the Congressional hearings.4 Based on a “learning curve” effect, production costs at these levels would average only about $12.5 million per unit, instead of $14 million as above. Had Lockheed been able to produce and sell as many as 500 aircraft, this average cost figure may have been even as low as $11 million per aircraft.

Lockheed had testified that it had originally hoped to capture 35%-40% of the total free-world market of 775 wide bodies over the next decade (270-310 aircraft). This market estimate had been based on a wildly optimistic assumption of 10% annual growth in air travel; at a more realistic 5% growth rate, the total world market would have been only 323 aircraft. The Tri Star’s actual sales performance never approached Lockheed’s high expectations. Lockheed’s share price plummeted from a high of about $70 to around $3 during this period. There were about 11.3 million shares of Lockheed common outstanding during this period.

• At what sales volume did the Tri Star program reach true economic (as opposed to accounting) break-even? Show your work in excel.

The stock of Arbor Pet Trees (APT) is priced based on the given systematic risk factors. Estimated sensitivities to these risk factors are given by the betas of the regression

R_APT – R_rf = β_creditR_credit + β_value R_value + α + ε

What is the expected return on the stock of Arbor Pet Trees if the stock is fairly valued?