Fincher Manufacturing (FM) is considering two mutually exclusive capital investments to
utilize an idle factory owned by the firm. The first alternative calls for manufacturing tundratorque drill bits required for the extraction of rare earth metals from the frozen tundra of
Greenland. This proposal would generate after-tax cash inflows of $12 million per year
beginning in one year (at date 1). Due to the current scarcity of rare earth metals, the yearly
cash flows for this project are expected to grow by 5 percent per year in perpetuity from date
1 on. The second alternative calls for producing the Polycrystalline Diamond Compact bits
frequently used in horizontal drilling operations. Alternative two will generate constant
yearly after-tax cash flows of $20 million beginning in one year (at date 1) and remaining
constant in perpetuity. Assuming each project requires an initial investment of $120 million:
a. Which capital investment project has the greater IRR?

b. Which project has a greater NPV if Fincher’s cost of capital is 10 percent.

c. Determine the range of estimates for Fincher’s cost of capital for which investing in the
project having the greater IRR maximizes the value of the firm.

Quincy Durant, who had his 75th birthday last month, has been offered a reverse mortgage by the Selleck National Bank. The terms of the reverse mortgage call for Mr. Durant to receive a fixed monthly income payment over his remaining 10-year life expectancy, with the monthly income payment being determined by setting the future value of the monthly payments to be received by Mr. Durant equal to 90 percent of the current $400,000 value of his home. At the end of 10 years Mr. Durant expects to sell his home and repay these monthly payments along with the accrued interest on his monthly borrowings over the previous 10 years. Assuming that that the interest rate on the reverse mortgage is 4.20 percent, compare the monthly amount that Mr. Durant will receive from the reverse mortgage with the monthly payment for a conventional 10-year mortgage loan in the amount of $360,000 with a monthly compounded interest rate of 4.20 percent.?

Explain how increased technology has aided sports organizations in minimizing expenses.

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $16 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.4 million with a 0.2 probability, $3.2 million with a 0.5 probability, and $0.3 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital ratio is 0.

RÔE = % ? = % CV =

Debt/Capital ratio is 10%, interest rate is 9%.

RÔE = % ? = % CV =

Debt/Capital ratio is 50%, interest rate is 11%.

RÔE = % ? = % CV =

Debt/Capital ratio is 60%, interest rate is 14%.

RÔE = % ? = % CV =

Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.

If Erik is risk averse, which investment will he prefer?

The investor will choose option 1.

The investor will choose option 2.

The investor will choose option 3.

The investor will be indifferent toward these options.

In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin?

Everything else remaining constant, Devin will prefer option 3.

Everything else remaining constant, Devin will prefer option 2.

Everything else remaining constant, Devin will prefer option 1.

None of these options is preferred.

Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table:

Brandon calculated the portfolio’s beta as 0.930 and the portfolio’s expected return as 9.1150%.

Brandon thinks it will be a good idea to reallocate the funds in his client’s portfolio. He recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%.

According to Brandon’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? (Note: Do not round your intermediate calculations.)

1.1935 percentage points

0.7508 percentage points

0.9625 percentage points

1.1069 percentage points

Analysts’ estimates on expected returns from equity investments are based on several factors. These estimations also often include subjective and judgmental factors, because different analysts interpret data in different ways.

Suppose, based on the earnings consensus of stock analysts, Brandon expects a return of 9.65% from the portfolio with the new weights. Does he think that the required return as compared to expected returns is undervalued, overvalued, or fairly valued?

Overvalued

Fairly valued

Undervalued

Suppose instead of replacing Atteric Inc.’s stock with Transfer Fuels Co.’s stock, Brandon considers replacing Atteric Inc.’s stock with the equal dollar allocation to shares of Company X’s stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio’s risk would ----- .

If you are one of Apple's shareholder, will you vote for or against stock buyback of ICAHN proposal? please explain.

Following are the securities and projections for Mogul Corp:

Stock A: REQUIRED RATE OF RETURN = 5% Constant-growth - growth rate of 3% D0 = $3.00

Stock B: REQUIRED RATE OF RETURN = 7% D0 = $4.00, growth at 5% per year for 2 years, followed by 4% forever

Stock C: REQUIRED RATE OF RETURN = 9% D0 = $2.00, growth at 25% for next 4 years, followed by 5% forever

Mogul has a 3.5% Treasury bond, semi-annual interest, with 4 years left to maturity and a quoted price of $962.81.

1) Calculate the bond’s current yield and yield to maturity.

2) Calculate the value per share today for stock A.

3) Calculate the value per share 4 years from today for stock B.

4) Calculate the value per share today for stock C.

ABC, Inc. purchased an equipment at time=0 for $53,474. The shipping and installation costs were $23,977. The equipment is classified as a 5-year MACRS property. The investment in net working capital at time=0 was $5,040 which would be recouped at the end of the project. The project life is five years. At the end of the fifth year, the company will sell the equipment for $43,842. The annual cash flows are $43,724. What is the cash flow of the project in Year 5? That is, solve for CF5. Assume that the tax rate is 23% The MACRS allowance percentages are as follows, starting with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. Note: In the last year of the project, the Total Cash Flow = Operating Cash Flow + Terminal Cash Flow

Prime Mortgage Company sanctions a loan application for a 30 year mortgage loan for
US$100,000. The interest rate on the loan is 12% per annum and the borrower is required to
make equated monthly payments to repay the loan in 30 years (360 months). If the market
rate of interest goes down to 9% per annum, is the loan still worth US$100,000? Why? Why
not? (5 points)

b) If the corn farmer in the example above harvests 60,000 bushels, what amount will he
receive? What if he had not hedged his position? If the corn farmer in the example is able to
harvest only 40,000 bushels and the price per bushel rises to US$3.90 due to short supply of
corn, will his exposure be completely hedged? Why? Why not? Support your answer with
calculations. (5 points)

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $665,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the sausage system can be scrapped for $87,000. The sausage system will save the firm $187,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $39,000. If the tax rate is 22 percent and the discount rate is 10 percent, what is the NPV of this project?

I have gotten a Year 0 Cash Flow of -2,550,000
Year 1 CF of 937,064.23
Year 2 CF of 859,691.95
Year 3 CF of 1,108,430.80
And an NPV 355,186.94

My assignment says that the Year 0 CF and the NPV are correct, but all of the other Cash Flows are incorrect. But the sum (NPV) is correct, so I'm not sure what I'm doing wrong.

Suppose we have the following returns for large-company stocks and Treasury bills over a six-period:

Year                          Large Company                      US Treasury Bill

a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.( Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places.)

b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. ( Do not round intermediate calculations and enter your answers as a percent to 2 decimal places.)

c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.)

c-2: Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period? ( Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.)