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.)

Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Exhibit 16.1. Assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?

Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.

Refer to Exhibit 16.1. PP is considering changing its capital structure to one with 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations?

Ben buys a 180-day $100 000 bank bill, 30 days after issue, for a price of $98 140.70 (the purchase yield is 4.61% p.a.). After holding the bill for 30 days Ben sells it at a yield of 4.56% p.a. (simple interest).

a. Construct a Cash flow diagram from Ben's perspective

b. Find the sale price.

c. Find Ben's simple interest yield p.a. (as a percentage, rounded to 2 decimal places) over the 30-day holding period.

d. Explain how Ben's yield calculated in b. would change (increase or decrease) if the sale yield was less than 4.56% p.a. Why would the yield change in this way?

e. When a bank bill is purchased and sold before maturity the dollar return consists of two components—a capital component and an interest component. State how to calculate the capital component.

f. Explain in your own words and with reference to the purchase yield and the sale yield when the capital component will be a gain and when it will be a loss.

g. Use your explanation in (f.) to determine whether the capital component of Ben's bank bill investment will be a gain or a loss. Note that you are not required to calculate the actual value of the capital component.

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 $2 million of retained earnings with a cost of rs = 14%. New common stock in an amount up to $8 million would have a cost of re = 17%. Furthermore, Olsen can raise up to $2 million of debt at an interest rate of rd = 11% and an additional $5 million of debt at rd = 14%. The CFO estimates that a proposed expansion would require an investment of $4.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

The manager of Furniture For Less has approved Mac's application for 36 months of credit with maximum monthly payments of $32. If the APR is 20.2 percent, what is the maximum initial purchase that Mac can buy on credit?

• $627.53

• $1,047.91

• $858.70

• $870.58

• $617.19

We are evaluating a project that costs $1,740,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 86,700 units per year. Price per unit is $38.07, variable cost per unit is $23.30, and fixed costs are $821,000 per year. The tax rate is 22 percent, and we require a return of 9 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g. 32.16.)