Guthrie Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost $2,100,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $165,000. Your fixed production costs will be $650,000 per year, and your variable production costs should be $9.07 per carton. You also need an initial investment in net working capital of $320,000. If your tax rate is 21 percent and you require a 11 percent return on your investment, what bid price per carton should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

You are looking at the car that is currently selling at $65,000. Classic Autos is offering free credit (i.e. no interest charged on the borrowed amount) on the car. You pay $10,000 down today and then pay the remaining balance at the end of 6years. Premium Motors next door does not offer credit, but will give you $20,000 off the list price if you pay cash now. Assume annual compounding with 9% discount rate. Which of the following statement is TRUE?

You are considering a new product launch. The project will cost $1,192,500, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 230 units per year; price per unit will be $18,500, variable cost per unit will be $15,000, and fixed costs will be $321,000 per year. The required return on the project is 13 percent, and the relevant tax rate is 30 percent.

Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent.

What are the best-case and worst-case NPVs with these projections? (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.)

One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $140,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $8,182 per year. The market value today of the current machine is $45,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 10%Should your company replace its year-old machine?

The NPV of replacing the year-old machine is

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Asset sale is one form of corporate restructuring. Describe the asset sale process. Give one example of an asset sale as discussed in the course or in recent news articles.

As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset). Assume your personal risk aversion is 0.06 (A=0.06). The correlation between the equity fund and the bond fund returns is 0.1.

1. Find weights of the equity and corporate bond funds in the minimum variance portfolio.

2.Using weights calculated in Question 1, compute the expected return (E[r]) and the risk (standard deviation) of the minimum variance portfolio.

3.Find weights of the equity and corporate bond funds in the optimal portfolio.

4.Using weights calculated in Question 3, find the expected return (E[r]) and risk (standard deviation) of the optimal portfolio.

5.Compute the slope of the Capital allocation line (CAL) using the optimal portfolio from questions 3 and 4 as your risky portfolio.

6.Using your personal risk aversion (A=0.06) and the optimal portfolio as the risky portfolio, find the weights of the optimal portfolio and of the risk-free asset in the complete portfolio.

7.Using weights calculated in Question 6, compute the expected return (E[r]) and the risk (standard deviation) of your complete portfolio.

8.Calculate weight of the equity and corporate bond fund in the complete portfolio calculated in Questions 6 and 7.

Assume sales for Peach Street Industries are expected to increase by 8.00% from 2015 to 2016. Peach Street is operating at full capacity currently and expected assets-to-sales and spontaneous liabilities-to-sales to remain the same. Additionally, the firm is looking to maintain their 2015 net profit margin and dividend payout ratios for 2016. The firm’s tax rate is 38.00% and selected income statement and balance sheet information for 2015 is provided below:

What is the firm’s net income for 2015?

The owner of a development site is considering an offer from a parking lot operator to rent the parcel for the next five years, while the development is being planned and approved. The operator has offered to pay $65,000 today or an annuity of $20,000 at the end of each of the next 5 years. Which payment method should the site owner accept if her required rate of return is 15 percent?

Upton Umbrellas has a cost of equity of 11.9 percent, the YTM on the company's bonds is 6.4 percent, and the tax rate is 40 percent. The company's bonds sell for 103.5 percent of par. The debt has a book value of $417,000 and total assets have a book value of $955,000. If the market-to-book ratio is 2.83 times, what is the company's WACC?

Multiple Choice: 8.31% 5.62% 10.12% 9.84% 8.44%

Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $16 million; it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm’s tax rate is 30%, and the discount rate is 15%. Either machine will be replaced at the end of its life.

a. What is the equivalent annual cost of investing in the cheap system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places.)

b. What is the equivalent annual cost of investing in the more expensive system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places.)

Assume that sales will grow at 5.00%. The following accounts (cash, accounts receivable, inventory, net fixed assets, accounts payable and accruals, as well as operating costs) are assumed to change with sales and will maintain their current percentage of sales rates into 2016. The dividend payout ratio will remain the same. Long-term debt and notes payable will remain constant into 2016 as will interest expense, as a result. The firm also does not plan to issue any additional common stock or conduct any share repurchases. The firm’s tax rate is 40%. Any additional funds needed will be sourced through a line-of-credit (LOC) and surpluses will be paid out through a special dividend.

BALANCE SHEET AS OF 12/31/2015:

In the following questions, determine the percentage-of-sale forecast factors:

WHAT IS ACCOUNTS PAYABLE AND ACCRUALS???

Assume that sales will grow at 5.00%. The following accounts (cash, accounts receivable, inventory, net fixed assets, accounts payable and accruals, as well as operating costs) are assumed to change with sales and will maintain their current percentage of sales rates into 2016. The dividend payout ratio will remain the same. Long-term debt and notes payable will remain constant into 2016 as will interest expense, as a result. The firm also does not plan to issue any additional common stock or conduct any share repurchases. The firm’s tax rate is 40%. Any additional funds needed will be sourced through a line-of-credit (LOC) and surpluses will be paid out through a special dividend.

BALANCE SHEET AS OF 12/31/2015:

Using the percent-of-sales forecast approach, forecast the 2016 income statement and balance sheet. Be sure the balance sheet balances.

What are the Projected Regular Dividends for 2016?

Assume that sales will grow at 5.00%. The following accounts (cash, accounts receivable, inventory, net fixed assets, accounts payable and accruals, as well as operating costs) are assumed to change with sales and will maintain their current percentage of sales rates into 2016. The dividend payout ratio will remain the same. Long-term debt and notes payable will remain constant into 2016 as will interest expense, as a result. The firm also does not plan to issue any additional common stock or conduct any share repurchases. The firm’s tax rate is 40%. Any additional funds needed will be sourced through a line-of-credit (LOC) and surpluses will be paid out through a special dividend.

BALANCE SHEET AS OF 12/31/2015:

Using the percent-of-sales forecast approach, forecast the 2016 income statement and balance sheet. Be sure the balance sheet balances.

What is the Projected LOC (if any)?

Enter 0 if none.

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. What is the market risk premium (r_M - r_RF)? Round your answer to two decimal places.

   %

2. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

3. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

   %

4. Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%?

   1. less than 15%
   2. greater than 15%
   3. equal to 15%

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