Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent.

a. What is the bond price at 11 percent?

b. What is the bond price at 8 percent?

c. What would be your percentage return on investment if you bought when rates were 11 percent and sold when rates were 8 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $6.3 million. The company expects a total annual operating cash flow of $1.2 million for the next 8 years. The relevant discount rate is 9 percent. Cash flows occur at year-end.

a. What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b. After one year, the estimate of remaining annual cash flows will be revised either upward to $2.1 million or downward to $275,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.5 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

a. NPV = $341,868

b. NPV = __?

Some people might consider Virgin's policy to be a sign of laissez faire leadership. Do you are? Why or why not?

​(Cash receipts acceleration system​) Peggy Pierce Designs Inc. is a vertically​ integrated, national manufacturer and retailer of​ women's clothing.​ Currently, the firm has no coordinated cash management system. A​ proposal, however, from the First Pennsylvania Bank aimed at speeding up cash collections is being examined by several of​ Pierce's corporate executives. The firm currently uses a centralized billing​ procedure, which requires that all checks be mailed to the Philadelphia head office for processing and eventual deposit. Under this​ arrangement, all the​ customers' remittance checks take an average of 4 business days to reach the head office. Once in​ Philadelphia, another 1 days are required to process the checks for ultimate deposit at the First Pennsylvania Bank. The​ firm's daily remittances average ​$2.0 million. The average check size is ​$2,500. Pierce Designs currently earns 11 percent annually on its​ marketable-securities portfolio. Under the proposed​ plan, First Pennsylvania said that they could reduce funds tied up by mail float to 2 ​days, and processing float will be eliminated. Funds would then be transferred twice each business day by means of automated depository transfer checks from local banks to the First Pennsylvania Bank. Each DTC costs ​$18. These transfers will occur all 270 business days of the year. Each check processed through the proposed cash collection system will cost ​$0.17.

a. What amount of cash balances will be freed up if Peggy Pierce Designs Inc. adopts the system suggested by First​ Pennsylvania?

b. What is the opportunity cost of maintaining the current banking​ setup?

c. What is the projected annual cost of operating the proposed​ system?

d. Should Pierce adopt the new​ system? Compute the net annual gain or loss associated with adopting the system.

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $130,000, and it would cost another $32,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $52,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $76,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent. $ What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent. Year 1: $ Year 2: $ Year 3: $ If the WACC is 11%, should the spectrometer be purchased?

Problems with IRR  

White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.

a. Calculate the NPV at the following discount rates and plot an NPV profile for this​ investment:

0%,

5​%,

7.5​%,

10​%,

15%​,

20​%,

22.5​%,

25​%,

30​%.

b. What does the NPV profile tell you about this​ investment's IRR?

c. If the company follows the IRR decision rule and their cost of capital is

15​%,

should they accept or reject the​ opportunity? Why is it hard to make a decision on this investment based solely on the IRR​ rule?

d. If the​ company's cost of capital is

15​%,

should they reject or accept the investment based on its​ NPV?

Discuss the three main areas of concern in corporate finance.

16. Which of the following is true regarding the sensitivity of the Free Cash Flow valuation model to errors? a. The future terminal (continuation) cash flow is extremely sensitive to forecasting and growth rate errors. b. All else being equal, a terminal (continuation) value computed 10 years from today with a 3% overstatement in the growth rate will bias the intrinsic valuation more than if the terminal (continuation) value computation were made in 6 years with a 3% overstatement in growth. c. Financial statements after the year 2002 provide less accurate information regarding the market value of debt than financial statements prepared in the late 1980’s. d. Cash flow based statements provide more forward looking information than do accrual based statements and valuation methods. e. Free Cash Flow valuations are riddled with errors and do a poorer job of explaining and forecasting stock prices that the Discounted Dividends model.

which area of concern in corporate finance is the most difficult to address

(Accounts receivable collection policy​) The Cowboy Bottling Company will generate ​$16 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The​ firm's employees work 300 days a year.​ Currently, the​ firm's processing system ties up 6 ​days' worth of remittance checks. A recent report from a financial consultant indicated procedures that will enable Cowboy Bottling to reduce processing float by 1 full days. If Cowboy invests the released funds to earn 11 ​percent, what will be the annual​ savings?

The annual savings on the new processing system will be ​$

A store has 5 years remaining on its lease in a mall. Rent is $1,900 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

1. should the new lease be accepted
2. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.
3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.

A young couple buying their first home borrow $85,000 for 30 years at 7.1%, compounded monthly, and make payments of $571.23. After 2 years, they are able to make a one-time payment of $2,000 along with their 24th payment.

(a) Find the unpaid balance immediately after they pay the extra $2,000 and their 24th payment. (Round your answer to the nearest cent.) $

(b) How many regular payments of $571.23 will amortize the unpaid balance from part (a)? Give the answer to one decimal point. payments

(c) How much will the remaining debt be after the number of full payment periods in part (b) is made? (Round your answer to the nearest cent.) $ How much extra must be included with the last full payment to pay off the debt? (Round your answer to the nearest cent.) $

(d) How much will the couple pay over the life of the loan by paying the extra $2,000? (Round your answer to the nearest cent.) $ (e) How much will the couple save over the life of the loan by paying the extra $2,000? (Use your answer from part (b). Round your answer to the nearest cent.) $

(Cash management​) As CFO of Portobello Scuba Diving​ Inc., you are asked to look into the possibility of implementing a system to expedite cash receipts from clients. Portobello receives check remittances totaling ​$24 million in a year. The firm records and processes 15,000 checks in the same period. The National Bank of Brazil has informed you that it could provide the service of expediting checks and associated documents for a unit cost of $ 0.15 per check. After conducting an​ analysis, you project that the cash freed up by the adoption of the system can be invested in a portfolio of​ near-cash assets that will yield an annual​ before-tax return of 11 percent. The company usually uses a​ 365-day year in its financial calculations.

a. What reduction in check collection time is necessary for Portobello to be neither better nor worse off for having adopted the proposed​ system?

b. How would your solution to part a be affected if Portobello could invest the​ freed-up balances at an expected annual return of only 6 ​percent?

c. What is the logical explanation for the differences in your answers to part a and part b​?

​(Trade credit discounts​) Determine the effective annualized cost of forgoing the trade credit discount on the following​ terms:

a. 2​/9​, net 40

b. 1​/6​, net 45

c. 2​/6​, net 25

d. 5​/5​, net 80

e. 4​/7​, net 60

f. 3​/10​, net 90

1. A corporate bond being seriously considered for purchase by Oasis for RM975 in today’s market will mature 10 years from today and promises a coupon payment of 5% made semi-annually.  

          Given that the redemption value of this bond is RM1,000. Compute the annual yield-to-maturity (YTM) which range from 0% to 10% using the ‘trial-and-error’ method.