3. Assuming the following yields: Week 1: 3.84% Week 2: 3.51% Week 3: 3.95% (1) Compute the absolute yield change and percentage yield change from week 1 to week 2. (1.5 points) (2) Compute the absolute yield change and percentage yield change from week 2 to week 3. (1.5 points)

Blossom, Inc., a resort management company, is refurbishing one of its hotels at a cost of $8,554,779. Management expects that this will lead to additional cash flows of $1,970,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Blossom go ahead with this project? (Round answer to 2 decimal places, e.g. 5.25%.)

You are a financial analyst for Loch Motor Company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost $206,000. The estimated useful life is 12 years, and the estimated residual value is $46,160. The machine has an estimated useful life in productive output of 222,000 units. Actual output was 31,000 in year 1 and 27,000 in year 2.

Required:

1. For years 1 and 2 only, prepare separate depreciation schedules assuming: (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

a. Straight-line method.

b. Units-of-production method.

c. Double-declining-balance method.

Tim Smith is shopping for a used luxury car. He has found one priced as $40,000. The dealer has told Tim that if he can come up with a down payment of ​$7,500​, the dealer will finance the balance of the price at a 55​% annual rate over 5years ​(60 ​months).  ​(Hint: Use four decimal places for the monthly interest rate in all your​ calculations.) a.  Assuming that Tim accepts the​ dealer's offer, what will his monthly​ (end-of-month) payment amount​ be? b.  Use a financial calculator or spreadsheet to help you figure out what​ Tim's monthly payment would be if the dealer were willing to finance the balance of the car price at an annual rate of 3.3​%?

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $270,000, has a 4-year life, and requires $77,000 in pretax annual operating costs. System B costs $350,000, has a 6-year life, and requires $71,000 in pretax annual operating costs. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 21 percent and the discount rate is 8 percent. Calculate the EAC for both conveyor belt systems. (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.)

Consider the following.

a. Calculate the leverage-adjusted duration gap of an FI that has assets of $2.4 million invested in 25-year, 9 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 10.08 years. It has liabilities of $1,040,000 financed through a two-year, 6.50 percent semiannual coupon note selling at par.

b. What is the impact on equity values if all interest rates fall 20 basis points—that is, ΔR/(1 + R/2) = –0.0020?

From the news, you identified a trend that Mexican nominal interest rates have been substantially higher than U.S. nominal interest rates in recent years.

1. According to Fisher Effect, what do you expect inflation gap between two country’s inflation rate?

2. What does this imply about the future changes to Mexican peso vs. USD exchange rate and why? (explain with parities you have learned)

3. Assume three months later, the annual interest rate is 10% in Mexico and 1.5% in the US, the spot rate is $0.05 per peso and the one year forward rate is $0.048 per peso. Is interest rate parity holds? If not, can your company take advantage of this arbitrage opportunity? How much is your profit if you have $1million?

4. Since Mexican nominal interest rate is often substantially higher than U.S. interest rate. What is the future spot rate of peso vs. USD when you use peso/USD forward rate to forecast future spot rate? Based on which parity do you make your predication here?

5. What would you expect the gap of interest rate differentials affects the degree of expect changes on peso vs. USD exchange rate?

6. What other forecast methods you can use to forecast peso exchange rate in the future? Please explain each forecast method’s advantages and disadvantages respectively.

1. Explain various discounted cash flow (DCF) methods in capital budgeting process!
2. Which method that are used in your company to make the investment decision? Give a real example!
3. Discuss the challenges the DCF methods (for example, NPV) usage!

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 24 percent. Debt: 9,000 5.8 percent coupon bonds outstanding, $1,000 par value, 24 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common stock: 420,000 shares outstanding, selling for $60 per share; beta is 1.11. Preferred stock: 18,000 shares of 3.6 percent preferred stock outstanding, currently selling for $81 per share. The par value is $100 per share. Market: 5 percent market risk premium and 4.6 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

1. How does collateral affect the interest rate on a bond? How does subordination affect the interest rate on a bond too? What else might affect the interest rate on a bond?

Year   Project A   Project B
0 –$200   –$200   
1 80   100   
2 80 100   
3 80 100   
4 80      

a)   If the opportunity cost of capital is 10%, which of these projects is worth pursuing? Explain.

b)   Suppose that you can choose only one of these projects. Which would you choose? The discount rate is still 10%. Justify your reasoning.

c)   Which project would you choose if the opportunity cost of capital were 16%?

d)   What are the internal rates of return on projects A and B?

e)   In light of your answers to Problems a) – d), is there any reason to believe that the project with the higher IRR is the better project?

XYZ is considering a 3-yr project. The initial outlay is -$120,000, annual cash flow is $50,000 and the terminal cash flow is $10,000. The required rate of return (cost of capital) is 15%. The net present value is $736.42. What if the annual cash flow increases to $54,000 instead? Re-calculate the NPV.

Questions 1 to 3:

Janice Leo is the head of bond valuation at UMB Investments Management LLC. She has been very frustrated by the number of investment analysts who seem to have a little understanding of financial statement analysis and corporate finance concepts. She has written a set of conceptual questions and simple problems to screen for the better candidates in the applicant pool. A few of the questions related to cash flow statements, present value, future value and problems are given below:
In response to a few question regarding cash flow statements Mike Grillo, one of the analysts at UMB Investments made the following statements.

Statement -1: Cash flows are generally considered more sustainable if they are generated by a firm investing and financing activities.
Statement -2: If a firm is profitable and reports positive cash flow, this is sustainable over the long term.
Statement -3: The act of factoring accounts receivable will generally result in a decrease in operating cash flows in the current year, and a decrease in operating cash flows in subsequent years.
Statement – 4: The fundamental drivers that underlie operating cash flow are ROE, growth, sustainability, profitability and efficiency.

Is Leo correct with respect to statements 1 and 2?

With respect to statement 3, Leo is incorrect.

Leo’s statement 4 is correct with respect to

QUESTION 4

1. Leo was wondering whether candidates are familiar with accounting estimates and assumptions that a firm’s management could use to manipulate the firm’s profitability.  MicroMoon (MM) is one of the firms that UMB is considering in investing. In its December 31, 2011 annual report MM reported the following year-end data:

   Depreciation expense	$30 million
   Net income	$30 million
   Dividends	$5 million
   Total assets	$535 million
   Shareholder’s equity	$150 million
   Effective tax rate	35 percent

   Last year, MM purchased equipment for $140 million. For the first year, straight-line depreciation was used assuming a depreciable life of 7 years with no salvage value. However, at year-end MM’s management determined that assumptions of a useful life of 5 years with a salvage value of 10 percent of the original value were more appropriate.

   How would the return on assets (ROA) and return on equity (ROE) for last year change due to the change in depreciation assumptions? ROA decreases to:

   	A.	5.7% from 5.6% and ROE decreases to 19.7% from 20.0
   	B.	5.0% from 5.6% and ROE decreases to 18.4% from 20.0
   	C.	5.7% from 21.43% and ROE increases to 21.0% from 20.0

A 5-yr project has an initial requirement of $145,226 for new equipment and $9,294 for net working capital. The fixed assets will be depreciated to a zero book value over 5 years and have an estimated salvage value of $27,669. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $51,222. The cost of capital is 9% and the tax rate is 27%. What is the net present value of the project?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.