Hamstring Inc. is considering a project with the following cash flows:

C₀ C₁ C₂      C₃ C₄

_{$(25,000) $10,000 $12,000 $5,000 $8,000}

_{The company is reluctant to consider projects with paybacks of more than three years. If projects pass the payback screen, they are considered further by means of the NPV and IRR methods. The firm's cost of capital is 9%.}

_{a. What is the project 's payback period? Should the project be considered further?}

_{b. What is the project's NPV ? Does NPV indicate acceptance on a stand-alone basis?}

_{c. Calculate the project's IRR by using an iterative approach. Start with the cost of capital and the NPV calculation from part (b). Does IRR indicate acceptance on a stand-alone basis?}

_{d. What is the project's PI? Does PI indicate acceptance on a stand-alone basis?}

You will put $1200 down on a car and want a 4 year loan. You could buy a new car for $15,000 (interest rate 6%) or the same model car that is 2 years old for $11,500 (interest rate 6.5%). The new car has a monthly payment of $305.31 and the used car has a monthly payment of $244.26. Explain what you would pick and why.

Ch. 2 p. 64-65

EYK2-3) Ethics Case Great Cake is a large bakery known for its quality “boxed cake” products. Its motto is “We Use Only the Best Ingredients.” Ralph Sands, the purchasing supervisor, is responsible for ordering the ingredients for all the bakery products. He is being considered for a promotion based on his proven ability to purchase ingredients at the best price available.

The cost of all the ingredients has risen substantially over the past few months. Sands decides to purchase 2.5% of the ingredients at a lower quality than Great Cakes normally uses because the cost is significantly less. Without relying on the company’s test kitchens, he believes this substitution will not be noticed by the customers and the lower cost will counterbalance the increased costs of the other ingredients.

Sands explains this decision to his friend, Lynn Pall, the company’s accountant, one day at lunch. He also tells her that he does not intend to inform management of the inclusion of the lower-quality ingredients in the bakery’s products.

Required

What ethical considerations arise from Ralph Sands’ decisions? What problems face Lynn Pall because of his actions?

What is the discounted payback period on Versace's proposed investment in a new line of fashion clothes? The expected cash flows appear below. Note that year 0 and year 1 cash flows are negative. (Answer in years; round to 2 decimals)

Year 0 cash flow = -95,000
Year 1 cash flow = -18,000
Year 2 cash flow = 50,000
Year 3 cash flow = 49,000
Year 4 cash flow = 54,000
Year 5 cash flow = 45,000
Year 6 cash flow = 46,000


Required rate of return = 14.00%

Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway's cost of capital is 12%.

Project A    PROJECT B

_{0 ($25,000) ($80,000)}

_{1 $44,000 $65,000}

_{2 $34,000 $30,000}

_{3 $14,000 $ 0}

_{4 $14,000 $5,000}

_{a. Calculate each project's NPV and IRR.}

_{b. Which project should be undertaken ? Why?}

a.

Hi there, please solve these questions. These type of questions might be in my final exam this weekend.

Thank you

2. Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 8%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) −0.5×Aσ 2, where E(r) is the expected return, A is the risk aversion coefficient and σ 2 is the variance of returns.

a) What is the expected value and standard deviation of the rate of return on your client’s portfolio?

b) Your client’s degree of risk aversion is A = 3.5.

(i) What proportion, y, of the total investment should be invested in your risky fund?

(ii) What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?

c) Prove that the optimal proportion of the risky asset in the complete portfolio is given by the equation y ∗ = E(rp)−rf Aσ2 p , where rf is the risk-free rate, E(rp) is the expected return of the risky portfolio, σ 2 p is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable’s effect on y ∗ and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse.

Case Study 2: Lakme Cosmetics [7.5 Marks]

The following financial data relate to Lakme, a cosmetic and toiletries company in the Tata Group of Companies for the period ending on 31 March 20X6 and 20X7.

Lakme Financial Data for the year ending on 31 March

(Rs. In lakh)

Discussion Questions

1. Comment on Lakme’s performance. Show computation to support your answer.
2. How effectively has Lakme used its assets in generating sales?
3. Do you think there is appropriate balance between equity and borrowed funds? Show relevant ratios.
4. Critically evaluate Lakme’s profitability?
5. Does Lakme have sufficient liquidity?

You have just received a windfall from an investment you made in a​ friend's business. She will be paying you $35,235 at the end of this​ year, $ 70,470 at the end of next year, and $105,705 at the end of the year after that​ (three years from​ today). The interest rate is 7.6 % per year.

a. What is the present value of your​ windfall?

b. What is the future value of your windfall in three years​ (on the date of the last​ payment)?

Round to the nearest​ dollar.)

This is Question (exercise) 5 from Chapter 23 in the book Financial Modeling by Simon Benninga 4th edition.

An Underwriter issues a new 7-year C-rated bond at par. The anticipated recovery rate in default of the bond is expected to be 55%. What should be the coupon rate on the bond so that its expected return is 9%? Assume the transition matrix of exercise 2.(I tried to copy it bellow, hope it helps)

1 0 0 0 0

0.06 0.90 0.03 0.01 0

0.02 0.05 0.88 0.05 0

0 0 0 0 1

0 0 0 0 1

The expected rate of return for Stock A is?

The​ investment's standard deviation for stock A?

COMMON STOCK A       COMMON STOCK B  
PROBABILITY   RETURN   PROBABILITY   RETURN
0.20   11%   0.10   -4%
0.60   16%   0.40   7%
0.20   19%   0.40   14%
       0.10   22%

Is it possible for a MNC that has bought a currency forward or future contract to simply walk away at the settlement date if a new circumstance emerged prior to the settlement date and caused them not to need the contract any longer? What solution does this MNC have (without harming its credibility and reputation)? Prove it with an example along with numbers to support your explanation.

Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter has told you that your plant’s furnace needs to be replaced and he offers the following choices. All furnaces have a useful life of 10 years. Choice L (Low efficiency furnace) Initial cost is $28,000 including complete installation. Heating cost is expected to be $7,450 and increasing at 2.5% every year. Choice M (Medium efficiency furnace) Initial cost is $35,000 including complete installation. Heating cost is expected to be $6,100 and increasing at 2.5% every year. Choice H (High efficiency furnace) Initial cost is $45,000 including complete installation. Heating cost is expected to be $5,000 and increasing at 2.5% every year.

For each of the following company transactions, indicates whether the company in question should purchase forward contract, sell forward contract, purchase a call option, or purchase a put option, or none, to limit its exposure to exchange rate risk. Answers can be more than one.

a. A U.S. MNC, Independent Bank, will receive interest payments denominated in Colombian peso.

b. A U.S. MNC, Merged Co. will sell inventory software applications to Mexico denominated in Mexican peso.

c. A U.S. MNC, Bahamas Inc., will purchase Canadian papers and the contract is denominated in U.S. dollars.

d. A Singapore MNC, Tema Inc., may have projects in Thailand that needs funds in Thailand Baht. The company is in the bidding process and outcome is not known yet.