What are mutually exclusive projects? What are some of the ways we can evaluate which project is the better investment?

Gaurav Coal Mining, Inc. is considering opening a strip mine, the cost of which is $17.4 million. Cash flows will be $110.8 million, all coming at the end of one year. The land must be returned to its natural state at a cost of $100 million, payable after two years. Compute the IRR for this project. Should the project be accepted if required rate of return is 8 percent? Should the project be accepted if the required rate of return is 14 percent? Explain your reasoning. At what costs of capital, the project is acceptable. Plot the graph of NPV for this project.

4. Within-firm risk and beta risk

Understanding risks that affect projects and the impact of risk consideration

Garcia Real Estate is involved in commercial real estate ventures throughout the United States. Some of these ventures are much riskier than other ventures because of market conditions in different regions of the country.

If Garcia does not risk-adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply.

a) The firm will increase in value.

b) The firm’s overall risk level will increase.

c) The firm could potentially reject projects that provide a higher rate of return than the company should require.

Generally, a positive correlation exists between a project’s returns and the returns on the firm’s other assets. If this correlation is _______ , stand-alone risk will be a good proxy for within-firm risk.

a)high b)low

Consider the case of another company. Davis Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below.

Which of the following statements about these projects’ risk is correct? Check all that apply.

a) Project B has more market risk than Project A.

b) Project A has more corporate risk than Project B.

c) Project A has more stand-alone risk than Project B.

d) Project B has more corporate risk than Project A.

1.

ABC Home Improvement Supplies, Inc. sells Ironton 72 inch digging bars. The annual demand for the digging bars is estimated to be 5000 bars. The ordering cost is $60 per order and the carrying cost is 20% of the unit price paid. Its supplier offers quantity discounts as shown in the following table

  
If ABC is willing to pay a unit price of $25.00, determine the actual order quantity to take advantage of the quantity discounts

2.

ABC Home Improvement Supplies, Inc. sells Ironton 72 inch digging bars. The annual demand for the digging bars is estimated to be 5000 bars. The ordering cost is $60 per order and the carrying cost is 20% of the unit price paid. Its supplier offers quantity discounts as shown in the following table

If ABC is willing to pay a unit price of $23.00, determine the total, including the purchase, carrying and ordering, cost

3.

ABC Home Improvement Supplies, Inc. sells Ironton 72 inch digging bars. The annual demand for the digging bars is estimated to be 5000 bars. The ordering cost is $60 per order and the carrying cost is 20% of the unit price paid. Its supplier offers quantity discounts as shown in the following table

Which order quantity do you recommend to ABC so as to minimize total inventory cost?

How do you think the stock market would be affected if the laws were changed so that trading on insider information was no longer illegal? What would be the impact on the goal of the financial manager if such a change were to occur?

Your client is 31 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $11,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 8% in the future.

1. If she follows your advice, how much money will she have at 65? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

2. How much will she have at 70? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Do not round intermediate calculations. Round your answers to the nearest cent.

   Annual withdrawals if she retires at 65: $

   Annual withdrawals if she retires at 70: $

Cookie Monster wants to merge his cookie manufacturing business with the milk business that is owned by Matilda Milk, Inc. Cookie Monster would like for you to explain the difference between buying the stock of Matilda Milk, Inc or buying the assets of Matilda Milk, Inc. Please explain the general differences between a stock acquisition or an asset acquisition.

Answer:

Financial information for Powell Panther Corporation is shown below:

Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answers to the nearest dollar, if necessary. Negative values, if any, should be indicated by a minus sign.

1. What was net operating working capital for 2018 and 2019? Assume the firm has no excess cash.

   2018:  $  

   2019:  $  

2. What was the 2019 free cash flow?

   $  

3. How would you explain the large increase in 2019 dividends?

   1. The large increase in net income from 2018 to 2019 explains the large increase in 2019 dividends.
   2. The large increase in EBIT from 2018 to 2019 explains the large increase in 2019 dividends.
   3. The large increase in sales from 2018 to 2019 explains the large increase in 2019 dividends.
   4. The large increase in retained earnings from 2018 to 2019 explains the large increase in 2019 dividends.
   5. The large increase in free cash flow from 2018 to 2019 explains the large increase in 2019 dividends.

Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Cash $ 3.5 Accounts payable $ 9.0

Receivables 26.0 Notes payable 18.0

Inventories 58.0 Line of credit 0

Total current assets $ 87.5 Accruals 8.5

Net fixed assets 35.0 Total current liabilities $ 35.5

Mortgage loan 6.0

Common stock 15.0

Retained earnings 66.0

Total assets $122.5 Total liabilities and equity $122.5

Sales for 2016 were $325 million and net income for the year was $9.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.9 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations. If sales are projected to increase by $100 million, or 30.77%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million

There are two well–diversified portfolios in the economy, portfolio A and portfolio B. Portfolio A has beta of 1.5 and expected return of 14%, while portfolio B has beta 0.9 and expected return of 11.4%. If the expected return on the market is 12% and risk–free rate is 6%, is there an arbitrage opportunity? If so, show your arbitrage strategy.

XYZ corp. is considering investing in a new machine. The new machine cost will $ 10,000 installed. Depreciation expense on the new machine will be $1000 per year for the next five years. At the end of the fifth year XYZ expects to sell the machine for $6000. XYZ will also sell its old machine today that has a book value of $3000 for $3000. The old machine has depreciation expense of $600 per year. Additionally, XYZ Corp expects that the new machine will increase its EBIT by $2000 in each of the next five years. Assuming that XYZ’s marginal tax rate is 21% and the projects WACC is 15%, What is the projects NPV? Round your final answer to two decimals.

Given the year end prices of the following stocks, estimate the standard deviation of the returns of a portfolio of 30% AAA and 70% BBB. Enter your answer as a percent without the % sign. Round your final answer to two decimals.