1. What are some of the reasons firms use WACC when evaluating potential projects?
2. Why not simply use cost of debt or just cost of equity?

QUESTION 57

1. What is the duration of a 7-year zero coupon bond priced to yield 10%?

   		a. 5.55.
   		b. 5.93.
   		c. 6.34.
   		d. 7.00.

QUESTION 58

1. Which of the following statements is correct about duration?

   		a. Duration will always be less than the maturity for a bond.
   		b. The duration of a bond increases as YTM increases.
   		c. Modified duration is a precise measure of the change in the price of a bond based on a change in interest rates.
   		d. The duration of a portfolio equals the sum of the weighting of each portfolio component multiplied by its duration.

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $65,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $6,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life.

A new high-efficiency digital-controlled flange-lipper can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $25,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $30,000. The firm's tax rate is 35%, and the appropriate cost of capital is 15%.

1. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign.

   $  

2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be indicated by a minus sign.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar. Negative value, if any, should be indicated by a minus sign.

   $  

   Should Everly replace the flange-lipper?

   -Select-YesNoItem 8

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $5,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:

BPC has decided to evaluate the riskier project at a 11% rate and the less risky project at a 10% rate.

1. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar.

   	Project A	Project B
   Net cash flow	$	$

   What is the coefficient of variation (CV)? (Hint: σ_B=$6,890 and CV_B=$0.84.) Do not round intermediate calculations. Round σ values to the nearest cent and CV values to two decimal places.

   	σ	CV
   Project A	$
   Project B	$

2. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A		$
   Project B		$

3. If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision?

   This would tend to reinforce the decision to -Select-acceptrejectItem 9 Project B.

   If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?

   -Select-YesNoItem 10

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,371.00 to install, $5,188.00 to operate per year for 7 years at which time it will be sold for $7,079.00. The second, RayCool 8, costs $41,074.00 to install, $2,101.00 to operate per year for 5 years at which time it will be sold for $8,973.00. The firm’s cost of capital is 6.60%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

I am not sure where to post this complain. My situation is that I keep paying for help but having incorrect answers. This will be the 3rd time Ill be paying for these problems and keep have incorrect answers. Please help me with it.

7)

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.3 million. Investment A will generate $1.95 million per year? (starting at the end of the first? year) in perpetuity. Investment B will generate $1.47

million at the end of the first? year, and its revenues will grow at 2.2% per year for every year after that.

a. Which investment has the higher? IRR?

b. Which investment has the higher NPV when the cost of capital is 7.8%??

c. In this? case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best? opportunity?

a. Which investment has the higher? IRR?

The IRR of investment A is -------?%. (Round to the nearest? integer.)

9)

Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $17 million upfront investment and will generate $20 million in savings for Facebook each year for the next 3 years. The second bid from Cisco requires a $82 million upfront investment and will generate $60 million in savings each year for the next 3 years. a. What is the IRR for Facebook associated with each bid? b. If the cost of capital for each investment is 12%, what is the net present value (NPV) for Facebook of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $24 million upfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as with Cisco's original bid. c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now? d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain. a. What is the IRR for AOL associated with each bid? The IRR associated with the first bid from Huawei is --------%.(Round to one decimal place.)

10)

Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $21 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 45% will come from customers who switch to the new, healthier pizza instead of buying the original version.?? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? b. Suppose that 44% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? The incremental sales are $ -------- million. (Round to two decimal places.)

11) Cellular Access Inc., is a cellular telephone service provider that reported net operating profit after tax (NOPAT) of $241 million for the most recent fiscal year. The firm had depreciation expenses of $102 million, capital expenditures of $220 million, and no interest expenses. Working capital increased by $13 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year. The free cash flow is $ --- million. (Round to the nearest integer.)

12) A bicycle manufacturer currently produces 255,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $253,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $27,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $18,975. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is $ ------. (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 4% per annum and pays six-month LIBOR on a principal of $10 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 2% per annum. What is the loss to the financial institution? Assume that six-month LIBOR was 3% per annum halfway through year 3 and that at the time of default all OIS rates are 1.8% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,100 per month, and the rent is $2,300 per month. In addition, she must make a tax payment of $14,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $160,000.

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

1. Prepare a cash budget for December, January, and February. Use a minus sign to enter negative values for net cash flows, cumulative NCF values, and loans needed, if any. If the answer is zero, enter "0". Do not round intermediate calculations. Round your answers to the nearest dollar.

   Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this question are minimal.) Use a minus sign to enter a negative value for loan requirements. Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,259.00 to install, $5,190.00 to operate per year for 7 years at which time it will be sold for $6,843.00. The second, RayCool 8, costs $41,089.00 to install, $2,059.00 to operate per year for 5 years at which time it will be sold for $9,063.00. The firm’s cost of capital is 5.22%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

You are given the following information on the best guess of related outcomes for a project. The initial cash outlay for developing and market testing the product over the next year IS $70M. Following the test, the company will spend another $400M to put the productive capabilities in place at the END of the year. If the test is successful, which is expected to have a probability of 0.8, the expected annual cash flows will be $150M for five years. If the test fails, the expected annual cash flows will be $50M for five years. The discount rate is 12%. (a) Compute the NPV of this project at time 0 assuming that the project will be implemented regardless of the outcome of the test. Given that the value at the END of the testing year of the 5-year $150M annuity is $540.72M, and that of the 5-year $50M annuity is $180.24M. ( b) Say, you are given the option to upgrade by building a better production facility at a cost of $500M if the test fails. The upgraded facility is expected to generate annual cash flows of $100M for five years. Note that the base facility and cash flows estimates will apply if the test is successful. Compute the value of the option to upgrade at time 0.

Identify and describe the major steps involved in financial planning.

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

There are two bonds A and B. Both have the same maturity of 10 years. A has 3% coupon rate while B offers 10% coupon rate. The current yield to maturity for both bonds is 10%.

8. What are the bond prices?

Bond A                       Bond B

9. If the YTM goes up to 15% for both bonds, what are the bond prices?

10. Which bond has larger price change?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $250,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $43,000. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $23,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%.

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 dollar. $

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 dollar.

Year 1:

Year 2:

Year 3:

If the WACC is 14%, should the spectrometer be purchased?