Suppose that a company currently manufactures widgets and requires immediate cash payment upfront for all sales. They also pay immediately for all goods produced.

Suppose the following:

Current Price per unit (P) = $9

Current average monthly sales quantity (Q) = 10,000

Variable cost per unit (v) = $4

Fixed costs = $0 per month

In order to solve this problem, you will need to model the cash flows in each month. For simplicity, assume that ALL cash flows (both positive and negative) occur on the same day each month. Also, assume that today is time 0, next month is time 1, the following month is time 2, etc.). Assume that cash flows will happen each period forever.

ANNUAL required rate of return = 15%

i) What is the present value of all cash flows, including those occurring today?

Present Value = $ (Round to the nearest dollar, with NO decimal! Do NOT use commas!)

The company is considering a change to its credit policy whereby it will require payment within 30 days of the sale (Net 30) instead of cash upfront. Assume that all customers will pay on the due date. It is believed that, under the new policy, price will increase by $1/unit and average monthly sales will increase to 10,500. There is no anticipated change to variable unit costs.

ii) What is the net present value (NPV) of this proposed policy change if the company were to make the change immediately (ie. today, in period 0)? (HINT: Be careful! I am not asking for the present value of the new cash flows, I am asking for the NPV of the CHANGE in cash flows!)

NPV = $ (Round to the nearest dollar, with NO decimal! Do NOT use commas!)

A stock's returns have the following distribution:

Assume the risk-free rate is 3%. Calculate the stock's expected return, standard deviation, coefficient of variation, and Sharpe ratio. Do not round intermediate calculations. Round your answers to two decimal places.

Stock's expected return:   %

Standard deviation:   %

Coefficient of variation:

Sharpe ratio:

RAK, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 25 percent lower. RAK is considering a $95,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0. a-1 Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % a-2 Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) % change in ROE Recession % Expansion % Assume the firm goes through with the proposed recapitalization. b-1 Calculate the return on equity (ROE) under each of the three economic scenarios. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % b-2 Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) % change in ROE Recession % Expansion % Assume the firm has a tax rate of 35 percent. c-1 Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % c-2 Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) % change in ROE Recession % Expansion % c-3 Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) ROE Recession % Normal % Expansion % c-4 Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) % change in ROE Recession % Expansion %

Consider a 4-year, adjustable rate mortgage with an original balance of 15,000 and an initial interest rate of 5.9%. Suppose right after the month 6 payment has been made, the interest rate goes up by 0.8%. What is the new monthly payment in the following month?

(4) Suppose you observe the following situation:
Security Beta Expected Return
Pete Corp. 1.15 12.90%
Repete Co. 0.84 10.20%
Assume the two securities are correctly priced. Based on CAPM, what is the expected return on the market? What is the risk-free rate? (15 points)

Prompt 1
MM’s dividend irrelevance theory states that dividend policy does not affect either stock prices or the required rate of return on equity. This implies that shareholders should be indifferent as to which form of payout the firm chooses. At the same time, firms spend a good amount of resources over planning their payout policies.

• Discuss why firms spend so much time and money planning their payout policies if it doesn’t affect stock or the required rate of return on equity?

Prompt 2
Now, read the description/report below (from page 497-9 of your textbook).

We forecasted the total market demand for our products, what our share of the market is likely to be, and our required investments in capital assets and working capital. Using this information, we developed projected balance sheets and income statements for the period 2015–2019.

Our 2014 dividends totaled $50 million, or $2.00 per share. On the basis of projected earnings, cash flows, and capital requirements, we can increase the dividend by 6% per year. This would be consistent with a payout ratio of 42%, on average, over the forecast period. Any faster dividend growth rate would require us to sell common stock, cut the capital budget, or raise the debt ratio. Any slower growth rate would lead to increases in the common equity ratio. Therefore, I recommend that the Board increase the dividend for 2015 by 6%, to $2.12, and that it plan for similar increases in the future.

Events over the next 5 years will undoubtedly lead to differences between our forecasts and actual results. If and when such events occur, we should reexamine our position. However, I am confident that we can meet random cash shortfalls by increasing our borrowings—we have unused debt capacity that gives us flexibility in this regard.

We ran the corporate model under several scenarios. If the economy totally collapses, our earnings will not cover the dividend. However, in all likely scenarios our cash flows would cover the recommended dividend. I know the Board does not want to push the dividend up to a level where we would have to cut it under poor economic conditions. Our model runs indicate, though, that the $2.12 dividend could be maintained under any reasonable set of forecasts. Only if we increased the dividend to more than $3.00 would we be seriously exposed to the danger of having to reduce it.

I might also note that most analysts’ reports are forecasting that our dividends will grow in the 5% to 6% range. Thus, if we go to $2.12, we will be at the high end of the forecast range, which should give our stock a boost. With takeover rumors so widespread, getting the stock price up a bit would make us all breathe a little easier.

Finally, we considered distributing cash to shareholders through a stock repurchase program. Here we would reduce the dividend payout ratio and use the funds generated to buy our stock on the open market. Such a program has several advantages, but it would also have drawbacks. I do not recommend that we institute a stock repurchase program at this time. However, if our free cash flows exceed our forecasts, I would recommend that we use these surpluses to buy back stock. Also, I plan to continue looking into a regular repurchase program, and I may recommend such a program in the future.

• Discuss how stable this firm seems to be based on the payout policy they are undertaking.

Multiple Choice

• $-33,676.58

• $-31,222.32

• $-106,712.05

• $-35,360.41

17. An one-year European call option has the strike price of $60. The underlying stock pays no dividend and currently sells for $70. One time step is six months long, and the stock price may move up or down by 10% in each step. The risk-free rate is 3% per annum. (a) What is the risk-neutral probability of an increase in the stock price in each step? (b) What is the time-0 current price of the call? (c) Find the replicating portfolio that we construct in time 0 to generate the same value as the call six months later. (d) Suppose that risk-averse investors require the stock return to be 12% per annum. In the approach of Discounted Cash Flow, what is the discount rate for the call per annum?

1. a bond has a face (maturity) value of $1000, 5 years til maturity, an annual coupon rate of 7% and ayield to maturity of 5%. how much willl the bond price change in 1 year if the yield remains constant?

2. What is the current yield on the bond at 1year and year 2?

QUESTION 96

1. A baseball player is offered a contract that will pay $1,455,382 per year for 5 years, followed by $2,113,877 per year for 3 years, followed by $2,633,054 per year for 7 years. All contract payments are paid at the end of the year. If the player's required rate of return is 5.7%, how much is this contract worth? State your answer to the nearest whole dollar.

QUESTION 97

1. A company is considering the purchase of a new production line that it has estimated will generate the following annual cash flows:  $5,710,498 per year for 8 years, followed by $7,672,287 per year for 2 years, followed by $3,519,326 per year for 15 years. All cash flows will be received at the end of the year. If the company's required rate of return is 12.4%, what is the maximum price at which the company will purchase this new line? State your answer to the nearest whole dollar.

QUESTION 98

1. Assume that you will receive $8,766 per year for 4 years, followed by $4,590 per year for 8 years, followed by $7,686 per year for 3 years. All cash flows are to be received at the end of the year. If the required rate of return is 14.9%, what is the present value of these cash flows? State your answer to the nearest whole dollar.

QUESTION 99

1. What is the present value of a 28-year ordinary annuity with annual payments of $118,60480,000, evaluated at a 7.1 percent interest rate? State your answer to the nearest whole dollar.

QUESTION 100

1. What is the effective annual interest rate on an investment that quotes a nominal annual rate of 8.79% compounded quarterly? State your answer as a percentage to 2 decimal places

Lease or purchase fixed assets, the pros and cons and how does it effect corporate strategy?? Please Explain In Detail

Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 7.5%.

1. Which unit would you recommend?
   1. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR.
   2. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed.
   3. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV.
   4. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since LCC's NPV of costs is lower than HCC's, LCC would be chosen.
   5. Since we are examining costs, the unit chosen would be the one that had the lower NPV of costs. Since HCC's NPV of costs is lower than LCC's, HCC would be chosen.
   
   
2. If Kim's controller wanted to know the IRRs of the two projects, what would you tell him?
   1. The IRR of each project will be positive at a lower WACC.
   2. There are multiple IRR's for each project.
   3. The IRR of each project is negative and therefore not useful for decision-making.
   4. The IRR cannot be calculated because the cash flows are all one sign. A change of sign would be needed in order to calculate the IRR.
   5. The IRR cannot be calculated because the cash flows are in the form of an annuity.
   
   
3. If the WACC rose to 15% would this affect your recommendation?
   1. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any project that has a negative NPV.
   2. When the WACC increases to 15%, the NPV of costs are now lower for LCC than HCC.
   3. When the WACC increases to 15%, the NPV of costs are now lower for HCC than LCC.
   4. When the WACC increases to 15%, the IRR for LCC is greater than the IRR for HCC, LCC would be chosen.
   5. When the WACC increases to 15%, the IRR for HCC is greater than the IRR for LCC, HCC would be chosen.
   
   
   
   Explain your answer and the reason this result occurred.
   1. The reason is that when you discount at a higher rate you are making negative CFs higher and this lowers the NPV.
   2. The reason is that when you discount at a higher rate you are making negative CFs smaller and this lowers the NPV.
   3. The reason is that when you discount at a higher rate you are making negative CFs smaller thus improving the NPV.
   4. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the IRR.
   5. The reason is that when you discount at a higher rate you are making negative CFs higher thus improving the NPV.

Draft an individual investment policy statement as a guide to your future investment planning thus bringing out the advantages of having an investment policy statement