You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which distributes alcohol, while the other manufactures bottles for brewers and beverage companies. The company is considering a capacity expansion project in the alcohol distribution division, and the Board of Directors has asked you to provide a financial analysis of the project.

• The project would require an initial investment of $100 million for a new distribution center. In addition, $20 million in additional working capital would need to be committed to the project. The working capital will be recovered at the end of the project life.

• The distribution center facilities would be depreciated on a straight-line basis over five years. At the end of five years, you estimate that the center will be sold for $20 million.

• The distribution center is expected to generate cash revenues of $85 million per year and cash operating costs of $50 million per year in each of the next five years.

• The corporate tax rate is 40%.

• The book value of ABC’s assets is $20 billion, while the book value of its outstanding debt is

  $5 billion. ABC’s equity has an estimated beta of 1.2.

• The expected return on the market portfolio is 15%, while the risk-free rate of return is 5%.

• ABC could issue new debt at a yield to maturity of 8%.

• Companies that operate purely in the bottle manufacturing industry have an average beta of 1.5 and an average debt-equity ratio (measured at market value) of one quarter.

• Companies that operate purely in the alcohol distribution industry have an average beta of 0.5 and an average debt-equity ratio (measured at market value) of two-thirds.

  Based on information above, you are to complete the project analysis to present the Board meeting that is scheduled tomorrow.

1. a) Calculate the weighted average cost of capital.

2. b) Calculate the free cash flow of each year for the expansion project.

3. c) What is the NPV for the project?

1. A firm trading on the New York Stock Exchange just posted extraordinary earnings (income) after its controller implemented a new method of depreciation. Its stock price does not increase at all. Which principle of finance best explains this phenomenon?

2. Martha plans to graduate as a nurse next year and has begun planning her future with her financial planner. she forecasts her annual income to be 50,000 a year for the next 20 years, and plans to spend approximately 38,000 annually. After working hard during those years and completing her MBA, she plans to significantly increase her annual income in the subsequent 20 years. She expects to earn 90,000 a year in her managerial role. the financial planner informs her the the real risk-free interest rate over the next forty years is expected to be 5% annually.

a. Use the lifetime budget constraint to determine her maximum annual expenditures beginning in twenty years?

b. How is the answer in part (a) if the interest rate is 10%?

c. How does your answer change if she reduces her spending in the first 20 years to 30,000?

d. What is the opportunity cost of the annual $8,000 of additional expenditures in part (a)?

You have been hired as an analyst for Mellon Bank and your team is working on an independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the production of freshly imported farm products from France. Your assistant has provided you with the following data for Flipper Inc and their industry.

1. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).” Is the CEO correct? Explain and use only relevant information in your analysis.

2. What can you say about the firm's asset management? Be as complete as possible given the above information, but do not use any irrelevant information.

3. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.

Please use Excel financial functions or algebraic time value of money equations.

Prof. Business has a self-managed retirement plan through her University and would like to retire in 8years and wonders if her current and future planned savings will provide adequate future retirement income. Here’s her information and goals.

Prof. Business wants a 20-year retirement annuity that begins 8 years from today with an equal annual payment equal to $110,000 today inflated at 2% annually over 8 years. Her first retirement annuity payment would occur 8 years from today. She realizes her purchasing power will decrease over time during retirement.

Prof. Business currently has $640,000 in her University retirement account. She expects these savings and any future deposits into her University and any other retirement account will earn 7.5% compounded annually. Also, she expects to earn this same 7.5% annual return after she retires.

Answer the following questions to help Prof. Business finalize her retirement planning.

1.What is Prof. Business’ desired annual retirement income?

2.How much will Prof. Business need 8 years from today to fund her desired retirement annuity?

3.In addition to the $640,000 balance today, Prof. Business will fund her future retirement goal from question 2 by making 8 annual equal deposits at 7.5% compounded annually into her retirement accounts starting a year from today (the last deposit will be made when Prof. Business retires). How large does this annual deposit need to be in addition to the initial $640,000 invested in Prof. Business’ retirement fund?

4.This annual figure from #3 is morethan the Prof.’s current annual contribution, which makes her feel a little anxious about her future planned retirement. Also, Prof. Business’ annual retirement account contribution is based on a percentage of her salary and will increase as her salary increases. So, let’s re-plan her retirement income. Let’s account for the fact that her and the University’s contributions to Prof. Business’ University retirement plan are based on a certain percentage of her salary and will increase as her salary increases. Based on this formula, her first upcoming end of the year deposit will be $20,200 and let’s assume that her annual deposit and salary will grow at a 2% annual rate over the remaining 7 years (8 total deposits) to Prof. Business’ retirement. These deposits are in addition to the $640,000 she currently has today in the University retirement plan. Answer the following based on these assumptions. a)How much money will Prof. Business have in her retirement account immediately after her last deposit 8 years from today? b)What would be the equal annual payment from her 20-year retirement annuity whose first payment occurs exactly 8 years from today?

Your company is planning to borrow $2.75 million on a 7-year, 15%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? Round your answer to two decimal places.

57. Lita and Linda are partners in a general partnership and have borrowed $10,000 from the bank to finance their start-up. How is their liability for the bank loan best characterized?
a.
limited liability
b.
joint liability
c.
proportional limited liability
d.
full and complete impunity
58. Which statement best describes how a partnership comes into existence?
a.
The partners must sign a written partnership agreement.
b.
The partners must register the partnership.
c.
Two or more people carry on business together with a view to profit.
d.
Two or more people purchase property together.
59. Ray and Mohammed are forming a general partnership but have not yet discussed how profits will be shared between them. Which statement best describes their legal situation?
a.
General partners are always required to share profits equally.
b.
They are automatically entitled to a share proportional their relative contributions to the capital of the partnership.
c.
They cannot have a partnership until they determined how profits will be shared.
d.
If they fail to agree, partnership legislation requires them to share profits equally.

67. The Partnership Act provides for the following rule: “all partners are to share equally in the capital and profits of the business and must contribute equally to the losses.” Which statement best exemplifies this rule?
a.
The losses are restricted to the capital investments made by each partner.
b.
This rule is optional and may be varied by written agreement.
c.
This rule is mandatory and cannot be modified by agreement.
d.
The rule applies only to limited liability partnerships.
68. What is a positive feature of carrying on business as a limited partnership?
a.
All partners are completely shielded from negligent or wrongful acts of partners.
b.
They can be used as an investment device.
c.
They can be created informally.
d.
All partners have the same rights

A trader can sell gold at $794.00 per ounce and buy it at $800.00 per ounce. The trader can invest money at 5.7% per year and borrow money at 6% per year, each compounded annually.

For what range of two-year forward prices of gold does the trader have no arbitrage opportunity? Assume no storage costs.

During the most recent fiscal year, Medical Electronics Corporation sold 2,560,000 health monitoring devises at $60 per unit. Variable operating costs were 60% of sales ($36 per unit), while fixed operating costs were $12,288,000. The cost of outstanding debt (interest expense) was $4,152,000. Medical Electronics Corporation’s tax rate is 30%. The company does not sell any other product. (PLEASE SHOW YOUR WORK).

a) Construct Medical Electronics Corporation’s income statement for the most recent fiscal year (complete the following table).

b) Compute the degree of financial leverage (DFL)

c) Interpret the calculated DFL.

d) Compute the Operating Break-even point in dollars.

e) Compute the Operating Break-even point in units.

Kumquat Farms Ltd. has decided to acquire a kumquat picking machine. The cost of the picking machine is $45,000, and it has an economic life of 10 years. At the end of seven years, the market (salvage) value is estimated to be $11,000. Seven years is the time horizon for analysis.

The owner of Kumquat Farms Ltd. has discussed this acquisition with his financial services conglomerate. It has agreed to lend him the purchase price at 10 percent per year, payable in equal blended payments at the end of each year, for seven years.

An alternative method of financing the equipment would be to lease it from the local leasing store. Annual lease payments, payable at the beginning of each of the next seven years, would be $7,750. This would be considered an operating lease.

The equipment has a CCA of 20 percent. The benefits of any tax shields are realized at the end of each year. The company’s tax rate is 25 percent. Kumquat Farms’ cost of capital is 16 percent.

a-1. Calculate PV cost of lease alternative. (Do not round intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost           $

a-2. Calculate PV cost of borrowing/purchase alternative. (Do not round intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost           $

b. Should Kumquat Farms Ltd. lease or buy the picking machine?

• Lease

• Borrow/Purshase

Simon recently received a credit card with a 12% nominal interest rate. With the card, he purchased an Apple iPhone 7 for $372.57. The minimum payment on the card is only $10 per month.

1. If Simon makes the minimum monthly payment and makes no other charges, how many months will it be before he pays off the card? Do not round intermediate calculations. Round your answer to the nearest whole number.

     month(s)

2. If Simon makes monthly payments of $35, how many months will it be before he pays off the debt? Do not round intermediate calculations. Round your answer to the nearest whole number.

     month(s)

3. How much more in total payments will Simon make under the $10-a-month plan than under the $35-a-month plan. Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

The market consensus is that Analog Electronic Corporation has an ROE = 13%, a beta of 2.00, and plans to maintain indefinitely its traditional plowback ratio of 3/5. This year’s earnings were $3.40 per share. The annual dividend was just paid. The consensus estimate of the coming year’s market return is 11%, and T-bills currently offer a 5% return.

a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price?

b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Leading?

Trailing?

c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO?

d. Suppose your research convinces you Analog will announce momentarily that it will immediately change its plowback ratio to 2/5. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Intrinsic Value?

An investment project costs $16,400 and has annual cash flows of $3,500 for six years.

a. What is the discounted payback period if the discount rate is zero percent?

b. What is the discounted payback period if the discount rate is 5 percent?

Marine Tech is a young firm with a niche market in heavy equipment, specifically for the marine industry. Its owners are considering an IPO and have come to you for advice. Their projections show initial years of negative FCF, after which the numbers improve considerably. What are the methods you will use to value their firm and why? How would you advise them to price their IPO and why?

Jan sold her house on December 31 and took a $35,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.

$  

b. How much interest was included in the first payment? Round your answer to the nearest cent.

$  

How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

How do these values change for the second payment?

1. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.
2. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases.
3. The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan.
4. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines.
5. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases.

c. How much interest must Jan report on Schedule B for the first year? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Will her interest income be the same next year?
-Select-Her interest income will increase in each successive year.Her interest income will remain the same in each successive year.She will not receive interest income, only a return of capital.Her interest income will decline in each successive year.She will receive interest only when the mortgage is paid off in 10 years.Item 6

d. If the payments are constant, why does the amount of interest income change over time?

1. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases.
2. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.
3. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines.
4. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines.
5. As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same.