Assume that security returns are generated by the single-index model,

R_i = α_i + β_iR_M + e_i
where R_i is the excess return for security i and R_M is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data:

a. If σ_M = 22%, calculate the variance of returns of securities A, B, and C.

b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C?

Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chair of the board of directors of both Featherbed and the Morris Group, and Sarah is a director of both companies as well as the CFO of Featherbed.

In February 2020, Justin Morris approached your audit firm, KFP Partners, to carry out the Featherbed audit for the year ended June 30, 2020. Featherbed has not been audited before but this year the audit has been requested by the company’s bank and a new private equity investor group that has just acquired a 20-percent share of Featherbed.

Featherbed employs 30 full-time staff. These workers are employed in administration, accounting, catering, cleaning, and hotel/restaurant duties. During peak periods, Featherbed also uses part-time and casual workers. These workers tend to be travellers visiting the West Coast who are looking for short- term employment to help pay their traveling expenses.

Justin and Sarah have a fairly laid-back management style. They trust their workers to work hard for the company and they reward them well. The accounting staff, in particular, are very loyal to the company. Justin tells you that some accounting staff enjoy their jobs so much they have never taken any holidays, and hardly any workers ever take sick leave.

There are three people currently employed as the accountants, the most senior of whom is Peter Pinn. Peter heads the accounting department and reports directly to Sarah. He is in his fifties and plans to retire in two or three years. Peter prides himself on his ability to delegate most of his work to his two accounting staff, Kristen and Julie. He claims he has to do this because he is very busy developing a policy and procedures manual for the accounting department. This delegated work includes opening mail, processing payments and receipts, banking funds received, performing reconciliations, posting journals, and performing the payroll function. Julie is a recently graduated Chartered Professional Accountant. Kristen works part-time—coming into the office on Mondays, Wednesdays, and Fridays. Kristen is responsible for posting all journal entries into the accounting system and the payroll function. Julie does the balance of the work, but they often help each other out in busy periods.

Required

Using the factors in the above scenario, assess audit risk.

Your company is about to undertake a major investment project. The project will require an initial outlay of $100 million for fixed assets plus another $50 million for working capital. Tax authorities will allow you to depreciate the fixed assets on a straight-line basis over four years to a salvage value of zero. In fact, however, you expect that you can sell the fixed assets for $25 million at the end of Year 4. You also expect that you can recover your working capital at its book value at that time. You expect that the project will generate $60 million in revenue and $30 million in cash operating expenses (excluding depreciation) during each of the next four years. The corporate tax rate is 40%.

1. a) What are the cash flows for each year of the project’s life that you would use in conducting an NPV analysis of the project? (Be sure to show the cash flow components, rather than just showing a single number for each year.)

2. b) If the cost of capital is 10%, what is the project’s NPV?

3. c) What is the minimum price at which you could sell the fixed assets at the end of Year 4 in order for the project to be just acceptable?

Hampton Industries had $35,000 in cash at year-end 2018 and $10,000 in cash at year-end 2019. The firm invested in property, plant, and equipment totaling $140,000 — the majority having a useful life greater than 20 years and falling under the alternative depreciation system. Cash flow from financing activities totaled +$110,000. Round your answers to the nearest dollar, if necessary.

1. What was the cash flow from operating activities? Cash outflow, if any, should be indicated by a minus sign.

   $   

2. If accruals increased by $10,000, receivables and inventories increased by $140,000, and depreciation and amortization totaled $33,000, what was the firm's net income?

The most recent financial statements for Crosby, Inc., follow. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. Assume the firm is operating at full capacity and the debt-equity ratio is held constant.

Complete the pro forma income statements below. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Refer to the following financial statements of Bongo Comics Group.

Bongo Comic Group Income Statements (In 000’s, except EPS)

Bongo Comics Group Balance Sheets (In 000’s) as of Dec. 31, Years Ended

a. How long, on average, was Bongo Comics Group taking to collect on its receivable accounts in 2018? (Assume all of the company’s sales were on credit.)

b. Was Bongo Comics Group more or less profitable in 2018 than in 2016? Justify your answer by examining the net profit margin and return on assets ratios.

c. Was Bongo Comics Group more or less liquid at the end of 2018 than it was at the end of 2016? Justify your answer using the curre

Explain the net present value formula and also explain what the net present value represents.

Dickinson Company has $11,800,000 million in assets. Currently half of these assets are financed with long-term debt at 9.0 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.0 percent. The tax rate is 35 percent. Tax loss carryover provisions apply, so negative tax amounts are permissible.

Under Plan D, a $2,950,000 million long-term bond would be sold at an interest rate of 11.0 percent and 368,750 shares of stock would be purchased in the market at $8 per share and retired.

Under Plan E, 368,750 shares of stock would be sold at $8 per share and the $2,950,000 in proceeds would be used to reduce long-term debt.

a. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.)

b-1. Compute the earnings per share if return on assets fell to 4.50 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

b-2. Which plan would be most favorable if return on assets fell to 4.50 percent? Consider the current plan and the two new plans.
  

• Plan E

• Current Plan

• Plan D

b-3. Compute the earnings per share if return on assets increased to 14.0 percent. (Round your answers to 2 decimal places.)

b-4. Which plan would be most favorable if return on assets increased to 14.0 percent? Consider the current plan and the two new plans. Current Plan Plan D Plan

E c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,950,000 million in debt will be used to retire stock in Plan D and $2,950,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.0 percent. (Round your answers to 2 decimal places.)

c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive? Plan D Current Plan Plan E

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $1,175. If the yield to maturity remains at its current rate, what will the price be 5 years from now? Select the correct answer. a. $1,159.09 b. $1,165.29 c. $1,168.39 d. $1,162.19 e. $1,155.99

1. The Gulf Power Company currently is an all-equity firm. The value of Gulf Power's equity is $12,000,000 and there are 600,000 shares outstanding. The expected annual EBIT of Gulf Power is $2,400,000. Those earnings are also expected to remain constant into the foreseeable future. Gulf Power is in the 40-percent tax bracket. The Gulf Power Company plans to announce that it will issue $3,000,000 of perpetual bonds and uses the proceeds to repurchase common stock. The bonds will have a 5-percent coupon rate. After the sale of the bonds, Gulf Power will maintain the new capital structure indefinitely. The MM theory applies.   What is the firm's cost of capital before the capital restructuring?

   		8%
   		13%
   		12%
   		20%

You are considering making a movie. The movie is expected to cost $10.9 million up front and take a year to produce. After​ that, it is expected to make $4.9 million in the year it is released and $1.8 million for the following four years. What is the payback period of this​ investment? If you require a payback period of two​ years, will you make the​ movie? Does the movie have positive NPV if the cost of capital is 10.6%​?

What is the payback period of this​ investment?  

The payback period is years.  ​(Round to one decimal​ place.)

If you require a payback period of two​ years, will you make the​ movie?

▼

No

Yes

. ​(Select from the​ drop-down menu.)

Does the movie have positive NPV if the cost of capital is 10.6%​?

If the cost of capital is 10.6%​, the NPV is ​$   million. (round to 2 decimal places) ​

Suppose that the Index Model for the excess returns of stocks A and B is estimated with the following results: RA = 0.01 + 0.80 * Rm + eA RB = -0.02 + 1.5 * Rm + eB Stdev(Rm)=0.25 Stdev(eA)=0.40 Stdev(eB)=0.20 What is the Standard Deviation of each Stock. What is the Covariance between Stock A and Stock B. What is the Correlation between Stock A and Stock B

You are choosing between two projects. The cash flows for the projects are given in the following table​ ($ million):

a. What are the IRRs of the two​ projects?

b. If your discount rate is 4.9%​, what are the NPVs of the two​ projects?

c. Why do IRR and NPV rank the two projects​ differently?

c. Why do IRR and NPV rank the two projects​ differently? ​ (Select from the​ drop-down menus.)

NPV and IRR rank the two projects differently because they are measuring different things.

▼

NPVNPV

IRRIRR

is measuring value​ creation, while

▼

NPVNPV

IRRIRR

is measuring return on investment. Because returns do not scale with different levels of​ investment, the two meas

Karim deposits $100 every two years for 40 years into an account that earns an effective annual interest rate i. The accumulated value after 20 years is X. The accumulated value after 40 years is Y.

a) i = 2%. Find X. Find Y.

b) i is unknown, but Y = 4X. Find i. Find X.

One bond has a coupon rate of 5.4%, another a coupon rate of 8.2%. Both bonds pay interest annually, have 13-year maturities, and sell at a yield to maturity of 7.5%.

a. If their yields to maturity next year are still 7.5%, what is the rate of return on each bond?