1. (a)   Into what broad categories is consumer borrowing normally divided? Which category is most important and Why?

                      (b)   What is the difference between CREDIT CARDS and DEBIT CARDS?

                      (c)   What advantage does a credit card grant its owner? A debit card? What are the principal disadvantages of each?

                     (d)   Which sector of the economy usually provides the greatest amount of loanable funds for borrowers to draw upon? Does this sector make primarily direct loans or indirect loans to borrowers?   

A major new client has requested your company to present an investment seminar to the municipal mayors of the represented Metros. As an investment specialist, you have been tasked to assist your company in preparing the presentation. To illustrate the common share valuation process, you have been asked to analyze Business Analytics, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following:

2.1 Assume that Business Analytics has a beta coefficient of 1.2, that the risk-free rate ( the yield on T-bonds) is 3%, and that the required rate of return on the market is 8%. What is Business Analytic's required rate of return?

2.2 Assume that Business Analytics is a constant growth company whose last dividend (D0, which was paid yesterday) was R2.00 and whose dividend is expected to grow indefinitely at a 4% rate.

i. What is the company's expected dividend stream over the next 3 years?

ii. What is its current share price?

iii. What is the share's expected value 1 year from now?

2.3 now assume that the share is currently selling at R40.00. What is its expected rate of return?

2.4 What would the share price be if its dividends were expected to have zero growth?

2.5 Now assume that Business Analytics'dividend is expected to grow at 30% in the first year, 20% in the second year, 10% in the third year, and return to its long-run constant growth rate of 4%. What is the share's value under these conditions?

2.6 Suppose Business Analytics' is expected to experience zero growth during the first 3 years and then resume its steady-state growth of 4% in the fourth year. What would be its value then?

2.7 Finally, assume that Business Analytics' earnings and dividends are expected to decline at a constant rate of 4% per year, that is, g=-4%. Why would anyone be willing to buy such a share, and at what price should it sell?

2.8 suppose Business Analytics' embarked on an aggressive expansion that requires additional capital. Management decided to finance the expansion by borrowing R40 million and by halting dividend payments to increase retained earnings. Its WACC is now 7% and the projected free cash flows for the next three years are -R5 million, R10 million, and R20 million respectively. After Year 3, free cash flow is projected to grow at a constant 5%. What is Business Analytics' market value of operations? If it has 10 million shares, R40 million of debt and preferred share combined, and R5 million of non-operating assets, what is the price per share?

2.9 Suppose Business Analytics decided to issue preferred share that would pay an annual dividend of R5.00 and that the issue price was R100.00 per share. What would be the share's expected return? Would the expected rate f return be the same if the preferred share was a perpetual issue or if it had a 20-year maturity?

Again, suppose silver is currently selling at $4.23 per ounce in the spot market. Assume as well that the current risk-free rate (implied repo rate) is 3.75% and that silver contracts involve 5000 ounces each. Also, now assume that carrying costs (storage and insurance) for silver are accessed at .31% (0.0031) per ounce price.

a. Including carrying costs, what should the 6 month (180 days) silver futures contract be selling for according to the cost-of-carry model?

b. If the 6 month (180 day) futures contract for silver is selling for $4.18 per ounce, what should you, as an investor, do?

c. What arbitrage profit will you realize if you decide to work with two (2) silver contracts?

These are the correct answers, how do I get to them?

a. $21,600 (at a price of $4.32/oz.)

b. reverse cash-and-carry arbitrage needed

c. $1293.13

In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made logs that can be burned in fire places, fire pits in the backyard, and when camping. The logs are made from environmental friendly products like cardboard and clean wax and emit fewer greenhouse gases and less harsh chemicals. The logs come in three pound and five pound sizes. Green-logs are also available with citronella to ward off mosquitos. The Green-Logs have been well received. Revenue and profits have grown steadily. Based on the recommendation from her sales and marketing department Ms. Green is considering adding a new product line of Green-Log fire starters. These fire starters would be ideal for the outdoor market of camping, fishing, backpacking, and tailgating. Ms. Green has asked her sales and marketing team to come up with a sales forecast for units and pricing. She has also asked her manufacturing team to come up with alternatives for the production of the fire starters including what equipment is needed and what the projected costs would be. The sales and marketing team hired Smith and Smith Consulting to conduct a market survey. The total cost for this consulting was $32,500. Based on the survey and their own experience the sales and marketing has provided a sales forecast. The suggested price of the fire starter is $2.50 per starter and they would be sold as a four pack for $10.00. The unit sales forecast is 20,000 4-packs in year 1, 45,000 in year 2, 60,000 in year 3, 75,000 in year 4, and then increasing by 5,000 each year thereafter. Sales and marketing expenses are expected to be 10% of total revenue. The production team forecasts that the fixed costs needed for the fire starter production line will be $90,000 per year. Variable costs for materials (cardboard, wood shavings, wax, packaging, etc.) will be $0.85 per unit or $3.40 per four pack. The labor and maintenance costs will vary based on what equipment will be purchased. There are two brands of equipment that will do the job; The ABC brand and the XYZ brand. The ABC brand is more expensive, but higher quality and more efficient. It will cost $525,000 plus an additional $30,000 for shipping and installation. The equipment would be depreciated to zero over 5 years using straight line depreciation. It is expected that the equipment would last for 8 years and would be sold then for $55,000. Maintenance of the ABC equipment would cost $5,000 per year but every 3 years the equipment would need an overhaul that would increase the cost to $75,000 for that year. Since the ABC equipment is more efficient the variable labor cost would be $0.60 per four pack. The XYZ brand is less expensive. It will cost $395,000 plus an additional $40,000 for shipping and installation. The equipment would be depreciated to zero over 5 years using straight line depreciation. It is expected that the equipment would last for 8 years and would be sold then for $35,000. Maintenance of the ABC equipment would cost $10,000 per year but every 3 years the equipment would need an overhaul that would increase the cost to $85,000 for that year. The variable labor cost with the XYZ brand equipment would be $0.80 per four pack. The increase in working capital (accounts receivable and inventory) is expected to be $60,000 at the beginning of the project and will be the same for both machines. The company’s cost of capital is 14% and its tax rate is 40%. Since her production team believes that both brands of equipment will last for eight years Michelle wants this analyzed as an eight year project. Michelle has always believed in buying quality so she is leaning towards the ABC brand equipment. But after hearing that you have learned about capital budgeting in your Finance class at UVU she wants to take advantage of your expertise. Michelle has asked you to analyze her choices and give her some advice on which option would provide the best financial outcome for Green-Log Manufacturing. Prepare an analysis and professional report for Michelle. The report should be professionally written and include a two page letter, plus attached schedules. The letter should explain what analytical techniques you are using, why you are using those techniques, what the results show, what you would recommend to Michelle and why. Make sure that the letter is well organized and professionally written. Also make sure that the letter includes the following: 1. The cash flows associated with the different equipment brands for each year of the project. 2. The PB period, Discounted PB, IRR, and NPV for the two alternatives. 3. Your recommendation of which brand of equipment should be purchased.

Question 9

One year ago, XYZ Co. issued 16-year bonds at par. The bonds have a coupon rate of 6.49 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 6.85 percent. What is the percentage change in the bond price over the past year? Answer to two decimals

Question 10

Suppose ABC Co. issues $18.37 million of 17 year zero coupon bonds today. If investors require a return of 6.18 percent compounded semiannually and all the bonds remain outstanding until they mature, how much (in $ millions) will ABC have to pay to redeem the bonds. Answer in millions to two decimals - ie, if you get $50,268,382, you should enter 50.27.

3.There are three zero coupon bonds. Their prices are:1 year =$920; 2 year =$840; 3 year =$750.

Three zero coupon bonds have the face value of 1000.

To calculate YTM

Year 1   

Face value = Price (1+ YTM)

1000 = 920 ( 1+ YTM)

1+ YTM = 1000/920

YTM = 1.0896-1

YTM = 0.0869 = 8.70%

Year 2

Face value = Price (1+ YTM)²

1000 = 840 ( 1+ YTM)²

(1+ YTM)² = 1000/840

(1+YTM)² = 1.1905

1+ YTM = 1.0911

YTM = 1.0911-1

YTM = 0.0911 = 9.11%

Year 3

Face value = Price (1+ YTM)³

1000 = 750 ( 1+ YTM)³

(1+ YTM)³ = 1000/750

(1+YTM)^{3 =} 1.333333

1+ YTM = 1.1006

YTM = 1.1006-1

= 0.1006

= 10.06%

The answers are in the brackets. I want to know the process to get the answers.

***Question**** b. What are the 1 year forward rate at the end of year 1, and the annualized forward rate between end of years 1 and 3? [answers: 9.52%, and 10.75%]

In practice, Business Organizations need finance to operate and attain their strategic objectives. critically identify the various forms of business organizations and explain how each of them raises their finances. Please include references for your answer

Donald Gilmore has $100,000 invested in a 2-stock portfolio. $20,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Zacher Co.'s stock has a beta of 1.12, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Porter Plumbing's stock had a required return of 14.25% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

Select the correct answer.

a. 17.93%

b. 18.33%

c. 18.73%

d. 19.13%

e. 19.53% Stock A's stock has a beta of 1.30, and its required return is 13.25%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) a. 9.92% b. 9.95% c. 9.98% d. 10.01% e. 10.04%

Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.50%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

Select the correct answer.

a. 10.15%

b. 10.07%

c. 10.09%

d. 10.11%

e. 10.13%

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

a. 4.58%

b. 4.35%

c. 4.83%

d. 5.33%

e. 5.08%

Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

a. 8.72%

b. 10.22%

c. 9.08%

d. 9.44%

e. 9.82%

When working with the CAPM, which of the following factors can be determined with the most precision?

a. The beta coefficient, bi, of a relatively safe stock.

b. The most appropriate risk-free rate, rRF.

c. The market risk premium (RPM).

d. The beta coefficient of "the market," which is the same as the beta of an average stock.

e. The expected rate of return on the market, rM.

Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC?

a. 9.54%

b. 8.98%

c. 9.26%

d. 10.12%

e. 9.83%

Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Avery's WACC?

a. 9.17%

b. 9.54%

c. 8.82%

d. 8.48%

e. 8.15%

Excel Online Structured Activity: New project analysis

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $60,000, and it would cost another $12,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $30,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $13,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

   $  

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $  

   In Year 2 $  

   In Year 3 $  

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

   _____YesNo

Check My Work

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NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $164,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $82,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $51,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. The cost of research is an incremental cash flow and should be included in the analysis. Only the tax effect of the research expenses should be included in the analysis. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. -Select-IIIIIIIVVItem 1 What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. $ What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations. Year 1 $ Year 2 $ Year 3 $ Should the machine be purchased? -Select-YesNoItem 6

		Continue without saving

The interest rate of the loan that they have access to J12 = 4.92% p.a. Max repayment of $3000 per month for months 1 to 36 Max repayment of $1800 per month for months 37 to 96 Max Repayment of $1500 per month for months 97 to 120 A) Assuming they make the maximum payments that they have budgeted for, illustrate the cash flows associated with the loan as a fully labeled timeline diagram. (Assume the first repayment occurs one period after they take out the loan.) B) By breaking this cash flow into three simple annuities, determine the maximum amount that Kim and Lee can borrow if they are to pay off the loan in ten years. C) Assuming that Kim and Lee borrow the maximum amount that they can afford to pay back in ten years, construct an amortization table showing the last three payments.

LEZ Enterprises, Inc. has been considering the purchase of a new manufacturing facility for $700,000. The facility is to be depreciated on a straight line basis over 14 years. It is expected to have no value after those 14 years. Cash flow from depreciation are considered to be risk-free and so they should be discounted at the risk-free rate. Operating revenues from the facility are expected to be $160,000 during the first year. The revenues are expected to increase at the rate of 2.2% per year which is also expected to be the inflation rate. Production costs in the first year are $25,000 and they are expected to remain constant each year. The project ends after 14 years. LEZ’s cost of capital is 15%. Its corporate tax rate 21%. The risk-free rate 3%. What is the NPV of this project?

In practice, Business Organizations need finance to operate and attain their strategic objectives. critically identify the various forms of business organizations and explain how each of them raises their finances. Please include references for your answe

Our company has been a very profitable company for many years. Currently, they are considering investing in a new project that will last three years. The project will require an immediate capital expenditure of $900,000 which will be fully expended this year as is now allowable under the new tax law. Our company estimates that the revenues from this project will be $500,000 during the first year and that the revenues will grow at a rate of 10% per year. Variable cost are expected to be 30% of revenues each year, and fixed cost are expected to be $15,000 per year. A one-time net working capital investment of $40,000 is required immediately and will be recovered at the end of the project’s life. Our company’s marginal tax is 21%. What is the IRR of this project?