Create the following tables for your project and calculate the NPV:

• Annual depreciation and the ending book value each year using the 5-year MACRS schedule.
• Pro Forma income statements for years 1 – 3
• Project cash flows for years 1 – 3 including:  Operating Cash Flow, change in Net Working Capital, Net Capital Spending and Total Cash Flow from Assets.
• Calculate Net Present Value and decide whether the company should go forward with the project.

You are evaluating a project for ‘The Ultimate’ recreational tennis racket, guaranteed to correct a wimpy backhand.  You estimate the sales price of ‘The Ultimate’ to be $400 and sales volume to be 1,000 units the 1^st year, 1,250 units the 2^ndyear and 1,325 units in year 3.  The project has a 3-year life.  Variable costs amount to $225 per unit and fixed costs are $100,000 per year.  The project requires $165,000 of equipment that is depreciated using the 5-year MACRS schedule.  The actual market value of the equipment at the end of year 3 is $35,000.  Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales for the first two years.  There is no increase in year 3 of the project.  The tax rate is 34% and the required return on the project is 10%.

What is the NPV of this project?  (Show all your calculations)

Describe the existing needs for cost information in healthcare firms.

NOK Plastics is considering the acquisition of a new plastic injection-molding machine to make a line of plastic fittings. The cost of the machine and dies is $125,000. Shipping and installation is another $8,000. NOK estimates it will need a $10,000 investment in net working capital initially, which will be recovered at the end of the life of the equipment. Sales of the new plastic fittings are expected to be $350,000 annually. Cost of goods sold are expected to be 50% of sales. Additional operating expenses are projected to be $115,000 per year over the machine’s expected 5-year useful life. The machine will depreciated using a 5-year MACRS class life. The equipment will be sold at the end of its useful life (5 years) for $35,000. The tax rate is 25% and the relevant discount rate is 15%. Calculate the net present value (NPV), internal rate of return (IRR), payback period (PB), and profitability index (PI) and state whether the project should be accepted.

Portfolio X consists of 4 stocks which are A, B, C, and D. The information pertaining to the stocks, the portfolio and the market are given below:

Expected return of the market = 10%
Risk-free rate = 4%

(a) Calculate the beta of Portfolio Y that is equally invested in stock A and stock B.

b) Compute the beta of Portfolio Z that is equally invested in stock C and stock D.

(c) Suppose you sell all $25,000 invested in Stock A and use the proceeds to invest in Stock B. Calculate the resulting value of the beta of Portfolio X.

(d) Compute the change in the expected return of Portfolio X resulting from your actions in part (c).

(e) Discuss the likely circumstances where you would sell a stock with a lower beta and invest the proceeds in a stock with a higher beta, as in part (c).

Consider the mortgage pool data below for a Mortgage Backed Security (MBS). Beginning balance $800,000,000 WAC 5.750% WAM 354 Passthrough rate 5.250% PSA schedule 150% Please answer the questions below about the first scheduled payment to the investors of this MBS. SHOW YOUR WORK Dollar amounts may be rounded to the nearest dollar. (a) What is the CPR for this payment? (b) What is the SMM for this payment? (c) For this payment, what is the amount of the total scheduled mortgage payment, the gross interest paid with that payment, and the scheduled principal repaid with that payment? (You can use your BA II Plus to calculate this data. Show what you would enter into your calculator to obtain this data.) (d) What is the net interest payment available to the MBS investors after servicing fees have been paid? (e) What is the forecasted prepayment amount based on the SMM calculated in (b) above? (f) What will be the total principal repayment to the MBS investors in the first payment? (g) What will be the total payment made to the MBS investors?

Station WJXT is considering the replacement of its old, fully depreciated sound mixer. Two new models are available. Mixer X costs $216,000, has a five-year expected life, and will generate after-tax cash flow savings of $68,200 per year. Mixer Y costs $345,000, has a ten-year expected life, and generates after-tax cash flow savings of $83,400 per year.

The cost of capital is 10 percent. Should WJXT replace the old mixer with mixer X or Y?

Prokter and Gramble​ (PKGR) have historically maintained a​ debt-equity ratio of approximately 0.15. Its current stock price is $ 54 per​ share, with 2.8 billion shares outstanding. The firm enjoys very stable demand for its​ products, and consequently, it has a low equity beta of 0.375 and can borrow at 4.0%, just 20 basis points over the​ risk-free rate of 3.8%. The expected return of the market is 10.5%  and​ PKGR's tax rate is 32%.

a. This​ year, PKGR is expected to have free cash flows of ​$6.5 billion. What constant expected a growth rate of free cash flow is consistent with its current stock​ price?

b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher​ debt-equity ratio of 0.375, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its​ debt-equity ratio to 0.375 through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.

(round to two decimal places.)

List 3 key components you would consider in making an investment decision. What sources and factors would you review?

QUESTION 3

1. A colleague of yours has a K100,000-00, 2 years treasury Bond maturing in 12 months, issued at a fixed coupon of 10%, payable annually. He informs you that he has an urgent need of money and wants to sell you the Bond.

1. What’s the maximum price you would offer assuming the yield on a 12 months treasury bill is currently at 12%?

                                                                                    [04 Marks]

2. Briefly discuss how you may be affected by inflation over the holding period to maturity.

                                                                                    [06 Marks]

2. A 273 Days Treasury bill of K1,000 Face Value is currently on offer at K840.33.

1. Calculate its Yield to maturity (YTM) at this price.

                                                                                    [02 Marks]

2. Calculate its Effective Annual Return (APR).

                                                                                    [03 Marks]

3. Briefly explain why Treasury bills are treated as risk-free securities.                                                                                                 [05 Marks]

Total 20 Marks

Discounted Cash Flow Valuation
Presented below are data for Boso Audio:

Compute the value of a share of Boso common stock using the discounted cash flow method.

Do not round your computations until your final answer. Round final answer to two decimal places.

1. Your grandparents would like to establish a trust fund that will pay you and your heirs $185,000 per year forever with the first payment 8 years from today. If the trust fund earns an annual return of 3.6 percent, how much must your grandparents deposit today?

2. Smashed Pumpkins Co. paid $152 in dividends and $582 in interest over the past year. The company increased retained earnings by $486 and had accounts payable of $618. Sales for the year were $16,335 and depreciation was $728. The tax rate was 38 percent. What was the company's EBIT?

3. Roger has just lost a lawsuit and has agreed to make equal annual payments of $18,300 for the next 5 years with the first payment due today. The value of this liability today is $77,000. What is the interest rate on the payments?

4. Use the following information to answer this question.
   

What were the total dividends paid for 2017?

You are trying to assess the cost of capital for a small commercial aircraft manufacturer called Jetstream Inc. Unfortunately, Jetstream is a private company so you can not estimate its equity beta using its stock returns. You have, however, collected some information on comparable firms that are publicly traded (see the table below). Assume that Jetstream targets a stable debt to enterprise value ratio (D/(D+E)) of 10% and that its cost of debt is 3.95%.

All firms face a marginal tax rate of 21%, the market risk premium (?[?_?]−?_?) is 5%, and the risk-free rate (?_?) is 3.5%. Additionally, assume that corporate taxes are the only market imperfection.

1. Using the CAPM calculate the cost of equity for each competing firm. Then, using the Modigliani and Miller formula calculate the unlevered cost of capital for each competing firm. Tabulate your results in a table similar to the one above.
2. Assume that the unlevered cost of capital of Jetstream Inc. is equal to the average unlevered cost of capital of the competing firms, what is Jetstream’s cost of equity? C) What is Jetstream’s WACC?