Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in Shrieves’ main plant. The machinery would incur $10,000 in shipping charges, and it would cost an additional $28,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3­year class. The machinery is expected to have a salvage value of  15% of initial outlay after 4 years of use.

The new line would generate incremental unit sales per year for 4 years at an incremental cost of $108 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 35%, and its overall weighted average cost of capital is 10%.

1. Construct annual incremental operating cashflow statements.
2. Estimate the required net working capital for each year and the cash flow due to investments in net working capital.
3. Calculate the after­tax salvage cash flow.
4. Calculate the net cash flows for each year. Based on these cash flows, what are the project’s NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?
5. What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and, when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?
6. Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume each of these variables can vary from its base­case, or expected, value by +/-10%, +/-20%, and +/-30%.
   1. Include a sensitivity diagram, and discuss the results.
7. Assume that Sidney Johnson is confident in her estimates of all the variables that affect the project’s cash flows except unit sales and sales price. If product acceptance is poor, unit sales would be as in the table and the unit price would only be $160; a strong consumer response would produce sales as in the table and a unit price of $240. Johnson believes there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).
   1. What is the worst­case NPV? The best­case NPV?
   2. Use the worst­, base­, and best­case NPVs and probabilities of occurrence to find the project’s expected NPV, as well as the NPV’s standard deviation and coefficient of variation.
8. Shrieves typically adds or subtracts 3 percent­ age points to the overall cost of capital to ad­ just for risk. Should the new line be accepted?

Assume your company's pension plan promises to pay you $57,000 per year starting when you retire in 33 years (the first 33 years from now) and increase the payment by 2% every year after the first to compensate for inflation. You hope to live 21 years after you retire (you collect 22 payments). If your interest rate is 6%, what is the value today of your pension plan?

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $70,000, and it would cost another $17,500 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 $24,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $63,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 35%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent.
   $  
2. 
   
3. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest cent.
   Year 1: $  
   Year 2: $  
   Year 3: $  
4. 
   
5. If the WACC is 12%, should the spectrometer be purchased?
   -Select-YesNo

An FI has purchased a $211 million cap of 8 percent at a premium of 0.60 percent of face value. A $211 million floor of 5.1 percent is also available at a premium of .65 percent of face value.

a. If interest rates rise to 9 percent, what is the amount received by the FI? What are the net savings after deducting the premium?
b. If the FI also purchases a floor, what are the net savings if interest rates rise to 10 percent? What are the net savings if interest rates fall to 4.1 percent? (Negative amounts should be indicated by a minus sign.)
c. If, instead, the FI sells (writes) the floor, what are the net savings if interest rates rise to 10 percent? What if they fall to 4.1 percent? (Negative amounts should be indicated by a minus sign.)

What appeals you about working in the financial services Industry, particularly at BNY Melon?

You have a short position in one corn futures contract. Each futures contract calls for the delivery of 5,000 bushels of No. 2 yellow com. The initial margin was $2,500 and the maintenance margin is $1,250. At the close of trading yesterday, the futures price was $5.23 per bushel and the balance in your margin account was $1 ,750. Today, the settlement price for corn futures is $5.43. What is the balance in your account at the end of today's trading? Assume that you made the minimum deposit necessary if there was a margin call.

A) $1,750

B) *$2,500

C) $3,250

D) $ 1 ,500

Looking for the process work to understand why the solution is B) $2,500.

Suppose Intel stock has a beta of 1.53​, whereas Boeing stock has a beta of 0.91. If the​ risk-free interest rate is 3.5% and the expected return of the market portfolio is 10.9%​, according to the​ CAPM,

a. What is the expected return of Intel​ stock? Answer in percentage

b. What is the expected return of Boeing​ stock? Answer in percentage

c. What is the beta of a portfolio that consists of 60% Intel stock and 40% Boeing​ stock?

d. What is the expected return of a portfolio that consists of 60% Intel stock and 40% Boeing​ stock? (There are two ways to solve​ this.) (Answer in percentage)

The Government of Canada 2-year coupon bond has a face value of $1,000 and pays annual coupons of $30. The next coupon is due in one year. Currently, the one and two-year spot rates on Government of Canada zero coupon bonds are 5% and 5.5%. Use this information to answer part a) and b).

a) What is the correct price for the coupon bond at time zero (immediately)?

A) $925.46

B) $952.41

C) *$953.98

D) $971.68

E) $1009.54

b) What is the expected price for the coupon bond at year one (after the first coupon is paid)?

A) $953.98

B) *$971.69

C) $976.30

D) $980.95

E) $1009.54

Looking for the process work to understand why the solution for part a) is $953.98 and for b) is $971.69.

Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.7 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.85 for every $1.00 increase in sales. Paladin's profit margin is 4%, and its retention ratio is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

please Help!Thank you!;)

Max was recently hired by Imagine Software Inc. as a junior budget analyst. He is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. He must give his analysis and recommendation to the capital budgeting committee.

Max has a B.S. in accounting from CWU (2015) and passed the CPA exam (2017). He has been in public accounting for several years. During that time he earned an MBA from Seattle U. He would like to be the CFO of a company someday--maybe Imagine Software Inc. -- and this is an opportunity to get onto that career track and to prove his ability.

As Max looks over the financial data collected, he is trying to make sense of it all. He already has the most difficult part of the analysis complete -- the estimation of cash flows. Through some internet research and application of finance theory, he has also determined the firm’s beta.

Here is the information that Max has accumulated so far:

The Capital Budgeting Projects

He must choose one of the four capital budgeting projects listed below:  

Table 1

Table 1 shows the expected after-tax operating cash flows for each project. All projects are expected to have a 4 year life. The projects differ in size (the cost of the initial investment), and their cash flow patterns are different. They also differ in risk as indicated in the above table.

The capital budget is $20 million and the projects are mutually exclusive.

Capital Structures

Imagine Software Inc. has the following capital structure, which is considered to be optimal:

Cost of Capital

Max knows that in order to evaluate the projects he will have to determine the cost of capital for each of them. He has been given the following data, which he believes will be relevant to his task.

(1)The firm’s tax rate is 40%.

(2) Imagine Software Inc. has issued a 9% semi-annual coupon bond with 7 years term to maturity. The current trading price is $988.

Cost of Preferred Stock is 9.04 %

(3) The firm has issued some preferred stock which pays an annual 8.5% dividend of $100 par value, and the current market price is $94.

Cost of common equity

(1) Estimated cost of common equity using the CAPM approach

(4) The firm’s stock is currently selling for $76.5 per share. Its last dividend (D0) was $2.80, and dividends are expected to grow at a constant rate of 7.5%. The current risk free return offered by Treasury security is 3.1%, and the market portfolio’s return is 10%. Imagine Software Inc. has a beta of 1.25. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 2.8%.

What is the estimated cost of common equity using the DCF approach?

(5) The firm adjusts its project WACC for risk by adding 2% to the overall WACC for high-risk projects and subtracting 2% for low-risk projects.

Max knows that Imagine Software Inc. executives have favored IRR in the past for making their capital budgeting decisions. His professor at Seattle U. said NPV was better than IRR. His textbook says that MIRR is also better than IRR. He is the new kid on the block and must be prepared to defend his recommendations.

First, however, Max must finish the analysis and write his report. To help begin, he has formulated the following questions:

1. What is the firm’s cost of debt?

2. What is the cost of preferred stock for Imagine Software Inc.?

3. Cost of common equity

(1) What is the estimated cost of common equity using the CAPM approach?

The current risk free return offered by Treasury security is 3.1%, and the market portfolio’s return is 10%. Imagine Software Inc. has a beta of 1.25.

(2) What is the estimated cost of common equity using the DCF approach?

The firm’s stock is currently selling for $76.5 per share.

(3) What is the estimated cost of common equity using the bond-yield-plus-risk-premium approach?

Bond yield plus risk premium:

(4) What is the final estimate for rs?

4. What is Imagine Software Inc.’s overall WACC?

5. Do you think the firm should use the single overall WACC as the hurdle rate for each of its projects? Explain.

6. What is the WACC for each project? Place your numerical solutions in Table 2.

7. Calculate all relevant capital budgeting measures for each project, and place your numerical solutions in Table 2.

Table 2

8. Comment on the commonly used capital budgeting measures. What is the underlying cause of ranking conflicts? Which criterion is the best one, and why?

9. Which of the projects are unacceptable and why?

10. Rank the projects that are acceptable, according to Max’s criterion of choice.

1. Which project should Max recommend and why? Explain why each of the projects not chosen was rejected.

Imagine that you are holding 5,500 shares of stock, currently selling at $50 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $55 are selling at $2, and January puts with a strike price of $45 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $41, $50, $61? What will the value of your portfolio be if you simply continued to hold the shares?

Problem 11-06

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,150,000, and it would cost another $22,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $660,000. The machine would require an increase in net working capital (inventory) of $16,500. The sprayer would not change revenues, but it is expected to save the firm $456,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

What is the Year 0 net cash flow?

$

What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1 $

Year 2 $

Year 3 $

What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

If the project's cost of capital is 12 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

Should the machine be purchased?

p25.)

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,257.00 to install, $5,170.00 to operate per year for 7 years at which time it will be sold for $7,061.00. The second, RayCool 8, costs $41,293.00 to install, $2,116.00 to operate per year for 5 years at which time it will be sold for $8,997.00. The firm’s cost of capital is 6.55%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $13 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 6%, and the risk-free rate is 6%. BEA is considering increasing its debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 11%. BEA has a beta of 0.8.

What are BEA's new beta, cost of equity (Rs), and WACC if it has 40% debt? Do not round intermediate calculations. Round your answers to two decimal places.

European call and put options with a strike price of $50 will expire in one year. The underlying stock is selling for $51 currently and pays no cash dividend during the 1life of the options. The risk-free rate is 5% (continuous compounding). The price of the call option is $5.00. Please answer the following questions:

1. Please calculate the price of the put option under the put-call parity

2. If the actual price of the put is $2.50, is there an arbitrage opportunity? Please explain.

3. If your answer in 2 is yes, please write down the four transactions needed to realize the arbitrage profit.