In December 2019, Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of new on-site long-wood woodyard. The addition would have two primary benefits: to eliminate the need to purchase short-wood from an outside supplier and create the opportunity to sell short-wood on the open market as a new market for Worldwide Paper Company (WPC). The new woodyard would allow the Blue Ridge Mill not only to reduce its operating costs but also to increase its revenues. The proposed woodyard will utilise new technology that allows tree-length logs, called long-wood, to be processed directly, whereas the current process required short-wood, which had to be purchased from the Shenandoah Mill. This nearby mill, owned by a competitor, has excess capacity that allows it to produce more short-wood than it needs for its own pulp production. The excess is sold to several different mills, including the Blue Ridge Mill. Thus, adding the new long-wood equipment would mean that Prescott would no longer need to use the Shenandoah Mill as a short-wood supplier and that the Blue Ridge Mill would instead compete with the Shenandoah Mill by selling on the short-wood market. The question for Prescott was whether these expected benefits were enough to justify the $18m capital outlay plus the incremental investment in working capital over the six-year life of the investment. Construction would start within a few months, and the investment outlay would be spent over two calendar years: $16m in 2020 and the remaining $2m in 2021. When the woodyard begins operating in 2021, it would significantly reduce the operating costs of the mill. These operating savings would come mostly from the difference in the cost of producing short-wood on-site versus buying it on the open market and were estimated to be $2m for 2021 and $3.5m per year thereafter. Prescott also planned on taking advantage of the excess production capacity afforded by the new facility by selling short-wood on the open market as soon as possible. For 2021, he expected to show revenues of approximately $14m, as the facility came on-line and began to break into the new market. He expected shortwood sales to reach $20m in 2022 and continue at the $20m level through 2026. Prescott estimated that the cost of goods sold (before including depreciation expense) would be 75%. In addition to the capital outlay of $18m, the increased revenues would necessitate higher levels of inventories and accounts receivable. Therefore the amount of working capital investment each year would equal 15% of incremental sales for the year. At the end of the life of the equipment, in 2026, all the net working capital on the books would be recoverable at cost fully. Taxes would be paid at a 30% rate, and the equipment depreciation is to be calculated on a straight-line basis over the six-year life to zero balance. However, the new equipment is estimated to have a salvage value (scrap value) of $3m at the end of its life. WPC’s accountants have told Prescott that depreciation charges could not begin until 2021, when all the $18m had been spent and the equipment is in service. WPC has a company policy to use 15% as the hurdle rate for such investment opportunities. The hurdle rate is based on the study of the company’s cost of capital conducted 5 years ago. Page 7 of 7

a. Prepare cash flow statement/s and compute the NPV and IRR of the proposed project. Comment on the feasibility of the project.

b. Outline reasons why Prescott may be uneasy using the 15% hurdle rate for a discount rate.

c. Perform a sensitivity analysis on NPV of the project on the following scenarios: (i) Sales increases/decreases by 10%. (ii) Cost of capital increases/decreases by 10%. Comment on the feasibility of the project under each scenario.

d. The global paper and pulp industry, one of the world largest industries, has been growing slowly, at a rate much less than expected over the last 20 years. The price chart below shows that the Products Industry Index on average grew at around 2.5% per year over the last 20 years, while lumber futures contract prices have negative growth. Some analysts believe that the industry needs more structural change to counter disruption of technology and tackle social impacts due to climate change. Identify and analyse three qualitative risk factors (i.e. factors which are unquantifiable at present) faced by the industry. How would Bob Prescott consider these factors in evaluating the feasibility of the new on-site longwood woodyard?

You are planning on buying $100,000 face value of Australian Commonwealth Government Bonds. The bonds mature on 15 February 2022 and have a coupon rate of 4.75%. If your purchase will settle on 27 April 2012, and the quoted yield for the bond is 3.92%, what is the cash price of the bonds to the nearest dollar?

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million

Your company has been approached to bid on a contract to sell 5,100 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4.7 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $104,000 to be returned at the end of the project, and the equipment can be sold for $284,000 at the end of production. Fixed costs are $649,000 per year, and variable costs are $164 per unit. In addition to the contract, you feel your company can sell 10,400, 11,300, 13,400, and 10,700 additional units to companies in other countries over the next four years, respectively, at a price of $355. This price is fixed. The tax rate is 40 percent, and the required return is 10 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $100,000. What bid price should you set for the contract? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Given a 3 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,700, $1,900, $1,900, and $2,200, respectively.

3.

Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below.

Using the financial statements above, what is Rosnan's 2013 market value added (MVA)? Round your answer to the nearest dollar. Do not round intermediate calculations.

Using the financial statements given earlier, what is Rosnan's 2013 economic value added (EVA)? Round your answer to the nearest cent. Do not round intermediate calculations.

You are given the following set of data:

a. Determine Stock X beta coefficient

b. determine the arithmetic average rates of return for stock X and NYSE over the period given. Calculate the standard deviations of returns for both X and NYSE

c. assume the situation during years 1 to 7 is expected to prevail in the future. Also assume stock X is in equilibrium that is, its plots on the SML. What is the risk-free rate?

You win the lottery! Your choices are

• Take $25 million today.
• Take $1 million today and $1 million every year for the next 49 years (a total of $50 million)

a) If the interest rate is 0.1% compounded annually, which would you prefer?

b) If the interest rate is 4% compounded annually, which would you prefer?

c) At what annual interest rate would you be indifferent between the two?

use equation to solve!

2. Income statement

The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm’s gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders.

The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm’s revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company’s financial performance and condition.

Consider the following scenario:

Cold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.

Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

Given the results of the previous income statement calculations, complete the following statements:

Financial information for Powell Panther Corporation is shown below:

Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Write out your answers completely. For example, 25 million should be entered as 25,000,000. Round your answers to the nearest dollar, if necessary. Negative values, if any, should be indicated by a minus sign.

1. What was net operating working capital for 2018 and 2019? Assume the firm has no excess cash.

   2018:  $  

   2019:  $  

2. What was the 2019 free cash flow?

   $  

3. How would you explain the large increase in 2019 dividends?

   1. The large increase in net income from 2018 to 2019 explains the large increase in 2019 dividends.
   2. The large increase in EBIT from 2018 to 2019 explains the large increase in 2019 dividends.
   3. The large increase in free cash flow from 2018 to 2019 explains the large increase in 2019 dividends.
   4. The large increase in sales from 2018 to 2019 explains the large increase in 2019 dividends.
   5. The large increase in retained earnings from 2018 to 2019 explains the large increase in 2019 dividends.

   -Select-IIIIIIIVVItem 4

3. Income statement

The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm’s gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders.

The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm’s revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company’s financial performance and condition.

Consider the following scenario:

Cute Camel Woodcraft Company’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.

Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

KFA is considering investing in a new drone technology costing $12 million. It has a 5 year life (no salvage value) and will save KFA $3.5 million/year in pre-tax operating costs. It will need an up-front working capital investment of $300,000. KFA's cost of capital is 8.0% and its tax rate is 21.0%. Their current technology has a $5 million book value but a $1 million salvage value. What are the NPV and IRR of the decision to replace the old technology?

KFA has issued a 100-year coupon bond with par of $1,000, and a 6.50% annual coupon paid semi-annually. Calculate its price for each of the following three YTM scenarios: 4.0%, 6.0%, and 8.0%.

KFA is evaluating a project with the following cash flows in the first 4 years: $4,000, $5,000, $6,000, and $7,000. Use an 8.0% discount rate to calculate the project's net present values (NPV) for three potential initial investments: $11,000 (scenario 1), $13,000 (scenario 2), and $15,000 (scenario 3). Assume no residual value.

Suppose you inherited a building from your great aunt which you now own outright (e.g., you have complete ownership without any outstanding debt). If this building is 200,000 SF, rents for $12 per square foot per year, is expected to be on average 5% vacant, and costs $5 per occupied SF per year to operate, what is the expected Before-Tax Cash Flow for the building?

answer

$1,330,000

Now, you decide to complete some renovations on the building described in question 2. If the renovation costs $2,510,006, which you can finance with a 15-year FRM mortgage with payments due annually offered at 10% annual interest, how much more would you need to charge in rent for the Before-Tax Cash Flow to remain the same as it did in question 2?

Group of answer choices

~$1.74 /sf/year more

~$2.24 /sf/year more

~$3.03 /sf/year more

~$2.09/sf/year more