Baxter Equipment Company - Balance Sheet for Years Ending December 31st

Note: All figures add 3 zeros ($000)

Please answer what you can. The data is too long for me to add the Income Statement, which is necessary for these questions. Since many of these questions cannot be answered without the IS, and they all pertain to the same data - this should be counted as one question.

a. What was the company's depreciation expense for 2019?

b. What were the company's current ratios for both 2018 and 2019?

c. Was the current ratio for year 2019 better or worse compared to 2018 (a one word answer please)

d. What was the company's inventory turnover for 2019?

e. What was the average collection period (2019) for their accounts receivable?

f. What was their marginal tax rate?

g. How many shares of common stock did they sell in 2019?

h. What was their EPS?

i. How much did they pay in common stock dividends?

j. What was their "TIE" (times interest earned) for 2019?

Baxter Equipment Company - Income Statement for Years Ending December 31st

Note: All figures add 3 zeros ($000)

Baxter Equipment Company - Balance Sheet for Years Ending December 31st

Note: All figures add 3 zeros ($000)

a. What was the company's depreciation expense for 2019?

b. What were the company's current ratios for both 2018 and 2019?

c. Was the current ratio for year 2019 better or worse compared to 2018 (a one word answer please)

d. What was the company's inventory turnover for 2019?

e. What was the average collection period (2019) for their accounts receivable?

f. What was their marginal tax rate?

g. How many shares of common stock did they sell in 2019?

h. What was their EPS?

i. How much did they pay in common stock dividends?

j. What was their "TIE" (times interest earned) for 2019?

One of IBM's bond issues has an annual coupon rate of 3.6%, a face value of $1,000 and matures in 9 years

What is the value of the bond if the required return is 7%?

A project has an initial outlay of $4,975. It has a single payoff at the end of year 6 of $7,589. What is the net present value (NPV) of the project if the company’s cost of capital is 12.36 percent?

Round the answer to two decimal places.

WACC

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 11% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D₀) was $2.65, its expected constant growth rate is 6%, and its common stock sells for $30. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, and Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets.

1. What is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations.
   %
2. 
   
3. What is the WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
   %
4. 
   
5. Which projects should Empire accept?
   -Select-Project AProject B

NPV

Your division is considering two projects with the following cash flows (in millions):

1. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

2. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.)
   -Select-Project AProject BNeither A, nor B

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.)
   -Select-Project AProject BNeither A, nor B

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.)

You are a new financial analyst for Acme Bank and Funeral Directors. You are looking at the following for a company you are considering for a loan. Sales = $650,000, their operating profit was $400,000, their interest expense = $35,000, the par value of their common stock was $20,000, the paid-in-capital in excess of par was $210,000 and they have 10,000 shares of common stock outstanding. Assume a 21% tax rate.

Given this information: What was the price of a share of common stock when it was sold (assume no flotation costs and they only sold stock once) ?
AND
If they had no preferred stock, what must have been their earnings per share?

CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $51 million, and the expected cash inflows would be $17 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $18 million. The risk-adjusted WACC is 14%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $ million
   IRR %

   Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
   NPV $ million
   IRR %

2. How should the environmental effects be dealt with when this project is evaluated?

   1. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation" analysis from not doing the environmental mitigation.
   2. The environmental effects should be ignored since the mine is legal without mitigation.
   3. The environmental effects should be treated as a sunk cost and therefore ignored.
   4. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.
   5. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

3. Should this project be undertaken?
   -Select-Even when mitigation is considered the project has a positive IRR, so it should be undertaken.The project should not be undertaken under the "no mitigation" assumption.The project should be undertaken only under the "no mitigation" assumption.The project should not be undertaken under the "mitigation" assumption.Even when mitigation is considered the project has a positive NPV, so it should be undertaken.

   If so, should the firm do the mitigation?

   1. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.
   2. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.
   3. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis.
   4. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.
   5. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis.

A corporate bond pays interest twice a year and has 18 years to maturity, a face value of $1,000 and a coupon rate of 5.6%. The bond's current price is $1,359.59. It is callable starting 12 years from now (years to call) at a call price of $1,106.

What is the bond's (annualized) yield to call?

EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 13.20%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 18.62%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

4. Is it possible that most investors might regard Stock B as being less risky than Stock A?

   1. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   2. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.
   3. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   4. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
   5. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.

You have observed the following returns over time:

Assume that the risk-free rate is 4% and the market risk premium is 6%.

1. What is the beta of Stock X? Do not round intermediate calculations. Round your answer to two decimal places.

   What is the beta of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

2. What is the required rate of return on Stock X? Do not round intermediate calculations. Round your answer to one decimal place.

   %

   What is the required rate of return on Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

   %

3. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

   %

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Stock Expected Return Standard Deviation Beta

A 8.01 % 15 % 0.7

B 10.16 15 1.2

C 11.88 15 1.6

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

a. What is the market risk premium (rM - rRF)? Round your answer to two decimal places. %

b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. % d.

Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%?

I. less than 15%

II. greater than 15%

III. equal to 15%

Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

1. What is the market risk premium (r_M - r_RF)? Round your answer to two decimal places.

%

2. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

3. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

%

4. Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%?
   1. less than 15%
   2. greater than 15%
   3. equal to 15%

_____IIIIII

Provide Sue with financial advice on which option has the potential to yield the highest monetary value. Support your rational with calculations using time value of money and comment on the risk return relationship for each option, assume interest rate on savings is 4% and is compounded semi-annually.

Sue James is a 55-year old accountant who works at Ernst and Young (EY) who is about to retire. She has the following decision to make:

Option A – Select a lump sum gratuity payment of $120,000 with a reduced pension of $1,750 per month.

Option B – Select a monthly pension of $3,300 with no lump sum gratuity payment.

In addition, Sue has a loan of $72,000 with loan payments of $1,200 per month for the next five years.