The capital asset pricing model (CAPM) suggests the investors first consider the market portfolio and then decide a portfolio that would require borrowing and lending to archive a desired level of risk and return trade off. For an investor who is willing to take more risk, this would mean that they borrow at the risk free rate and invest in the market portfolio and repeat the process every period. Suppose you are a long-term investor (saving for retirement) who is willing to hold a portfolio twice as risky as the market portfolio. How would you implement the suggestion of CAPM? What are the limitations? Explain.

Establishing a capital structure for a firm is not simple. Although financial theory guides the process, there is no easy formula to determine a target debt-to-equity ratio. However, there are key factors which should be considered as they affect the target ratio.List and explain these factors.

What are the benefits and risks associated with motorcycle manufacturer, Harley-Davidson, issuing a bond that will increase its debt to assets ratio by 1% to finance an international expansion to Canada?

ALTERNATIVE DIVIDEND POLICIES

In 2015, the Keenan Company paid dividends totaling $2,390,000 on net income of $10 million. Note that 2015 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 4%. However, in 2016, earnings are expected to jump to $17 million and the firm expects to have profitable investment opportunities of $7.4 million. It is predicted that Keenan will not be able to maintain the 2016 level of earnings growth because the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2016, the company will return to its previous 4% growth rate. Keenan's target capital structure is 40% debt and 60% equity.

1. Calculate Keenan's total dividends for 2016 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25 million should be entered as 25,000,000.)
   1. Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.
      $
   2. 
      
   3. It continues the 2015 dividend payout ratio. Round your answer to the nearest cent. Do not round intermediate calculations.
      $
   4. 
      
   5. It uses a pure residual dividend policy (40% of the $7.4 million investment is financed with debt and 60% with common equity). Round your answer to the nearest cent.
      $
   6. 
      
   7. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. Round your answer to the nearest cent.
2. 
   
3. Which of the preceding policies would you recommend?
   -Select-Policy 1Policy 2Policy 3Policy 4Item 6
4. 
   
5. Assume that investors expect Keenan to pay total dividends of $10,000,000 in 2016 and to have the dividend grow at 4% after 2016. The stock's total market value is $170 million. What is the company's cost of equity? Round your answer to two decimal places.
   %
6. 
   
7. What is Keenan's long-run average return on equity? [Hint: g = Retention rate x ROE = (1.0 - Payout rate)(ROE).] Do not round intermediate calculations. Round your answer to two decimal places.
   %
8. 
   
9. Does a 2016 dividend of $10,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower?

Use the Black-Scholes formula for the following stock:

Calculate the value of a call option. (Do not round intermediate

Capital Budgeting Analysis

A firm is planning a new project that is projected to yield cash flows of -$515,000 in Year 1, $586,000 per year in Years 2 through 3, and $678,000 in Years 4 through 6, and $728,000 in Years 7 through 10. This investment will cost the company $2,780,000 today (initial outlay). We assume that the firm's cost of capital is 9.65%.

(1) Draw a timeline to show the cash flows of the project.

(2) Compute payback period, net present value (NPV), profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR).

(3) Discuss whether the project should be taken.

a. You have just purchased the options listed below. Based on the information given, indicate whether the option is in the money, out of the money, or at the money, whether you would exercise the option if it were expiring today, what the dollar profit would be, and what the percentage return would be. (Enter “0” if there is no profit or return from not exercising the option. Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places.)

a. You have just purchased the options listed below. Based on the information given, indicate whether the option is in the money, out of the money, or at the money, whether you would exercise the option if it were expiring today, what the dollar profit would be, and what the percentage return would be. (Enter “0” if there is no profit or return from not exercising the option. Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places.)

b. Now suppose that time has passed and the stocks’ prices have changed as indicated in the table below. Recalculate your answers to part a.

New Prices Today. Fill out chart the same way as above with these new prices

Call - 11.23

Putt - 11.23

Call - 27.00

Putt - 27.00

A firm has a capital structure that is 75% equity and 25% debt. They would like to buy some machinery that would cost $1,500,000. The firm has a flotation cost of equity of 6.5% and a flotation cost of debt of 5.75%. If they buy the equipment, how much will the firm have to pay in flotation costs? Assume that the firm maintains their current capital structure. Please do in Excel.

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $115 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $115 is $13.26.

a. If the risk-free interest rate is 6% per year, what must be the price of a 3-month call option on C.A.L.L. stock at an exercise price of $115 if it is at the money? (The stock pays no dividends.) (Do not round intermediate

b-3. How far can the stock price move in either direction before you lose money? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? What is the net cost of establishing that position now? (Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required.)

Find the effective rate of an account that earns 3.5% compounded:

semiannually
quarterly
monthly
weekly
daily
continuously

please dumb this down for me as much as possible

Which of the following would likely encourage a firm to increase the debt in its capital structure?

a. the corporate tax rate increases

b. the personal tax rate increases

c. due to market changes, the firm's assets become less liquid

d. changes in bankruptcy code make bankruptcy less costly to the firm

e. the firms sales and earnings become more volatile

provide rational for each letter in order to support your decision.

A project has annual cash flows of $7,000 for the next 10 years and then $10,500 each year for the following 10 years. The IRR of this 20-year project is 13.96%. If the firm's WACC is 9%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Project A costs $3,000, and its cash flows are the same in Years 1 through 10. Its IRR is 15%, and its WACC is 10%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Given the following information about the cash flows of a project that lasts for 6 years, answer the next 3 questions. The initial outlay is $100,000 , incremental cash flows for the next 6 years are $20,000 , $30,000 , $40,000 , $40,000 , $70,000 , $70,000. The discount rate is 13%.

1. What is the pay back period of the project?

2. What is the NPV of the project?

3. What is the IRR of the project?

(please type the answers) (accounting 640)

What was the most interesting topic that was covered in accounting 640 ? Was there something that you learned that you can apply to your current position or in another course you may be taking?