1. Suppose that firms face 40% income tax rate on positive profits and that net losses receive no credit. (Thus, if profits are positive, after-tax income is (1 – 0.4) * profit, while if there is a loss, after-tax income is the amount lost.) Firms A and B have the same cash flow distribution as in problem 5 above. Suppose the appropriate effective annual discount rate for both firms is 10%?
   1. What is the expected pre-tax profit for A and B?
   2. What is the expected after-tax profit for A and B?
   3. What would Firms A and B pay today to receive next year’s expected cash flow for sure, instead of the variable cash flows described above?

Here I attach problem 5, so you can see the info for problem 6, problem 6 is the one that I want to get the answer.

Problem 5.

1. Suppose that firms face 40% income tax rate on all profits. In particular, losses receive full credit. Firm A has 50% probability of a $1000 profit and a 50% probability of a $600 loss each year. Firm B has a 50% probability is a $300 profit and a 50% probability of a $100 profit each year.

Problem 16-04
Cost of Trade Credit

A large retailer obtains merchandise under the credit terms of 2/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume 365 days in year for your calculations. Do not round intermediate calculations. Round your answer to two decimal places.

You company wants to build a new small plant that will cost $90,000,000 to construct. You will

pay the construction engineering firm $45,000,000 today and another $45,000,000 at the end of the first year of construction. The plant will be finished 24 months from the start of construction. Each year of operation, the plant will take charges of $5,000,000 per year at the beginning of the year for raw materials, labor, and maintenance. Each year of operation, the plant will take credits of $20,000,000 in sales revenues at the end of the year. If the company requires a MARR of 15% and the plant is expected to have a life of 15 years of production, answer the following questions:

a. What is the simple Payback Period for this project ignoring the effects of time value of money? b. What is the NPV of this project using the MARR? c. What is the Discounted Payback Period of this project using the MARR? d. What is the IRR for this project?

Problem 17-04
Exchange Rate

If euros sell for $1.91 (U.S.) per euro, what should dollars sell for in euros per dollar? Round your answer to two decimal places.

Problem 22-03
Merger Bid

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.15 (given its target capital structure). Vandell has $10.32 million in debt that trades at par and pays an 7.5% interest rate. Vandell’s free cash flow (FCF₀) is $2 million per year and is expected to grow at a constant rate of 5% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 6% and the market risk premium is 6%.

Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.6 million, $3.1 million, $3.3 million, and $3.85 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $10.32 million in debt (which has an 7.5% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.434 million, after which the interest and the tax shield will grow at 5%.

Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent. Do not round intermediate calculations.

The bid for each share should range between $ per share and $ per share.

6. Suppose that the following information represents the complete trade data for each country.

(a) Calculate the intra-industry trade index for each commodity category in each country.

(b) Calculate the intra-industry trade index for total trade in each country.

(c) Use trade theory to explain the usefulness of these indices in determining each country’s trade patterns.

Note: You may use either the Balassa index or the Grubel-Lloyd index for your calculations.

What are some of the key factors affecting investment returns - internal characteristics and external forces.

In our class example, I simplified the “annuity” prize option by assuming level, equal annual payments. Actually, this annuity prize option us now on an annuitized prize payment schedule with 30 beginning of year payments that start at a lower amount with each successive payment being 5% higher than the previous annual payment. The sum of these 30 annuitized payments equal the announced estimated jackpot amount with a lower one-time lump-sum payment also being available as the Cash Option.

A recent Mega Millions estimated jackpot amount is $300 million which is the undiscounted sum of the 26 annuity option payments with a Cash Option of $207 million. The first payment under the Annuity Option which would occur immediately is $4,515,432 with 29 additional annual payments with each payment being 5% larger than the previous one. Using this information and assuming you demand a 4% annual return, would you prefer the Annuity Option or the Cash Option if you have the winning ticket?

Please include the following to support your decision:

1. A complete schedule of all 30 annual payments under the Annuity Option. (Please use excel)

2. A comparison of the present value of all the payments under the Annuity Option and the present value of the Cash Option.

3. Use the Excel IRR function to find the interest rate that equates the PV of the annual payments with the cash option. This is the rate of return that the annuity option pays. Hint: you will have to deduct the first annual payment from the cash option amount for the initial (time zero) cash flow to calculate this rate.

4. Your decision.

Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000. Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront. Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

(A) Assuming Ann makes payments for 30 years, what is Ann’s annualized IRR from mortgage A?

(B) Assuming Ann makes payments for 30 years, what is Ann’s annualized IRR from mortgage B?

(C) Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage A?

(D) Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage B?