Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

(A)    (6 points) What is the initial cash outlay for this replacement project?

(B)    (5 points) What is the operating cash flow of the project?

(C)    (5 points) What is the terminal cash flow of th

(D)    (4 points) Should you replace the existing assembly line? Provide all the details.

Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

(a) (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

(b) (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.

(c) (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?

(d) (5 points) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

On June 15, you took a long forward contract (delivery on December 15) on a dividend-paying stock when the stock price was $30 and the risk-free interest rate (with discrete compounding) is 12% per annum. The amount of the dividends were known as $0.75 on Aug 15, and Nov 15. It is now September 15 and the current stock price and the risk-free interest rate are, respectively, $31 and 10%. What is the value of your long forward position now? Assume the forward contract prices are arbitrage free prices.

) Consider the following situation:

State of Economy	Probability of State of Economy	Returns if State Occurs
		Stock A	Stock B	Stock C
Boom	20%	25%	10%	5%
Recession	80%	-30%	5%	10%

The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

1. (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

2. (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.

3. (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?
4. ) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

Use the Black-Scholes model to find the value for a European put option that has an exercise price of $34.00 and 0.3333 years to expiration. The underlying stock is selling for $26.00 currently and pays an annual dividend yield of 0.03. The standard deviation of the stock’s returns is 0.3500 and risk-free interest rate is 0.08. (Round your final answer to 2 decimal places. Do not round intermediate calculations.)

Put value            $

Your 21 year old client just graduated from college and started a job with monthly salary of $5,000 per month. He wants to retire when he is 60 years old and wants to start saving for retirement right away. We cannot be sure of how long we live after retirement, but the client wants to be extra careful and save for 30 years of after retirement life. Market expectation for average annual inflation for the future is 1.7% (Let’s assume inflation to be 0 after retirement period). Because of inflation, he will need substantially higher retirement monthly income to maintain the same purchasing power. He plans to purchase a lifetime annuity from an insurance company one month before he retires, where the retirement annuity will begin in exactly 39 years (468 months). The insurance company will add a 2.00 percent premium to the pure premium cost of the purchase price of the annuity. The pure premium is an actuarial cost of his anticipated lifetime annuity. He has just learned the concept of time value of money and never saved anything earlier. He will make the first payment in a month from now and the last payment one month before he retires (a total of 467 monthly payments).

1) Given a rate of return of 4% for the foreseeable future, how much does he need to save each month until the month before he retires?

Compute the payback statistics (Not discounted) for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriare cost of capital is 10 percent and the maximum allowable payback is
five years.

Time:                  0        1      2        3         4       5
Cash flow:        -75   -75     0     100     75     50

a. 3.67 years, accept
b. 4.67 years, accept
c. 3.67 years, reject
d. 4.67 years, reject

The current year financial statements for Blue Water Company and Prime Fish Company are presented below. Blue Water Prime Fish Balance sheet: Cash $ 41,100 $ 20,900 Accounts receivable (net) 38,500 31,300 Inventory 98,500 40,600 Property & equipment (net) 141,500 402,200 Other assets 84,100 306,000 Total assets $ 403,700 $ 801,000 Current liabilities $ 98,500 $ 50,500 Long-term debt (interest rate: 15%) 65,700 60,200 Capital stock ($10 par value) 148,700 513,000 Additional paid-in capital 29,100 106,100 Retained earnings 61,700 71,200 Total liabilities and stockholders’ equity $ 403,700 $ 801,000 Income statement: Sales revenue (1/2 on credit) $ 445,500 $ 801,000 Cost of goods sold (240,500 ) (400,100 ) Operating expenses (161,200 ) (311,100 ) Net income $ 43,800 $ 89,800 Other data: Per share stock price at end of current year $ 22.1 $ 16 Average income tax rate 45 % 45 % Dividends declared and paid in current year $ 33,100 $ 148,500 Both companies are in the fish catching and manufacturing business. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Blue Water is more conservative, and as its president has said, “We avoid what we consider to be undue risk.” Neither company is publicly held. Required: 1. Complete a schedule that reflects a ratio analysis of each company. (Round your intermediate calculations and final answers to 2 decimal places. Enter percentage answers rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) Ratio BLUE WATER COMPANY PRIME FISH COMPANY Profitability ratios: 1. Return on equity 2. Return on assets 3. Financial leverage percentage 4. Net profit margin 5. Earnings per share Turnover ratios: 6. Total asset turnover 7. Fixed asset turnover 8. Receivable turnover 9. Inventory turnover Liquidity ratios: 10. Current ratio 11. Quick ratio 12. Cash ratio Solvency ratios: 13. Debt/equity ratio Market ratios: 14. Pricelearnings ratio 15. Dividend yield ratio

kindly give me the true-false answer, please. if you are not sure please don't take this

Question 1 (TRUE or FALSE?) Current assets normally include fixed assets such as buildings, land, and machinery.

Question 2 (TRUE or FALSE?) ROE = Gross income/Preferred equity.

Question 3 (TRUE or FALSE?) The times-interest-earned (TIE) uses net income rather than EBIT because dividends is paid with pre-tax dollars and therefore the firm’s ability to pay current dividends is not affected by taxes.

Question 4 (TRUE or FALSE?) The ratio of gross income to common equity measures the return on total assets (ROE).

Question 5 (TRUE or FALSE?) Inventories may result in losses in a bankruptcy because inventories are the least liquid of a firm’s current assets.

Question 6 (TRUE or FALSE?) The return on total assets is the ratio of gross income to total debt.

Question 7 (TRUE or FALSE?) If the firm’s assets generate a higher pre-tax return than the interest rate on debt, then the shareholders’ returns are magnified, or “leveraged.”

Question 8 (TRUE or FALSE?) The net profit margin identifies the gross profit per dollar of sales before any other expenses are deducted.

Question 9 (TRUE or FALSE?) If the ROIC is greater than the company’s weighted average cost of capital (WACC), then the company usually is adding value.

Question 10 (TRUE or FALSE?) The net profit margin is calculated by dividing sales by taxable income.

Question 11 (TRUE or FALSE?) Market debt ratio = Total debt/(Total debt + Market value of equity).

Question 12 (TRUE or FALSE?) The current ratio measures liquidity by comparing the current assets to the current liabilities and it is equal to current assets divided by current liabilities.

Question 13 (TRUE or FALSE?) If a company has high leverage, even a small decline in performance might cause the firm’s value to fall below the amount it owes to creditors.

Question 14 (TRUE or FALSE?) Window dressing is a technique employed by firms to make their financial statements look worse than they really are.

Question 15 (TRUE or FALSE?) The extent to which a firm uses debt financing is called financial leverage.

Question 16 (TRUE or FALSE?) Net operating working capital is operating current liabilities minus operating current assets.

Question 17 (TRUE or FALSE?) The income statement begins with assets, which are the “things” the company owns.

Question 18 (TRUE or FALSE?) Taxable income is defined as gross income less a set of exemptions and deductions which are spelled out in the instructions to the tax forms individuals must file.

Question 19 (TRUE or FALSE?) Assets such as stocks, bonds, and real estate are defined as capital assets and if a capital asset is sold for more than its cost, the profit is called a capital gain.

Question 20 (TRUE or FALSE?) Preferred stock is a hybrid or a cross between common stock and debt.

Question 21 (TRUE or FALSE?) Investing activities such as sells a building increases cash at the time of the sale.

Question 22 (TRUE or FALSE?) A progressive tax means the higher one’s income, the smaller the percentage paid in taxes.

Question 23 (TRUE or FALSE?) An S corporation is a small corporation which, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

Question 24 (TRUE or FALSE?) Interest income received by a corporation is not taxed under the new tax law, 2017 Tax Cut and Jobs Act (TCJA).

Question 25 (TRUE or FALSE?) A proprietorship is is a small corporation which, under Subchapter S of the Internal Revenue Code, elects to be taxed as S corporation yet retains limited liability and other benefits of the corporate form of organization.

Question 26 (TRUE or FALSE?) Operating current assets are the current assets used to support operations, such as cash, accounts receivable, and inventory and does not include short-term investments.

Question 27 (TRUE or FALSE?) Increases in current liabilities such as accounts payable decrease cash.

Question 28 (TRUE or FALSE?) Dividing net income by the number of shares outstanding gives earnings per share (EPS).

Question 29 (TRUE or FALSE?) Total net operating capital = NOWC + Operating long-term assets.

Question 30 (TRUE or FALSE?) When a firm takes out a loan that must be repaid within a year, it signs an IOU called a bond.

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 $9.66 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 $57 million, and the expected cash inflows would be $19 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $20 million. The risk-adjusted WACC is 11%. a. 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 ________ %

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

I. 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.

II. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. III. 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.

IV. The environmental effects should be ignored since the mine is legal without mitigation.

V. The environmental effects should be treated as a sunk cost and therefore ignored.

_________________

c. Should this project be undertaken? _________________

If so, should the firm do the mitigation?

I. 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.

II. 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.

III. 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.

IV. 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.

V. 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.

_________________

You just got hired at a brand new hospital as a financial analyst and the Board wants to buy an MRI machine but they are unsure if this makes financial sense. You gather some figures so you can make an informed decision to present to the Board. (questions 40-44) Use CF’s given, no further calculation has to be done for CF’s.

Cost of the MRI machine 1.5 million

Salvage value after 5 years 50k

Working capital to hire an operator 200k only initially and not recoverable.

CF yr 1-3 400k

CF yr 4-5 300k

The hospital currently has no common stock or preferred stock or debt in their capital structure as it was funded with a 25 million dollar gift from Bill Gates. The machine is to be financed with a 5%, 5 year loan. Interest is tax deductible and the tax rate is 30%.

40. The IRR on this MRI machine is:

1. 4%
2. 3%
3. 7.7%
4. 6.8%

41. T/F Based on the IRR decision criteria we should accept this project

42. Based on the NPV analysis what should you recommend to the board

a. Do not recommend as it will take away 89k of value

b. Recommend as it will add 135k in value

c. Recommend as it will add 177k in value

d. Do not recommend as it will take away 23k of value

43. Assume now that the hospital was financed with 60% debt and 40% equity. The cost of debt is 6% and taxes are 20%, while the risk free rate is 3%, beta is .8 and the return of the market is 9%. If cash flow in years 1-3 are now assumed to increase to 500k instead of 400k, what would you recommend to the board?

a. Yes as it adds 136k in value

b. Yes as it adds 98k in value

c. no as the IRR

d. Yes as it adds 100k in value

44. T/F the payback under the original MRI assumptions is 4.67 years

Please answer it correctly. Here is a short problems. Please solve all problems correctly. Make sure the answers are correct. I would really appreciate your effort. Thanks.

1). The Oriole Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,429.26 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $14 per share. The preferred shares pay an annual dividend of $1.20. Oriole also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 4 percent per year forever. If Oriole is subject to a 40 percent marginal tax rate, then what is the firm’s weighted average cost of capital?

Excel Template
(Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you’ve been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.)

Calculate the weights for debt, common equity, and preferred equity. (Round intermediate calculations and final answers to 4 decimal places, e.g. 1.2514.)

Debt _________?

Preferred Equity ________?

Common Equity ________?

Calculate the cost of debt. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Cost of debt _______%

Calculate the cost of preferred equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Cost of preferred equity _________%

Calculate the cost of common equity. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 0 decimal places, e.g. 15%.)

Cost of common equity_________%

What is the firm’s weighted average cost of capital? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

WACC______%

 The annual sales for​ Salco, Inc. were

$4.46

million last year. The​ firm's end-of-year balance sheet was as​ follows:  

. ​ Salco's income statement for the year was as​ follows:  

.

a. Calculate​ Salco's total asset​ turnover, operating profit​ margin, and operating return on assets.

b.  Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of

$1.04

million. The firm will maintain its present debt ratio of 50

percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to

13.4

percent. What will be the new operating return on assets ratio​ (i.e., net operating

income divided by÷total

​assets) for Salco after the​ plant's renovation?

c.  Given that the plant renovation in part

​(b​)

occurs and​ Salco's interest expense r $49,000

per​ year, what will be the return earned on the common​ stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this​ comparison, did the renovation have a favorable effect on the profitability of the​ firm?

Current assets $507,000

Liabilities

$1,005,500

Net fixed assets

1,504,000

​Owners' equity

1,005,500

Total Assets

$2,011,000

Sales

$4,460,000

​Less: Cost of goods sold

(3,495,000)

Gross profit $965,000

​Less: Operating expenses

(497,000)

Net operating income

$468,000

​Less: Interest expense

(104,000)

Earnings before taxes

$364,000

​Less: Taxes

​(35%​)

(127,400)

Net income

$236,600

14.7 California Health Center, a for-profit hospital, is evaluating the purchase of new diagnostic equipment. The equipment, which costs $600,000, has an expected life of five years and an estimated pretax salvage value of $200,000 at that time. The equipment is expected to be used 15 times a day for 250 days a year for each year of the project’s life. On average, each procedure is expected to generate $80 in collections, which is net of bad debt losses and contractual allowances, in its first year of use. Thus, net revenues for Year 1 are estimated at 15 × 250 × $80 = $300,000.

Labor and maintenance costs are expected to be $100,000 during the first year of operation, while utilities will cost another $10,000 and cash overhead will increase by $5,000 in Year 1. The cost for expendable supplies is expected to average $5 per proce- dure during the first year. All costs and revenues, except deprecia- tion, are expected to increase at a 5 percent inflation rate after the first year.

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e equipment falls into the MACRS five-year class for tax depreciation and is subject to the following depreciation allowances:

Year    Allowance

1    0.20 2    0.32 3    0.19 4    0.12 5    0.11 6    0.06

1.00

The hospital’s tax rate is 40 percent, and its corporate cost of capi- tal is 10 percent.

a. Estimate the project’s net cash flows over its five-year estimated life. (Hint: Use the following format as a guide.)

Year

012345

Equipment cost Net revenues Less: Labor/maintenance costs

Utilities costs Supplies Incremental overhead Depreciation

Operating income Taxes

Net operating income Plus: Depreciation Plus: Equipment salvage value

Net cash flow

b. What are the project’s NPV and IRR? (Assume for now that the project has average risk.)

The following questions are conceptual questions on several topics that we have discussed in the course. In answering the questions, be clear and to-the-point. The motivation of your answer determines the grade.

1. Suppose you have to choose between three projects. All involve production technologies that will be repeated at the end of their economic lives. Relevant project information is summarized below. Your supervisor expects a recommendation consistent with shareholder value maximization (his compensation package is linked to the share price of the firm). Which of the projects would you recommend to him, and how can you explain the difference in project rankings between the different capital budgeting criteria? Motivate your answer.
   

Project	T=0	T=1	T=2	T=3	IRR	NPV@10%	EA
A	-$500,000	$250,000	$250,000	$ 200,000	19.7%	$84,147	$33,837
B	-$1,000,000	$500,000	$750,000	-	15.1%	$74,380	$42,857
C	-$1,500,000	$250.000	$750,000	$1,000,000	13.1%	$98,422	$39,577

1. As part of its efforts to stimulate the economy after the crisis, the Obama administration allowed small businesses to immediately write down capital expenditures for tax purposes. The policy is now being reviewed as part of the discussion on corporate tax reform. One of your colleagues argues that this ultimate form of accelerated depreciation is always beneficial to companies. Another colleague argues that this is not necessarily true, but depends on the salvage value of the asset at the time it is sold. In particular, if a firm sells an asset at a price above book value, accelerated depreciation may be less attractive. A third colleague points out that the depreciation method used by a firm is irrelevant, since depreciation is a non-cash expense, and therefore only affects accounting earnings. Please respond to each of these statements. Who do you agree with and how would you assess the attractiveness of the Obama policy? Motivate your answer.
              
2. American Chemical, a large chemical conglomerate, is planning to buy the Paper division of Du Pont. A Stern student doing an internship at the firm has been asked to identify the correct cost of capital of American Chemical after the acquisition and collected the following firm and financial market information. The student established that all firms in the table pay corporate taxes at a 35% rate, and estimated a market risk premium of 6%. The target capital structure for the acquisition is 50% debt. American Chemical’s target capital structure has 40% debt and Du Pont’s Paper division has 30% debt. Describe clearly how the student should proceed in estimating the correct cost of capital. Motivate your input choices, discuss any additional information you would need and show the steps (You can include any formulas you would use)