Then respond to the following: The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments

1) A bank with a leverage ratio of 15 has a cost of debt of 2%pa and a portfolio of assets with an expected yield of 4%pa. What are the expected ROA net of debt funding costs and the expected ROE of the bank, using the approach to defining leverage taken in the lecture slides? Show your workings.

2) What will the ROA and ROE actually be if the yield on assets turns out to be 3%? Show your workings. (1 mark)

3) What will the ROA and ROE actually be if the yield on assets turns out to be 1%? Show your workings.

4) What is the unweighted bank’s capital (or E/A) ratio (i) for a leverage ratio of 20 and (ii) for a leverage ratio of 30? Show your workings. (1 mark)

5) Redo the above calculations in parts 1) and 3) for a leverage ratio of 25. What affect does the higher leverage ratio have on your answers? Show your workings.

6) What is the relationship between a bank’s capital ratio and the risks and returns faced by (i) its shareholders and (ii) its creditors? Explain your answers.

This should be done in as an Excel file.

Using the simple time value of money concepts from Corporate Finance course:

1. Calculate the price of an annual coupon‐bond with a par value of $1,000, time to maturity of 10 years, coupon rate of 10% and
2. yield to maturity of 12% (bond DC).
3. yield to maturity of 8% (bond PC).
4. Do the sensitivity analysis on the price of these two bonds (bond DC & bond PC) by changing the
5. following (one variable change at a time):
6. Time to maturity from 1 year to 50 years in increments of 1 year.
7. Coupon rate from 0% to 20% in increments of 1%.
8. Fix the time to maturity at 5 years and coupon at 10% but change the yield to maturity from 0% to 30%. This will be just one bond, not the two bonds mentioned above.
9. Fix the time to maturity at 30 years and coupon at 10% but change the yield to maturity from 0% to 30%. This will be just one bond, not the two bonds mentioned above.
10. Calculate the price of two zero‐coupon bond with a par value of $1,000, time to maturity of 10 years, and
11. yield to maturity of 12% (bond DZ).
12. yield to maturity of 8% (Bond PZ).
13. Do the sensitivity analysis on the price of these two bonds (bond DZ and bond PZ) by changing the following:

a. Time to maturity from 1 year to 50 years in increments of 1 year.

1. Fix the time to maturity of the zero to 5 years but change Yield to maturity from 0% to 20%
2. Fix the time to maturity of the zero to 30 years but change Yield to maturity from 0% to 20%

For each sensitivity analysis part, a table and a graph is required. The graph should show the relationship between the variable that you changed and price of the bond. The graph type should be the smooth line kind under the charts icon that shows scatter dots.

Under each graph a sentence or two is required to explain the relationship between the variable that you changed and the bond price.

Finally, in a few sentences that compare the sensitivity of the coupon‐bond with the zero‐coupon bond for similar change in time to maturity and yield to maturity.

Sensitivity analysis = studying the effect of changing one variable value on an outcome of interest. From Corporate Finance, this analysis was done for project NPV.

Early 2000 years were famous for corporate scandals (Enron, Worldcom, and Tyco) Please give a recent example of an agency problem or scandal that came to light in the media. Make a reference to the textbook and state what type of conflict you are describing. (Stockholders vs. managers, managers vs. creditors, etc) Provide your reference.

What are the similarities of Total asset turn over and capital intensity. What does a high and low value indicate? why are these important equations

Discuss a short and long-term plan for a perennially losing team and identify specific steps that could be taken to increase income or generate victories.

At 6.5​% ​APR, what is the present value of ​$2263 per year​ forever, if the first payment will be received 16 years from​ today? ​ (Rounded to the nearest 10​ cents.)

SUBJECT is FINANCE

Free Cash Flows

Rhodes Corporation’s financial statements are shown below.

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

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

Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.
2. What are the amounts of net operating working capital for both years (2020 and 2019)? Enter your answers in millions. Round your answers to the nearest whole number.

   2020: $   million

   2019: $   million

3. What are the amounts of total net operating capital for both years? Enter your answers in millions.

   2020: $   million

   2019: $   million

4. What is the free cash flow for 2020? Enter your answer in millions. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number.

   $    million

5. What is the ROIC for 2020? 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 answers in millions.

   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

You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company's weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company's weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project is financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Based on the scenario above, post your reactions to the following questions and concerns:

What is your reaction to Harriet's suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

Exercise Example - Capital Budgeting Project Analysis - Chapter 5

As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections.  

1. Calculate the Payback Period for each project.

2. If the discount rate for all three projects is 12.5%, calculate the Net Present Value for each project.

You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company's weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company's weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project is financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Based on the scenario above, post your reactions to the following questions and concerns:

What is your reaction to Harriet's suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

You want to borrow $60,000 for a new tricked-out Hummer H2 for your high school basketball star son.  If you can somehow qualify for an outrageously low interest rate of 4.5%, compounded monthly for a six-year (60 month) loan, what amount will your monthly payment be?

Growth for the sake of growth is not always in the best interest of the firm and shareholder value. What are some of the things the firm can do to increase its growth potential, and when might an action to increase growth be contrary to the interest of increasing the firm's value?