What are the advantages and disadvantages of the residual policy? (Hint: Don’t neglect signaling and clientele effects.)

Discuss the advantages and disadvantages of a firm repurchasing its own shares.

Problem 6

Exchange rate is currently $1.85 US per 1 British pound. Interest rate is 4% in the US and 3% in the UK. A bank is short a futures contract on 1,000,000 pounds with F= $1.9 million in one year.

1. Find the expected future spot exchange rate using the interest rate parity

2. What risk is the bank facing?

3. Write the expression for the present value of the bank’s short futures position, as a function of current spot exchange rate S

4. Find the delta of the bank’s position.

(Future value of an ordinary​ annuity)  You are graduating from college at the end of this semester and after reading the The Business of Life box in this​ chapter, you have decided to invest ​$4 comma 200 at the end of each year into a Roth IRA for the next 40 years. If you earn 7 percent compounded annually on your​ investment, how much will you have when you retire in 40 ​years? How much will you have if you wait 10 years before beginning to save and only make 30 payments into your retirement​ account? How much will you have when you retire in 40 ​years?

Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT's technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics' fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Flick and Associates, which has been retained to prepare for its public offering and has asked you to address the following issues:

Assume that IWT has completed its IPO and has a $112.5 million capital budget planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal, and its net income is forecasted at $140 million. Use the residual distribution approach to determine IWT's total dollar distribution. Assume for now that the distribution is in the form of a dividend. Suppose IWT has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio?What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $90 million? To increase to $160 million.

Consider the following data.

1. Calculate the Black-Scholes value of the call option

2. Calculate the delta

3. How many units of the underlying stock should you hold to hedge a short position in 100 call option contracts? The contract multiplier is 100.

(Calculating the geometric and arithmetic average rate of​ return)  The common stock of the Brangus Cattle Company had the following​ end-of-year stock prices over the last five years and paid no cash​ dividends: Time Brangus cattle Comapny 1 ​$14 2 11 3 12 4 24 5 25 a.  Calculate the annual rate of return for each year from the above information. b.  What is the arithmetic average rate of return earned by investing in Brangus Cattle​ Company's stock over this​ period? c.  What is the geometric average rate of return earned by investing in Brangus Cattle​ Company's stock over this​ period? d.  Which type of average rate of return best describes the average annual rate of return earned over the period​ (the arithmetic or​ geometric)? ​ Why? a.  The annual rate of return at the end of year 2 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 3 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 4 is nothing​%. ​(Round to two decimal​ places.) The annual rate of return at the end of year 5 is nothing​%. ​(Round to two decimal​ places.) b.  The arithmetic average rate of return earned by investing in Brangus Cattle​ Company's stock over this period is nothing​%. ​(Round to two decimal​ places.) c.  The geometric average rate of return earned by investing in Brangus Cattle​ Company's stock over this period is nothing​%. ​(Round to two decimal​ places.) d.  Which type of average rate of return best describes the average annual rate of return earned over the period​ (the arithmetic or​ geometric)? ​ Why?  ​(Select the best choice​ below.) A. Arithmetic average return best describes the average annual rate of return over a period because it takes compounding into​ account, so it answers the question concerning the expected rate of return over a​ multi-year period. B. Geometric average return best describes the average annual rate of return over a period because it takes compounding into​ account, so it answers the question concerning the expected rate of return over a​ multi-year period. C. Arithmetic average return best describes the average annual rate of return over a period because it is a simple​ average, so it answers the question concerning the expected rate of return over a​ multi-year period. D. Geometric average return best describes the average annual rate of return over a period because it is a simple​ average, so it answers the question concerning the expected rate of return over a​ multi-year period. Click to select your answer(s).

Layla's Distribution Co. is considering a project which will require the purchase of $1.6 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Layla's expects to sell the equipment at the end of the project for $180,000. Annual sales from this project are estimated at $1.3 million, and you will incur $100,000 in fixed costs and variable costs equal to 10% of sales. Net working capital equal to 30 percent of sales will be required to support the project and built up in the beginning. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 12 percent rate of return on this project. The tax rate is 30 percent.

1. What is the value of the depreciation tax shield in year 3 of the project? (Answer is 96000?)

2. What is the amount of the net (after-tax) salvage value of the equipment? (Answer is 126,000?)

3. What is the recovery amount attributable to net working capital at the end of the project?

4. What is the operating cash flow each year?

5. What is the IRR of this project?

Refunding Analysis

Mullet Technologies is considering whether or not to refund a $250 million, 13% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $9 million of flotation costs on the 13% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 9% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 9% any time soon, but there is a chance that rates will increase.

A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $6 million. Mullet's marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 7% annually during the interim period.

A. Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

$_____

B. What factors would influence Mullet's decision to refund now rather than later?

_________

S&P 500 Index is at 2780. A European June 21, 2019 SPX call option struck at 2500 is trading at $316.94. An identical put is trading at $55.15. A T-bill with 200 days to maturity is quoted at a yield of 2.46.

1. From the T-bill, calculate the discount factor

2. Use the discount factor from part a to check the lower-bound condition for the call and the put

3. Use the discount factor from part a to check put-call parity.

4. Design a zero-net-investment strategy exploiting the violation of the put-call parity assuming it is genuine.

You are planning on retiring the moment that you accumulate $1,000,000 in your mutual fund. Currently, you have $226,619 in the account, and you pay 1,000 into it monthly. If your account earns 8%, how many years until you can retire? A. 14 B.15 C. 16 D. 17

Eight years ago, you took out a loan for 100,000 at an interest rate of 12% compounded monthly. The loan was for 20 years, and you make monthly payments of $1,101.09 each month. What is the current balance on the loan today? A. 67,747 B. 9,176 C. 83,834 60,000

Your bank offers you the following choices for an interest rate. Which one would have the lowest actual cost of interest?

A: 12% monthly compounding

B: 12.24% quarterly compounding

C: 12.40% semi-annual compounding

D: 12.75% annual compounding

You are considering the purchase of a new industrial pump that you will use for three years, and it will cost you $40,000 to buy. It will be depreciated using the 3-year MACRS schedule (.33, .45, .15, .07 are the factors) and will be sold at the end of the third year for $8,000. It will also require 3,000 each year in maintenance. If your tax rate is 25% and your cost of capital is 10%, what is the equivalent annual payment for this machine?

xternal Financing

We examined two important topics in finance during this unit: external financing requirements and agency conflicts. Address the prompts below in your essay.

• Include an introduction that summarizes the main points with an example.
• Critically reflect on the importance of external financing requirements. What key factors must be considered when determining external financing requirements?
• Briefly describe the types of agency conflict, and provide an example of at least one of the types of agency conflict to support your response.

Your essay should be at least two pages in length, not counting the title and reference pages. You are required to cite and reference at least your textbook. Use APA format to cite in-text and reference citations.

Profit or Loss on New

Stock Issue Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

Price to public: $5 per share

Number of shares: 3 million

Proceeds to Beedles: $14,000,000

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $290,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

A. $4.75 per share? Use minus sign to enter loss, if any.

$____

B. $6.50 per share? Use minus sign to enter loss, if any.

$____

C. $4.25 per share? Use minus sign to enter loss, if any.

$____

​(Percent

of sales

forecasting​)

Which of the following accounts would most likely vary directly with the level of a​ firm's sales? Discuss each briefly.

Is cash likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​Yes, cash receipts vary directly with sales and have a relation to the​ firm's customers payment habits or the​ firm's policy regarding payments on its accounts payable.

B.

​No, cash receipts follow sales with a lag related to the payment habits of the​ firm's customers and the​ firm's policy regarding payments on its accounts payable.

Are marketable securities likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​Yes, the value of marketable securities varies directly with sales.

B.

​No, marketable securities are not related to sales.

Is accounts payable likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​No, accounts payable will not vary directly with sales.

B.

​Yes, accounts payable will vary directly with sales.

Is notes payable likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​Yes, notes payable is likely to vary directly with sales.

B.

​No, notes payable will only follow sales if the firms uses a line of credit to finance its working capital needs.

Is plant and equipment likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​No, plant and equipment is not likely to vary directly with the level of sales.

B.

​Yes, plant and equipment is likely to vary directly with the level of sales.

Are inventories likely to vary directly with the level of a​ firm's sales?  ​(Select the best choice​ below.)

A.

​Yes, inventories are likely to vary directly with the level of sales.

B.

​No, inventories are not likely to vary directly with the level of sales.