1. You sell short 400 shares of Apple that are currently selling at $200 per share. You post the 60% margin required on the short sale, and the maintenance margin requirement is 25%. At what price would you receive a margin call (assume the margin call happens immediately).

1. You short-sell 10 shares of Amazon.com, Inc today. The stock price is $2,000 per share. What is your maximum possible gain of this trade when you cover your position in the future (ignoring transactions costs)?

1. Investor X puts up $10,000 but borrows an equal amount of money from her broker to double the amount invested to $20,000. The broker charges 8% interest on the loan. The stock was originally purchased at $10 per share and in one year, Investor X sells the stock for $12. Investor Y does not believe in borrowing to buy shares and invests $20,000 of his own money in the same stock. What is the difference in rate of return between Investor X and Investor Y?

1. The table presents forecasts of the returns of stock market and probability of each state of the economy for next year. Calculate the standard deviation.
   

Which of the following indexes requires frequent rebalancing?

[I] Value-weighted index
[II] Price-weighted index
[III] Equally-weighted

An investor invests 60% of her wealth in the market portfolio with an expected rate of return of 12% and a variance of 0.01, and she puts the rest in Treasury bills that pay 2% per year. What is the standard deviation of the portfolio?

You are an investment advisor for Alan and Jimmy. You've helped them optimally allocate their investment portfolios along the same capital allocation line (CAL). If Alan's portfolio has a higher weight on risk-free asset than Jimmy's portfolio, then which of the following statements MUST be true:

[I]   Alan’s portfolio has lower expected returns than Jimmy’s
[II]  Alan is less risk-averse than Jimmy
[III] Alan must hold a positive position in the risky asset

The table presents forecasts of the returns of stock market and probability of each state of the economy for next year. Calculate the expected return.

On Jan 1, you sold short 400 shares of AT&T at $35 per share. You post $7000 to the margin account. On April 1, you received a margin call on this trade. Assume the minimum margin requirement is 40%, what is the price of the stock that triggered the margin call?

Times-Interest-Earned Ratio

The Morris Corporation has $700,000 of debt outstanding, and it pays an interest rate of 10% annually. Morris's annual sales are $3.5 million, its average tax rate is 35%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan, and bankruptcy will result.

1. What is Morris's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Part B Cost of Capital (Show all workings 50 marks) Grainwaves Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 55% Ordinary Equity, 5% Preference Shares, and 40% Debt. All of the shareholders of Grainwaves are Australian residents for tax purposes. To fund a major expansion Grainwaves Ltd needs to raise a $150 million in capital from debt and equity markets. Grainwaves Ltd’s broker advises that they can sell new 10 year corporate bonds to investors for $105 with an annual coupon of 6% and a face value of $100. Issue costs on this new debt is expected to be 1% of face value. The firm can also issue new $100 preference shares which will pay a dividend of $7.50 and have issue costs of 2%. The company also plans to issue new Ordinary Shares at an issue cost of 2.5%. The ordinary shares of Grainwaves are currently trading at $4.50 per share and will pay a dividend of $0.15 this year. Ordinary dividends in Grainwaves are predicted to grow at a constant rate of 7% pa. i. Calculate how much debt Grainwaves will need to issue to maintain its target capital structure. ii. What will be the appropriate cost of debt for Grainwaves. iii. Calculate how much Preference Share equity Grainwaves will need to issue to maintain their target capital structure. iv. What will be the appropriate cost of Preference shares for Grainwaves? v. Calculate how much Ordinary Share equity Grainwaves will need to issue to maintain their target capital structure. vi. What will be the appropriate cost of Ordinary Equity shares for Grainwaves? vii. Calculate how the Weighted Average Cost of Capital for Grainwaves Ltd following the new capital raising. viii. Grainwaves Ltd has a current EBIT of $1.3 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the company’s cost of capital by 0.5%. How will this change the value of the company? Support your answer using theory and calculations.

Current and Quick Ratios

The Nelson Company has $1,392,000 in current assets and $480,000 in current liabilities. Its initial inventory level is $355,000, and it will raise funds as additional notes payable and use them to increase inventory.

1. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.2? Do not round intermediate calculations. Round your answer to the nearest dollar.

2. What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

Mr. Thomas has just inherited $ 1000,000. He could either invest his money in the bank which gives a return of 4% or invest in shares of Monopoly Corp which is the only company in the market. Shares of Monopoly Corp offer an average return of 12% and a risk of 10%.

a) If Mr. Thomas wants a return of 10%, how much money does he need to invest in shares ?

b) Calculate the risk of his investment strategy.

2) At end of Day 1, I invest equal amounts of money in shares of company A and B.

By end of Day 2, the price of company A shares has doubled and the price of company B shares has halved (compared to Day 1 price).

• What is the return on my entire investment from Day 1 to Day 2 ?
• What are the weights of my portfolio at the end of Day 2 ?
• At the end of Day 3, the price of company A shares has halved and the price of company B shares has quadrupled (compared to Day 2 price).

What is the return on my investment from end of Day 1 to end of Day 3 ?

) In a market with three assets, the portfolios P₁ = (0.6, 0.3, 0.1) and P₂ = (- 0.2, 0.5, 0.7) lie on the Minimum Variance Set. The portfolios have returns 12% and 4% respectively.

a) Find the portfolio on the MVS with return 14%.

b) Does the portfolio P = (0.1, 0.4, 0.5) lie on the MVS ? Explain.

The owners of a small manufacturing company have hired a manager to run the company with the expectation that the new manager will buy the company after 3 years. Compensation of the new vice president is a flat salary of $100,000 plus 50% of the first $200,000 profit, then 10% of profit over $200,000. When the new manager purchases the company, he will be required to pay 5 times the average annual profitability of the 3 year period. 1. Plot the annual compensation of the VP as a function of annual profit. (Place profit on the horizontal axis and compensation on the vertical axis.) 2. Assume the company will be worth $10 million in 3 years. Plot the profit of buying the company as a function of annual profit. (Profit from purchase= Value – Price Paid) 3. Does this contract align the incentives of the new VP with the profitability goals of the current owners? 4. Redesign the contract to better align the incentives of the new VP with the profitability goals of the owners.

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $2.8 million in additional financing. His investment banker has laid out three plans for him to consider:

1. Sell $2.8 million of debt at 10 percent.
2. Sell $2.8 million of common stock at $20 per share.
3. Sell $1.40 million of debt at 9 percent and $1.40 million of common stock at $25 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,380,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1 million per year for the next five years.
Delsing is interested in a thorough analysis of his expansion plans and methods of financing.He would like you to analyze the following:

a. The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.)
  

b. The degree of operating leverage before and after expansion. Assume sales of $5.8 million before expansion and $6.8 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC). (Round your answers to 2 decimal places.)
  

c-1. The degree of financial leverage before expansion. (Round your answer to 2 decimal places.)
  

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $6.8 million for this question. (Round your answers to 2 decimal places.)
  

d. Compute EPS under all three methods of financing the expansion at $6.8 million in sales (first year) and $10.8 million in sales (last year). (Round your answers to 2 decimal places.)
  

Suppose you are considering a project that will generate quarterly cash flows of $16429 at the beginning of each quarter for the next 12 years. If the appropriate discount rate for this project is 12%, how much is this project worth today? Round to the nearest cent.