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.

The TEMKO Company encountered the problem of defects in some of its pur- chased tractor short-block castings. The short-block castings are used to build the R-208 tractor engines. TEMKO installs the heads, manifold, carburetor, and other engine parts, which consist of approximately 13 percent of the short-block casting purchase price. When the defects are discovered, the short blocks have to be disas- sembled and repaired. It takes approximately eight hours per repair. Even with this process, almost 4 percent of the incoming short blocks end up as scrap. In other words, approximately 10 out of every 100 units are repaired and 40 percent of the repaired short blocks are scrapped. Each short-block casting costs between $1,550 and $1,700 depending on the supplier. There is also a cost of downtime as- sociated with interruptions on the shop floor.
The internal labor cost of assembling each incoming short-block casting and repair as necessary is approximately $878 per short block. The estimated overhead, which is 150 percent of direct labor, consists of 33 percent variable and 67 percent fixed costs; the shop floor disruption cost is estimated to be $500 per disruption.
Recently, James Sun, the purchasing manager, released a request for quote (RFQ) for the short blocks to three prequalified suppliers of assembled tractor en- gines. However, only one supplier, ACE Manufacturing, Inc., showed an interest. ACE was a small startup company that was looking for work. In order to produce assembled R-208 engines, an investment in precision machinery of more than $1,500,000 would need to be made. ACE was willing to both invest in the neces- sary machine and guarantee at least 100 engines per month—provided TEMKO would contract with it as a sole source for the engines for the next three years. The price per engine would be $3,500 the first year, with an annual increase of 3 per- cent. TEMKO anticipated that they would need at least 1,000 finished engine as- semblies per year for the next five years. As the purchasing manager for TEMKO, how would you analyze this outsourcing decision? (Make sure your analysis is complete.)

1. Develop a unit cost breakdown for R-208 tractor engines utilizing both available current

data and assumptions in the process of calculations. State all assumptions

2. What would the estimated probable cost resulting from poor quality of incoming shortblocks

castings? Suggest probable solutions to this quality problem.

5. According to ACE Manufacturing, what would the resulting cost reduction from

outsourcing to ACE Manufacturing be? Discuss the probable sources of this cost reduction.

What would be the consequence of exploiting these sources to TEMKO and ACE

Manufacturing?

You have 3 billion dollars in the fund, which you can invest in any combination of Australian stocks, US stocks, and Australian Treasury. The idea is to use your knowledge of portfolio theory to make an argument for having an internationally diversified portfolio, rather than just holding domestic assets. The data are monthly returns and the relevant sample statistics are summarized in the following table:

1. Using the results of portfolio theory and the estimates above, compute the tangency mutual fund (portfolio) between Australian and US stocks (i.e., the optimal split between Australian and US stocks). Find the tangency portfolio using the Solver in Excel. Paste the table used with Solver to your Word document and discuss your findings.

2. Suppose you would like to achieve an average return of 0.5% per month in excess of the T-bill rate with the smallest possible risk. What is the optimal split between Australian stocks, US stocks, and T-bills? That is, how much of the $3 billion should you invest in each country and how much should you borrow or lend? What is the standard deviation of this portfolio?

3. After a bad year on the US stock market, some people try to influence you to divest (i.e., sell all of) the holdings of US stocks. How much should you invest in Australian stocks and T-bills alone to obtain the same level of risk as you obtained in part 2.? (Hint: you want the standard deviation of the divested portfolio to be the same as the nondivested portfolio.)

4. What would be the cost in terms of expected monthly return from divesting in the US stocks? What would be the cost in terms of annual return (note: the returns are continuously compounded)? What would be the cost in dollar terms on the $3 billion portfolio each year?

In order to expand, El Cap Climbing Company (ECCC) is considering taking out a mortgage for a new store location, a nonresidential real property that includes land and a building. Leah is unsure if she has the cash flow to take on any more debt. She asked you to create a loan amortization schedule for the proposed mortgage loan. Then, you’ll create a chart that represents the portion of each payment that goes toward principal and interest. A. Prepare the following: n A loan amortization schedule n A chart showing the percentage of the payment applied toward the principal and interest
Loan Amortization Schedule
First, you’ll need to create a loan amortization schedule in the downloaded Excel spreadsheet. Create the table on the tab named “Part 2 Loan Amortization Sched.” The following table illustrates the payments and interest amounts for a fixed-rate, 30-year, $500,000 mortgage, at a five-percent interest rate. The monthly payment will be 2,684.11Payment Number
Payment Amount
5% Interest Expense
Principal Balance Annual Interest Expense 0 500,000.00 1 2,684.11 2,083.33 600.78 499,399.22 2 2,684.11 2,080.83 603.28 498,795.94 …break in the sequence… Totals 466,278.03 500,000.00 359 2,684.11 22.22 2,661.89 2,671.41 360 2,682.54 11.13 2,671.41 - 855.56
The table serves as an example of what you’ll create in Excel. Note that the table shows only the figures for the first and the last year of payments; you’ll need to calculate the amounts for the remaining payments, and fill them in. Once you’ve determined how each of the amounts in the table is obtained, you can use relative and absolute cell references to fill in the full 360 paymentsThe following is an explanation of the columns in the table: n Payment number—The first column in the table shows the 360 payments required to pay off the mortgage loan (30 years, with 12 monthly payments per year). n Payment amount—The second column shows the monthly payment amount. n Interest—The third column shows the portion of the monthly payment that goes to interest. n Principal—The fourth column shows the portion paid toward the principal. n Balance—The fifth column shows the starting balance of $500,000, and the remaining balance each month after the principal is subtracted. n Annual interest expense—The last column provides a running total of the interest expense on the mortgage for the entire 12-month period. It’s the amount that would be reported on the financial statements. n Totals—The “Totals” under the “5% Interest Expense” and “Principal” columns show the final totals for the 30-year life of the mortgage.
Mortgage Principal and Interest Chart Next, you’ll create a chart following these steps. Create the table on the tab named “Part 2 Chart.” 1. Start by selecting the Interest Expense and Principal columns. Make sure to select the column headers and values. Don’t select the Totals row. 2. Click on the Insert tab and select a “Stacked Column.” Make sure to label the x-axis (payment month) and y-axis (dollars), and include a legend for the two values (interest and principal). 3. Your final chart should be set up similar to the chart below, with the data populating the chart. (The increments don’t need to be the same). B. Answer the following: 1. How can you describe the relationship between time and the amount paid towards principal and interest? 2. Knowing what we know about ECCC’s cash flow from Part 1, is it reasonable to believe that ECCC can take on this new debt

​(Weighted average cost of capital​) Crawford Enterprises is a publicly held company located in​ Arnold, Kansas. The firm began as a small tool and die shop but grew over its​ 35-year life to become a leading supplier of metal fabrication equipment used in the farm tractor industry. At the close of​ 2015, the​firm's balance sheet appeared as​ follows:

Cash: 450,000
Accounts receivable: 4,250,000
Inventories: 8,400,000
Net property, plant, and equipment: 17,821,000
Total assets: 30,921,000

Long-term debt: 11,800,000
Common equity: 19,121,000
Total debt and equity: 30,921,000

.

At present the​ firm's common stock is selling for a price equal to its book​ value, and the​ firm's bonds are selling at par.​ Crawford's managers estimate that the market requires a return of 18 percent on its common​ stock, the​ firm's bonds command a yield to maturity of 8 ​percent, and the firm faces a tax rate of 38 percent.

a. What is​ Crawford's weighted average cost of​ capital?

b. If​ Crawford's stock price were to rise such that it sold at 1.5 times book​ value, causing the cost of equity to fall to 16 ​percent, what would the​ firm's cost of capital be​ (assuming the cost of debt and tax rate do not​ change)?

Please do in excel showing the work Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. a. Should Wansley purchase the paper company? b. Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. c. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.