Consider the following projects, X and Y where the firm can only choose one. Project X costs $1500 and has cash flows of $678, $652, $347, $111, $54, $16 in each of the next 6 years. Project Y also costs $1500, and generates cash flows of $738, $693, $405 for the next 3 years, respectively. WACC=9.5%.

1. A) Draw the timelines for both projects: X and Y.

2. B) Calculate the projects’ NPVs, IRRs, payback periods.

3. C) If the two projects are independent, which project(s) should be chosen?

4. D) If the two projects are mutually exclusive, which projects should be chosen?

5. E) Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.

6. F) If the WACC were 5.5 percent, would this change your recommendation if the projects were

   mutually exclusive? If the WACC were 16.5 percent, would this change your recommendation? Explain your answers.

7. G) There is a “crossover rate” of X’s and Y’s NPV curves, and mark it on the graph with Point O. Explain in words what this rate is and how it affects the choice between mutually exclusive projects.

8. H) If it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

This is my final paper! I just need a couple paragraphs for each!

1) When regressing Beta manually, you could use daily, weekly, and monthly stock data. Which do you recommend using? What things do you need to consider when making your choice of which time frame to use? What are the issues that can happen when using each of the 3 time frames?

2) When we discussed relative valuation we introduced the ratios P/E, P/S and P/B. Knowing that P/E is the most commonly used of the 3, why would someone choose to use P/S or P/B in valuation? Give as many situations as possible to illustrate your knowledge of relative valuation.

3) Explain the winner’s curse phenomenon and how it affects IPO pricing. Give an example with numbers if possible.

You believe that 6 months from now, the 12-month treasury spot rate will be 7%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

• Invest in an 18-month treasury.
• Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.
• Invest in a 6 month treasury, at maturity reinvest proceeds in a 12-month treasury.
• You are indifferent between all 3 strategies.

You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. You believe that 18 months from now, the 6-month treasury spot rate will be 5%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

• Invest in an 18-month treasury.
• Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.
• Invest in a 6 -month treasury, at maturity reinvest proceeds in a 12-month treasury.
• Invest in a 24-month treasury but sell 6-month prior to maturity.
• You are indifferent between all 3 strategies.

Compute the cost of not taking the following trade discounts: (Use 365 days in a year. Round the intermediate calculations to 4 decimal places. Round the final answer to 2 decimal places.)

a. 2/13, net 50.

Cost of lost discount             %

b. 2/20, net 50.

Cost of lost discount              %

c. 3/18, net 65.

Cost of lost discount             %

d. 3/18, net 150.

Cost of lost discount             %

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $2 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%.

1. Assume that the company pays no dividends.
   Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
   $
2. 
   
3. Why is this AFN different from the one when the company pays dividends?
   
   1. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.
   2. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
   3. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
   4. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
   5. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
   
   -Select-IIIIIIIVV

1.  Problem 11.07

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

$

Now assume the company's assets totaled $3 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation?
-Select-DifferentThe sameItem 2

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $4 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and the forecasted retention ratio is 35%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

3. A firm has the following three projections of revenue estimates:

Current Year1 Year 2 Year 3

Revenue $1,500 $1,650 $1,815 $2,000

EAT $95 $106 $117 $130

The company also receives a royalty net after taxes of $10 million per year. It is expected that the cash flows equal to depreciation will have to be reinvested to keep the firm operating. Further, capital expenditures equal to 60 percent of the net cash flow will need to be invested to keep the firm growing. Other items on the balance sheet remain unchanged. The CFO believes that it will just forecast for the first three years and then simply assume a 6 percent annual growth rate after the third year.

T-bills yield 8 percent and the market return is 13 percent. The company’s beta using Hamada equation is 1.2. What is the value of the company or what would you pay for the firm if you were interested in it.

1. The most recent year-end financial data for company “A” is as follows:

Revenues=$112 million; Depreciation=$7 million

Operating income (EBIT) =$28 million

Earnings after taxes=$12 million Total assets=$172 million

Interest bearing debt=$54 million Common equity=$40 million

Shares outstanding=5.6 million Current price of the stock=$16.25

The company “B” is considering acquiring A. The investment bankers believe that the acquisition is a good one even if B were to pay a premium of 40%. Presently A’s cash flow is as follows:

EBIT (operating profit) after taxes $17

Depreciation … 7

Total … $24

Less: capital expenditures 8

Incremental working capital 3

Free cash flow … $13

The company believes that with synergy it can grow the operating income by 20% per year for the next 3 years and then 12% per year for the next 3 years. At the same time, it plans to hold capital expenditures and working capital additions to a combined increase of only $2 million per year. At the end of 6 years, B is advised by investment bankers the cash flow will probably grow at 5% per year. The cost of capital computed by the IBs is 15%.

Certain comparable data of some recent M & A is as follows:

Equity value to book value 2.9x

Enterprise value to sales 1.4x

Equity value to earnings 15.3x

Enterprise value to EBITDA 7.8x

As B’ CFO, would you go ahead with the acquisition?

2. Company currently sells for $24/share. Management holds 40% of the 1 million shares outstanding. Chang Inc. is considering acquiring Li because of positive synergies. The estimated present value of these synergies is $8 million. In addition, Chang feels that the management of Li is overpaid and have a lot of unnecessary perks like yachts and jets to fly around. Getting rid of all these will save the firm about $400,000 per year. This would add $3 million in value to the acquisition.

What is the maximum price per share that Chang should pay?

What price would you offer?

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%.

Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $

Why is this AFN different from the one when the company pays dividends?

1.Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.

2.Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

3.Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.

4.Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.

5.Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.

We are evaluating a project that costs $912,000, has an thirteen-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 147,000 units per year. Price per unit is $36, variable cost per unit is $29, and fixed costs are $921,120 per year. The tax rate is 33 percent, and we require a 18 percent return on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 14 percent. (a) Calculate the best-case NPV. (b) Calculate the worst-case NPV.

Please use Excel and show formulas. Thanks.