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.

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 6%, and the forecasted retention ratio is 40%. 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.

Jan sold her house on December 31 and took a $30,000 mortgage as part of the payment. The 10-year mortgage has an 11% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.

How much interest was included in the first payment? Round your answer to the nearest cent.  

How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent.

How much interest must Jan report on Schedule B for the first year? Do not round intermediate calculations. Round your answer to the nearest cent.

A manager buys three shares of stock today, and then sells one of those shares each year for the next 3 years. His actions and the price history of the stock are summarized below. The stock pays no dividends.

a. Calculate the time-weighted geometric average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Calculate the time-weighted arithmetic average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Calculate the dollar-weighted average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Consider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager’s portfolio in column 1, the fraction of the portfolio allocated to each sector in column 2, the benchmark or neutral sector allocations in column 3, and the returns of sector indices in column 4.

a-1. What was the manager’s return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 5%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns.

a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)

Stock A & Stock B

i.Alpha

ii.Information ratio

iii.Sharpe ratio

iv.Treynor measure

The table lists the monthly total returns on Adobe Systems Inc. common stock and the market rates of return for a 24-month period. Observation Month Adobe rate of return (%) Market rate of return (%) 1 Aug 2014 3.83 4.18 2 Sep 2014 -3.77 -2.11 3 Oct 2014 1.34 2.74 4 Nov 2014 5.08 2.43 5 Dec 2014 -1.33 -0.01 6 Jan 2015 -3.54 -2.77 7 Feb 2015 12.79 5.78 8 Mar 2015 -6.52 -1.01 9 Apr 2015 2.87 0.42 10 May 2015 3.98 1.39 11 Jun 2015 2.43 -1.70 12 Jul 2015 1.21 1.65 13 Aug 2015 -4.17 -6.00 14 Sep 2015 4.65 -2.95 15 Oct 2015 7.83 7.86 16 Nov 2015 3.16 0.56 17 Dec 2015 2.71 -2.04 18 Jan 2016 -5.12 -5.67 19 Feb 2016 -4.47 -0.02 20 Mar 2016 10.16 7.03 21 Apr 2016 0.45 0.63 22 May 2016 5.57 1.79 23 Jun 2016 -3.70 0.23 24 Jul 2016 2.16 3.97 Estimate beta to two decimal places for Adobe based on this data. Hint: see Examples 16 and 17 in the lecture. 1.73 1.27 1.58 1.04 1.42

For the most recent fiscal year, book value of long-term debt at Schlumberger was $11962 million. The market value of this long-term debt is approximately equal to its book value. Schlumberger’s share price currently is $59.03. The company has 1,000 million shares outstanding. Managers at Schlumberger estimate that the yield to maturity on any new bonds issued by the company will be 8.46%. Schlumberger’s marginal tax rate would be 35%. Schlumberger’s beta is 0.89. Suppose that the expected return on the market portfolio is 8% and the risk-free rate is 2%. Assume that the company will not change its capital structure. Also assume that the business risk of the projects under consideration is about the same as the business risk of Schlumberger as a whole. What would Schlumberger’s after-tax WACC be, given this information? Do not round at intermediate steps in your calculation. Express your answer in percent. Round to two decimal places. Do not type the % symbol.

The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed but the withdrawals at retirement are tax-free. In a traditional IRA, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement.

a. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%. (Round your answers to 2 decimal place.)

b. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA? (Round your answers to 2 decimal place.)

c. Which provides better expected results if you expect your tax rate to decrease from 30% today to 25% at retirement?

• Traditional IRA

• Roth IRA

In 175 words or more, explain how to manage cultural risks and other factors related to a foreign operation of a multinational business. Is cultural, business, or political risk more challenging to overcome than one of the others? Why or why not? How should American standards influence multinational businesses? Thanks in advance

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $2 million, $6 million, $8 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Brandtly's WACC is 9%, the market value of its debt and preferred stock totals $54 million; and it has 12 million shares of common stock outstanding.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.
   
   $
2. 
   
3. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
   
   $
4. 
   
5. What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.
   
   $
6. 
   
7. What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations

You want to make a one-year investment in a fixed-income security. You have two investment choices: a Treasury security and a Treasury inflation-protected security (TIPS). The nominal interest rate for the Treasury security is 4% and TIPS promises 1% real interest rate. You use scenario analysis to compare two securities. There are two possible scenarios with equal probabilities: High inflation and low inflation. The inflation rate will be 0% in the low state and 6.1% in the high state. (Do not use % approximation by adding or subtracting)

(a) Compute nominal and real realized returns for each asset with respect to each inflation scenario, and calculate expected return of each asset. (Round to the nearest tenth)

Nominal Returns Before Taxes

Real Returns Before Taxes

b) According to (a), which security will investors choose?

c) Now suppose the investor is subject to tax with marginal tax rate 40%. Compute nominal and real realized returns for each asset with respect to each inflation scenario, and calculate expected return of each asset. (Round to the nearest tenth)

Nominal Returns Before Taxes

Real Returns After Taxes

(d) What security would the investor choose if the investor has to pay tax with marginal tax rate 40%?

e) Explain why expected return and risk of TIPS changed after taxes.