Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

(A) What is the initial cash outlay for this replacement project?

(B) What is the operating cash flow of the project?

(C) What is the terminal cash flow of th

(D) Should you replace the existing assembly line? Provide all

1. You are trying to determine the WACC for White Sox. It has the following characteristics. (12 points)

1. Discount rate of 10%.   The company had pre-tax net income of $50mm last year and paid taxes of $10mm.
2. White Sox has $900mm of total liabilities, $100mm of accounts payable, and $650mm of debt.
3. The company has 120mm shares authorized, 17mm shares issued, and 7mm shares of treasury stock.   The stock traded at $65 per share two years ago and now trades at $97.87 per share.
4. A 10-year senior bond was issued 1 year ago. It is priced at 97 today. The coupon rate is 6% paid semi-annually. Use the YTM on this bond as a proxy for the pre-tax cost of total debt.
5. The company pays a dividend of $.75 per share per quarter. Twelve years ago, the dividend was $0.30 per share. The ten-year treasury rate is 2%. The company’s Beta is 1.5 and the market return for equities is 8%.

1. We find the following information on NPNG (No-Pain-No-Gain) Inc. (18 marks total)

• EBIT = $2,000,000
• Depreciation = $250,000
• Change in net working capital = $100,000
• Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

• EBIT: 10%
• Depreciation: 15%
• Change in net working capital: 20%
• Net capital spending: 15%

The firm’s tax rate is 35%, and it has 1,000,000 outstanding shares and $6,000,000 in debt. We have estimated the WACC to be 15%.

a.   Calculate the EBIT, Depreciation, Changes in NWC, and Net Capital Spending for the next four years.                                                                           

b.   Calculate the CFA* for each of the next four years, using the following formula:

CFA* = EBIT(1 – T) + Depr – ΔNWC – NCS                                                  

d.   Calculate the present value of growing perpetuity at Year 3.                   (1 mark)

e.   Calculate the firm’s value at time 0 using the WACC of the firm as the discount rate. (Note that the first CFA* to be discounted is the cash flow from one year into the future.)                                                                                           

f.   Calculate the firm’s equity value at time 0.                                                    (1 mark)

g.   Calculate the firm’s share price at time 0.                                           (1 mark)

It is only July and we have run short of funds to pay our employees for the remainder of this year. As a result, we need to seek creative ways to help the company weather the storm... get through this problem. However, after conducting a series of brainstorming sessions, we are really no further ahead than we were before, so we have decided to hire an outside consulting firm, i.e. YOU, to help us decide upon the best option to pursue. Therefore, our options would be to pursue either debt or equity financing, or a combination of both and were we to pursue debt financing, we can engage in either short-term or long-term financing. If we pursue equity financing, we can sell either common or preferred stock, or bonds.   

1)         What are the advantages (pros) and disadvantages (cons) associated with DEBT financing, i.e. loan... debt?

            a) Long-term

            - Advantages... at least 2!

            - Disadvantages... at least 2!

            b) Short-term

            - Advantages... at least 2!

            - Disadvantages... at least 2!

2)        What are the advantages and disadvantages associated with EQUITY financing, i.e. stocks?

            a) Common stock

            - Advantages... at least 2!

            - Disadvantages... at least 2!

            b) Preferred stock

            - Advantages... at least 2!

            - Disadvantages... at least 2!

3)        Which course of action are you recommending, i.e. specific type of long-term or short-term financing, and what is your reasoning for recommending this type of approach? (Note: Your reasoning should be based upon and supported by the extensive research you had conducted… 25 points)

4)        What are some other… “alternative courses of action", other than those stated above, to obtain the needed funding discussed either in the text, or elsewhere?

Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

1. (15 points) What is Kirksville’s weighted average cost of capital?

2. (10 points) What is the net present value (NPV) of this project? Should you accept the project? Explain why.

3. (5 points) What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

   Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

4. (15 points) What is Kirksville’s weighted average cost of capital?
5. (10 points) What is the net present value (NPV) of this project? Should you accept the project? Explain why.
6. (5 points) What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

   Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

7. (15 points) What is Kirksville’s weighted average cost of capital?
8. (10 points) What is the net present value (NPV) of this project? Should you accept the project? Explain why.
9. (5 points) What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

   Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

10. (15 points) What is Kirksville’s weighted average cost of capital?
11. (10 points) What is the net present value (NPV) of this project? Should you accept the project? Explain why.
12. (5 points) What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

FIND, CITE AND SUMMARIZE AN ARTICLE WHERE CORPORATE DIRECTORS PAID FOR THEIR BAD ACTIONS WITH JAIL TIME, FINES OR BOTH

A firm sells Gizmos to consumers at a price of $87 per unit. The costs to produce Gizmos is $30 per unit. The company will sell 14,000 Gizmos to consumers each year. The fixed costs incurred each year will be $140,000. There is an initial investment to produce the goods of $2,400,000 which will be depreciated straight line over 5 year life of the investment to a salvage value of $0. The opportunity cost of capital is 9% and the tax rate is 25%.

1. What is the operating cash flow each year?

2. Using the operating cash flow, what is the net present value of the investment? And should the project be rejected or accepted.

Stilley Resources bonds have 20 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 21.5 percent.
  
Compute If the price of the bond is $1,330, what is the yield to maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month.

a.       What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer.

1. What are flotation costs and why they must be included in the initial cost of a project? Explain in detail.

2. Tell me the differences between the standard deviation and beta in the measurement of risk in the capital market.

a. What are the redeeming qualities and shortcomings of the internal rate of return (IRR) method in capital budgeting analysis? explain

b.Explain conceptually in detail what the weighted average cost of capital (WACC) is and the role it plays in capital budgeting.

c. Explain why the opportunity cost and net working capital (NWC) are included, while the financing costs and sunk costs are NOT in the cash flow analysis.

Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

Show your work! do not use excel.

(A)     (6 points) What is the initial cash outlay for this replacement project?

(B)      (5 points) What is the operating cash flow of the project?

(C)      (5 points) What is the terminal cash flow of the project?

(D)     (4 points) Should you replace the existing assembly line? Provide all the details.

Consider the following situation:

The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

Show your work. Do not use excel.

1. (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

2. (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.

3. (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?

4. (5 points) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

YEEHAW Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate off to a constant 5 percent thereafter. If the required return is 11 percent, and the company just paid a dividend of $2.80, what is the current share price?

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

                 Project A   Project B
Year Cash Flow Year Cash Flow

0 -$45,000   0 $-40,000

1 $17,500 1 $8,200

2 $18,000   2 $ 14,600

3 $22,500 3 $ 36,800

Required Rate of Return

Project A- 8% Project B- 12%

Required Payback Period

Project A- 2 years Project B- 2 years

Required Accounting Return

Project A 8.5% Project B- 9.5%

a. (5 points) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.

b. (5 points) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.

c. (5 points) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.

d. (5 points) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.

e. (5 points) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.

f. (5 points) What is the average accounting return (AAR) for each of the projects, assuming that cash flows occurring after year 0 are net income? Which project should be accepted if AAR method is applied? Also, assume that the target AAR is 10%.

g. (5 points) Define and find the crossover rate.

h. (5 points) Sketch the NPV profile. Plot all the relevant coordinates (i.e., the points on the x and y axis; and the cross-over rate) on the graph.