You have $5,000 to invest for the next year and are considering three alternatives: A money market fund with an average maturity of 30 days offering a current yield of 2.0% per year A 1-year savings deposit at a bank offering an interest rate of 4.0% A 20-year U.S. Treasury bond offering a yield to maturity of 4.0% per year A 20-year corporate bond offering a yield to maturity of 7. What is the risk profile of each of these assets? What role does your forecast of future interest rates play in your decisions?

A company intends to pay a $1 dividend at the end of each of the next 3 years. After which it expects its dividends to increase by 3% per year forever. The required return on the company’s equity is 7%. What is the current price?

1. Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six-year useful life. The old oven cost the company $800,000 just four years ago. The old oven is being depreciated on a straight-line basis over its expected ten-year useful life. (That is, the old oven is expected to last six more years if it is not replaced now.) Due to changes in fuel costs, the old oven may only be sold today for $100,000. The new oven will allow the company to expand, increasing sales by $300,000 per year. Expenses will also decrease by $50,000 per year due to the more energy efficient design of the new oven. Premium Pie Company is in the 40% marginal tax bracket and has a required rate of return of 10%.

a. Calculate the net present value and internal rate of return of replacing the existing machine

b. Explain the impact on NPV of the following:
i) Required rate of return increases
ii) Operating costs of new machine are increased
iii) Existing machine sold for less

On 1 June, 2019, immediately after payment of the interest due that day, Tim Shaw bought two bonds each with a face value of $100,000 and a coupon rate of 8% p.a., paid half-yearly. The first bond will mature on 1 December 2021 and the second bond will mature on 1 December 2025. At the date of purchase, both bonds were selling at par. Since then, yields on bonds have risen by 2% pa, compounded half-yearly. Tim now intends to sell the bonds and put a deposit on a house.

a. Calculate the price he will receive from each bond if he sells on 1 September, 2019 at the new yield. (Hint: There are 92 days from 1 June, 2019 to 1 September, 2019, and 183 days from 1 June, 2019 to 1 December, 2019 – in both cases, ignoring the first day and including the last day of the period.)

b. Explain the relative price movements in the two bonds, as evidenced in your answer to part a above.

Job Costs Using Activity-Based Costing Heitger Company is a job-order costing firm that uses activity-based costing to apply overhead to jobs. Heitger identified three overhead activities and related drivers. Budgeted information for the year is as follows: Activity Cost Driver Amount of Driver Materials handling $108,000 Number of moves 4,500 Engineering 165,000 Number of change orders 10,000 Other overhead 263,200 Direct labor hours 47,000 Heitger worked on four jobs in July. Data are as follows: Job 13-43 Job 13-44 Job 13-45 Job 13-46 Beginning balance $20,000 $19,500 $2,800 $0 Direct materials $5,900 $9,750 $10,600 $9,800 Direct labor cost $950 $1,100 $1,640 $100 Job 13-43 Job 13-44 Job 13-45 Job 13-46 Number of moves 45 47 33 7 Number of change orders 34 35 21 16 Direct labor hours 950 1,100 1,640 100 By July 31, Jobs 13-43 and 13-44 were completed and sold. Jobs 13-45 and 13-46 were still in process. Required: 1. Calculate the activity rates for each of the three overhead activities. Round all activity rates to the nearest cent. Materials handling rate $ per move Engineering rate $ per change order Other overhead rate $ per direct labor hour Hide 2. Prepare job-order cost sheets for each job showing all costs through July 31. When required, round your answers to the nearest dollar. If an amount is zero, enter "0". Heitger Company Job-Order Cost Sheets Job 13-43 Job 13-44 Job 13-45 Job 13-46 Balance, July 1 $ $ $ $ Direct materials Direct labor cost Materials handling Engineering Other overhead Total $ $ $ $ 3. Calculate the balance in Work in Process on July 31. $ 4. Calculate the cost of goods sold for July. $ 5. What if Job 13-46 required no engineering change orders? What is the difference in the new cost of Job 13-46? $ How would the cost of the other jobs be affected?

Use the following information to answer the next four questions.

Your business (US company) will receive a payment of 150,000 British pounds. You have decided to fully hedge your company’s foreign exchange risk with futures contracts. Each futures contract for British pounds has an initial margin of $1500 and a maintenance margin of $1100. Each futures contract has 25,000 British pounds attached. You open your position on 11/30/2018 when the futures price was $1.955 per pound. The table below shows the futures prices for the three days immediately after you opened your position.

1) Find your initial margin balance on the day you opened your position.

2) Find your ending margin balance on 12/1. Assume any deficits are eliminated to keep the position open and any excesses remain in the account.

3) Find your ending margin balance (in dollars) on 12/3.  Assume deficits are eliminated to keep the position open and excesses remain in the account. Do not use currency symbols or words when entering your response.

4) Find the total amount of variation margin that occurred from 11/30-12/3.

What are mutual funds and why do so many investors find mutual funds a good way to invest money? What are the advantages of owning such a fund?

Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $1,900 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $600, but Koehl has agreed to maintain an average bank balance of $4,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $100,000.

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

   
   
2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
   $

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .7. It’s considering building a new $75 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $8.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6.4 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.9 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 23 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Please Use TI BAII Plus Calculator and Show How You Get the Answer with it.

Management of the SoSadItIsOver Company needs to determine its cost of capital in order to evaluate some large capital purchases. The company's bonds have a yield to maturity of 6%, last dividend paid on common stock was $2.16 per share, current stock price is $47/share, and constant growth of 5% is expected on dividends and earnings. The company's capital structure is 30% debt, 70% equity. There is no preferred stock and the marginal tax rate is 21%.   SHOW ALL WORK.
a) 2 pts. What is the after-tax cost of debt?
b) 4 pts. What is the cost of equity?
c) 6 pts. What is the company's cost of capital (WACC)?

a-1. Cash flow = ________________

a-2. Net cash flow = _____________

b. Given the two investment strategies in (a), which will investors choose?

a: Veblen

b: Knight

I need an answer to question #4 for the business situation - Greetings Inc. stores as well as the Wall Décor division have enjoyed healthy profitability during the last two years.... In a one page memo, provide a recommendation based on the NPV analysis.....

Greetings Inc.: Capital Budgeting

The Business Situation

Greetings Inc. stores, as well as the Wall Décor division, have enjoyed healthy profitability

during the last two years. Although the profit margin on prints is often

thin, the volume of print sales has been substantial enough to generate 15% of

Greetings’ store profits. In addition, the increased customer traffic resulting from

the prints has generated significant additional sales of related non-print products.

As a result, the company’s rate of return has exceeded the industry average during

this two-year period. Greetings’ store managers likened the e-business leverage created

by Wall Décor to a “high-octane” fuel to supercharge the stores’ profitability.

This high rate of return (ROI) was accomplished even though Wall Décor’s

venture into e-business proved to cost more than originally budgeted. Why was it

a profitable venture even though costs exceeded estimates? Greetings stores were

able to generate a considerable volume of business for Wall Décor. This helped

spread the high e-business operating costs, many of which were fixed, across

many unframed and framed prints. This experience taught top management that

maintaining an e-business structure and making this business model successful

are very expensive and require substantial sales as well as careful monitoring of

costs.

Wall Décor’s success gained widespread industry recognition. The business

press documented Wall Décor’s approach to using information technology to

increase profitability. The company’s CEO, Robert Burns, has become a frequent

business-luncheon speaker on the topic of how to use information technology to

offer a great product mix to the customer and increase shareholder value. From

the outside looking in, all appears to be going very well for Greetings stores and

Wall Décor.

However, the sun is not shining as brightly on the inside at Greetings. The

mall stores that compete with Greetings have begun to offer prints at very competitive

prices. Although Greetings stores enjoyed a selling price advantage for a

few years, the competition eventually responded, and now the pressure on selling

price is as intense as ever. The pressure on the stores is heightened by the fact that

the company’s recent success has led shareholders to expect the stores to generate

an above-average rate of return. Mr. Burns is very concerned about how the

stores and Wall Décor can continue on a path of continued growth.

Fortunately, more than a year ago, Mr. Burns anticipated that competitors

would eventually find a way to match the selling price of prints. As a consequence,

he formed a committee to explore ways to employ technology to further reduce

costs and to increase revenues and profitability. The committee is comprised of

store managers and staff members from the information technology, marketing,

finance, and accounting departments. Early in the group’s discussion, the focus

turned to the most expensive component of the existing business model—the

large inventory of prints that Wall Décor has in its centralized warehouse. In addition,

Wall Décor incurs substantial costs for shipping the prints from the centralized

warehouse to customers across the country. Ordering and maintaining

such a large inventory of prints consumes valuable resources.

One of the committee members suggested that the company should pursue

a model that music stores have experimented with, where CDs are burned in the

store from a master copy. This saves the music store the cost of maintaining a

large inventory and increases its ability to expand its music offerings. It virtually

guarantees that the store can always provide the CDs requested by customers.

Applying this idea to prints, the committee decided that each Greetings store

could invest in an expensive color printer connected to its online ordering system.

This printer would generate the new prints. Wall Décor would have to pay a royalty

on a per print basis. However, this approach does offer certain advantages. First,

it would eliminate all ordering and inventory maintenance costs related to the

prints. Second, shrinkage from lost and stolen prints would be reduced. Finally,

by reducing the cost of prints for Wall Décor, the cost of prints to Greetings stores

would decrease, thus allowing the stores to sell prints at a lower price than competitors.

The stores are very interested in this option because it enables them to

maintain their current customers and to sell prints to an even wider set of customers

at a potentially lower cost. A new set of customers means even greater

related sales and profits.

As the accounting/finance expert on the team, you have been asked to perform

a financial analysis of this proposal. The team has collected the information

presented in Illustration CA 4-1.

Illustration CA 4-1

Information about the proposed capital investment project

Instructions

Mr. Burns has asked you to do the following as part of your analysis of the capital

investment project.

1. Calculate the net present value using the numbers provided. Assume that annual cash

flows occur at the end of the year.

2. Mr. Burns is concerned that the original estimates may be too optimistic. He has suggested

that you do a sensitivity analysis assuming all costs are 10% higher than expected

and that all inflows are 10% less than expected.

3. Identify possible flaws in the numbers or assumptions used in the analysis, and identify

the risk(s) associated with purchasing the equipment.

4. In a one-page memo, provide a recommendation based on the above analysis.

Include in this memo: (a) a challenge to store and Wall Décor management and (b) a

suggestion on how Greetings stores could use the computer connection for related

sales.

Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $21,600 per year until the end of that person’s life. The insurance company expects this person to live for 15 more years and would be willing to pay 8 percent on the annuity. How much should the insurance company ask this person to pay for the annuity?

Earleton Manufacturing Company has $2 billion in sales and $800,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

a. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answer completely. Round your answer to the nearest whole number.

b. What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.

c. If Earleton's sales increase 35%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest whole number.