1. In your own words, describe what real options are in relation to capital budgeting. Describe two specific examples of real options. In general, how do real options tend to affect project NPVs and why? (10 pts.)

.   Explain what passive bond portfolio management is and how immunization and dedication can work when using a passive strategy. Please be as specific and complete as possible. (10 pts.)

Deutsche Transport can lease a truck for four years at a cost of €30,000 annually. It can instead buy a truck at a cost of €80,000, with annual maintenance expenses of €10,000. The truck will be sold at the end of four years for €20,000. Ignore taxes.

a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10%? (Do not round intermediate calculations. Enter your answer in Euro. Round your answer to the nearest whole number.)

b. Which is the better option: leasing or buying?

1. A year ago, an investor purchased bonds in General Electric at par. The bond had a coupon of 8% at the date of issue. The bond declined over the course of the year to 94. What is the current yield on the bond? Answer is 8.51%

2. XYZ Inc. has some bonds outstanding, currently with 10 years remaining to maturity. The coupon rate is 8%, and the interest is paid semi-annually. The face value of the bonds is $100. What is the present value of the interest coupon stream if the yield to maturity is 10%? Answer is 87.53

show work for both preferably for financial calculator please

Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $400,000. Of this sum, $50,000 is described by the supplier as an installation cost. Ms. Potts does not know whether the company will need to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company could depreciate the $50,000 straight-line over five years.

How will the tax authority's decision affect the after-tax cost of the kiln? The tax rate is 25%, and the opportunity cost of capital is 5%. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Unsure how to get the answer to the second part of the question.

Filer Manufacturing has 4,793,350 shares of common stock outstanding. The current share price is $55.99, and the book value per share is $8.27. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $77,208,537, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $65,474,675, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par.

The most recent dividend was $0.75 and the dividend growth rate is 0.05. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 0.21.

What is Filer's aftertax cost of debt? Enter the answer with 4 decimals (e.g. 0.2345)

. Sure-cure pharmaceutical Co Ltd. is contemplating investing in a machine for its manufacturing processes. The machine will be used to manufacture a product known as “Curex”. The machine will cost Sh.5 million and will incur installation costs amounting to Sh.500,000. The machine is expected to have an economic life of 5 years and a re-sale value of Sh.1 million at the end of this period.

The acquisition of this machine is expected to cause in working capital to increase by Kshs 2.5 Million at the beginning of the economic life of the machine. The net change in working capital will be recovered at the end of the machine’s economic life.

The quantity of “Curex” expected to be manufactured and sold in each year will be as follows:

            Additional information:

1. Each unit of “Curex” is expected to be sold at Sh.100 in year However, the price is expected to increase by 10% annually thereafter.
2. The variable cost per unit of “Curex” is estimated at Sh.20 in year 1. In subsequent years, this cost will rise at the same rate as the increase in the selling price.
3. Fixed costs per annum excluding depreciation are estimated at sh.0.5 million.
4. The company applies the straight line method of depreciation for all its fixed assets.
5. The company’s cost of capital is 12%.
6. Corporation tax rate is 30%.

Required:

Using the net present value (NPV) technique, advise the company on whether the machine should be purchased.                                                                                                      

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 8%, and the market’s average return was 12%. 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.)

Sharpe ratio: Stock A = Stock B =

Treynor Measure: Stock A = Stock B =

A project has an initial cost of $64,675, expected net cash inflows of $12,000 per year for 10 years, and a cost of capital of 13%. What is the project's NPV?

A company is projected to have a free cash flow of $368 million next year, growing at a 5% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4% in perpetuity. The company's cost of capital is 8.9%. The company owes $99 million to lenders and has $11 million in cash. If it has 218 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. (e.g., $4.32 = 4.3)

Consider a 2-year European put with a strike price of $52 on a stock whose current stock price is $50. Suppose that there are two time steps, and in each time step the stock price either moves up by 30% or moves down by 30%. Also suppose that risk-free rate is 7% per annum with continuous compounding. What is the value of the European put option?

The current price of a non-dividend paying stock is $40. Use a two-step tree to value a European call option on the stock with a strike price of 42 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding. What is the European call option price when u = 1.1 and d = 0.9 ?

Suppose you are a Chief Financial Officer (CFO) of a UK based listed Part A - company. The company is currently trading at £10 per share and 10 million shares in issue. The total market value of the issued share capital of the company is £100 million. You have been requested to write a report to the board of directors with respect to raising an additional funding of £50 million to enable the next stage of development of international projects to be carried out. Note 2: For the report in Part A, it should critically review the advantages and disadvantages of the main funding options and have many appropriate academic references to strengthen your discussion. Further, your report should form the basis for a discussion at the next board meeting. In particular, you are required to include the different financing choices available through the equity and debt markets.

Part B - This additional funding will allow the business to become more global with the opportunity to develop a market in numerous countries with payment being made in the local currency. The directors are conservative in their attitude to risk. You have been requested to provide a report to the directors critically evaluating alternative derivatives including forwards, futures, options and swaps that are available in the market in order to minimize the risk with respect to payment in international currencies. : For the report in Part B. it should critically discuss and compare the use of derivatives including forwards, futures, options and swaps to hedge Foreign Exchange (FX) Risk. With reference to appropriate academic references, discussions must include: • how it works in mitigating FX risk. advantages and disadvantages of each type of derivative in managing FX risk.  

Can you please assist in answering Part B in bold. thank you

Your firm is contemplating the purchase of a new $400,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $31,000 at the end of that time. You will be able to reduce working capital by $30,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 21 percent.

a. What is the aftertax salvage value of the equipment?

b. Suppose your required return on the project is 8 percent and your pretax cost savings are $136,000 per year. What is the annual OCF? What is the NPV of the project?

c. Suppose your required return on the project is 8 percent and your pretax cost savings are $90,000 per year. What is the annual OCF? What is the NPV of the project?

Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,200. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your answer to 2 decimal places.)

PRICE OF THE BOND____________

b. Do you think the bonds will sell for the price you arrived at in part a?

• Yes

• No