Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 40%. The current stock price is P₀ = $21.50. The last dividend was D₀ = $2.00, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your intermediate calculations.

1. r_s = _______ %
2. WACC = ________ %

Suppose you are given the following two projects A and B with the cash flows below, if the cost of capital is 10%, what is the Profitability Index (PI) of projects A and B?

Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Production of the implants will require $1,600,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $3,400,000 per year, variable production costs are $257 per unit, and the units are priced at $381 each. The equipment needed to begin production has an installed cost of $16,900,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The tax rate is 22 percent the required return is 14 percent.

The MACRS schedule:

a.) What is the NPV of the project?

b.)What is the IRR?

A company is considering replacing one of the old machines used in the manufacturing process. The machine was purchased 2 years ago for $600,000. This machine is being depreciated on a straight-line basis, and it has 4 years of remaining life. When this machine was purchased 2 years ago, it was assumed to have zero salvage value at the end of its useful life of 6 years. Currently, this machine has a market value of $250,000. The company intends to keep this old machine as spare if the replacement happens. The current revenue generated by this machine is $250,000 annually and the cost of operating the machine is $175,000 annually.

The replacement machine will cost of $750,000 and $50,000 for shipping and transportation to the company’s location. The new machine falls into 3-year MACRS (33%, 45%, 15% and 7%). The replacement machine would permit an output expansion, so sales will become $450,000 per year. Even so, the new machine's greater efficiency would cause operating expenses to become $95,000 per year. The new machine would require inventories be increased by $65,000, but accounts payable would simultaneously increase by $10,000. The replacement project life is 4 years. The new machine can be sold at the end of the project’s life for $50,000 while the old machine will not have any value at the end of the 4^th year. The company’s marginal federal-plus-state tax rate is 40%, and its cost of capital is 12%.

What is cash flow CF1 to be used in NPV calculations?

What is the “cornerstone” of the appraisal process

A company is considering three capital budgeting projects. Data relative to each is given below. Each project has a life of 5 years. The company uses the Net Present Value (NPV) method to evaluate capital budgeting projects and its discount rate is 9%.

Project A         Project B         Project C

Initial cash outlay (cost)                     -$5,000,000     -$6,000,000     -$2,500,000

Cash inflows per year                           $1,500,000    $1,800,000     $600,000

Residual value                                       $ 500,000              0                $100,000

1. If the projects are mutually exclusive, which, if any, should the company accept?  Why?

2. If the projects are independent, which, if any, should the company accept?  Why?

3. One of the company’s managers states “To me, no matter what else we do, Project C needs to be our first choice because it has the lowest initial cost of $2,500,000.”  Comment on this manager’s proposal, considering the concepts of NPV and Payback Method.

How does a balance sheet relate to a cash flow statement?

Calculate The Following Elements Used to Derive a Cap Rate Sinking Fund Factor 9- Loan/Holding Period 10 Equity Yield Rate 8% _____________ 10- Loan/Holding Period 10 Equity Yield Rate 9% _____________ 11- Loan/Holding Period 10 Equity Yield Rate 10% _____________ 12- Loan/Holding Period 10 Equity Yield Rate 11% _____________

Calculate The Following Elements Used to Derive a Cap Rate Sinking Fund Factor 9- Loan/Holding Period 10 Equity Yield Rate 8% _____________ 10- Loan/Holding Period 10 Equity Yield Rate 9% _____________ 11- Loan/Holding Period 10 Equity Yield Rate 10% _____________ 12- Loan/Holding Period 10 Equity Yield Rate 11% _____________

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 15 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that the index currently has a P/E ratio of 15. The firm can be compared to the car rental industry as follows: Richmond Car Rental Industry Growth rate in earnings per share 12% 10% Consistency of performance Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years Debt to total assets 25% 40% Turnover of product Slightly below average Average Quality of management High Average Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a 0.50 point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a 0.50 point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm? (Round your answer to 1 decimal place.)

The estimated cashflows for two mutually exclusive projects are shown below.

(A) Using a cost of capital of 14%, which project should be taken based on the NPV amounts?

(B) Calculate the IRR for both projects.  Based on the IRR amounts, which project should be taken?

(C) Why are your answer to parts A and B not the same?

(D) Using a cost of capital of 17%, which project should be taken based on the NPV amounts?

(E) Create an NPV profile for the net cashflows form the two projects with discount rates from 0% to 20% in increments of 1%.  You do not need to create the graph.

Notice in your NPV profile that the two lines cross at about 16%.  This is called the crossover point.

(F) Use the IRR function to calculate the exact cross-over point.

(G) Next use the value you just calculated with the IRR function as the new discount rate for both projects, and calculate the NPV of both projects.  

(H) What do you find from your answers to part G?

1. Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow $1 million (or its Swiss franc equivalent) at her disposal for a short term money market investment. Kavita wonders whether she should make an uncovered interest arbitrage (UIA) transaction. She faces the following quotes:

2. Which currency should she borrow, and how much is the payoff in terms of U.S. dollars in case of uncovered interest arbitrage (UIA) transaction?

Walk me through DCF (Discounted Cash Flows)

Please respond very accurately and in detail I need this for an interview.

Thanks! :)

1. Oregon Transportation Inc. (OTI) has just signed a contract to purchase light rail cars from a manufacturer in Germany for €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, OTI is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
   • The spot exchange rate is $1.1740/€
   • The six month forward rate is $1.1480/€
   • OTI’s cost of capital is 12% per annum
   • The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
   • The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
   • The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
   • The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
   • December put options for €625,000; strike price $1.18, premium price is 1.5%
   • OTI’s forecast for 6-month spot rates is $1.19/€
   • The budget rate, or the highest acceptable purchase price for this project, is $2,975,000 or $1.19/€ ($2,975,000/€2,500,000)

Q.1) OTI chooses to hedge its transaction exposure in the forward market at the available forward rate. The required amount in dollars to pay off the accounts payable in 6 months will be __________.

Q.2)

1. Using the information provided in question 29, OTI would be ____________ by an amount equal to ____________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

Q.3)

1. Again, using the information provided in question 29, OTI chooses to hedge its transaction exposure by the money market hedge. Given the OTI's cost of capital, the future value of the U.S. dollar proceeds at the end of 6 months to pay off the accounts payable will be __________.

You own a car dealership and are trying to decide how to configure the showroom floor. The floor has 2000 square feet of usable space. You have hired an analyst and asked her to estimate the NPV of putting a particular model on the floor and how much space each model​ requires:

In​ addition, the showroom also requires office space. The analyst has estimated that office space generates a NPV of

$ 14 per square foot. What models should be displayed on the floor and how many square feet should be devoted to office​ space?