At the age of 30, Morgan decided to create a financial plan to retire in 25 years. He had the following retirement objectives:

■ Home purchase objective: Own a home worth at least $1,200,000 with no mortgage.

■ Vacation objective: Have an amount of $45,000 for a European tour.

■ Monthly allowance objective: Receive a month-beginning allowance of $2000 for 20 years after retirement.

He created the following financial plans to achieve the above retirement objectives. Answer the questions related to each plan.

Plan to achieve his home purchase objective

Assuming that the value of a property in a Toronto suburb would double over 25 years, Morgan would purchase a house worth $600,000 by making a down-payment of $30,000 and obtaining a mortgage for the balance amount from a local bank at an interest rate of 4% compounded semi-annually for 25 years.

a. If the interest rate is constant over the 25-year period, calculate the month-end payments for the mortgage. What would be his total investment in the house over the term?

Plan to achieve his vacation objective

Deposit $150 at the end of every month for ten years into a savings account that earns 3% compounded monthly. At the end of the ten years, transfer the accumulated money into an investment fund that earns 6% compounded quarterly, and allow the money to grow in this fund until retirement.

b. How long (in years and months) would it take to accumulate the required amount of $45,000 to pay for his vacation?

c. To ensure that the amount accumulates to only $45,000 at the time of retirement, by how much should he change his monthly deposit?

Plan to achieve his monthly allowance objective

He will save $500 at the beginning of every month until retirement in an RRSP that has an interest rate of 5.4% compounded monthly.  

d. What would be the accumulated value of the RRSP at the time of retirement?

e. For Morgan to be able to withdraw $2000 from the RRSP at the beginning of every month during his planned 20-year retirement period, what does the nominal interest rate, compounded monthly, need to change to, assuming the interest rate during the 25-year savings period remains unchanged at 5.4% compounded monthly?

1. A regular deposit of $100 is made at the beginning of each year for 20 years. Simple interest is calculated at i%per year for the 20 years. At the end of the 20-year period, the total interest in the account is $840. Suppose that interest of i% compounded annually had been paid instead. How much interest would have been in the account at the end of the 20 years?

2. Herman has agreed to repay a debt by using the following repayment schedule. Starting today, he will make $100 payments at the beginning of each month for the next two-and-a-half years. He will then pay nothing for the next two years. Finally, after four-and-a-half years, he will make $200 payments at the beginning of each month for one year, which will pay off his debt completely. For the first four-and-a-half years, the interest on the debt is 9% compounded monthly. For the final year, the interest is lowered to 8.5% compounded monthly. Find the size of Herman’s debt. Round your answer to the nearest dollar.

9. Are these two statements correct?
Statement 1: Because DDMs do not incorporate the cash flows to investors from repurchases, they
systematically understate the present value of future cash flows from a stock and underestimate the
true rates of return, which should be based on total cash flows.
Statement 2: Some considerations that might argue against the corporate use of repurchases are their lack
of transparency, potential unequal treatment of sellers and nonsellers, and their lesser ability
(compared to cash dividends) to discipline managers.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

10. Are these two statements correct?
Statement 1: A stock with a high P/E ratio might be a growth stock and a stock with a high book-to-
market ratio might be a value stock.
Statement 2: From the net stock anomaly, on average we expect a positive stock reaction to an
announcement that the corporation will issue additional debt.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

Consider the following US government (risk-free) bonds:

Bond A: 2-year note issued one year ago with a coupon rate of 5%

Bond B: 3-year note issued two years ago with a coupon rate of 5%

The price of the first bond is 100 and the price of the second bond is 101. For simplicity, assume that investors do not face margin requirements or interest payments to short-sell assets.

a. Assume there are no transaction costs. Establish an arbitrage trade to profit from the pricing of these bonds. What would be the profit in USD per pair of bonds traded?

b. Assume that transaction costs are 1% of the face value of the bond per transaction. Selling and buying a bond are two separate transactions. What is the net gain/loss of implementing the strategy from the previous question?

c. The US government issues a one-year bond that makes semi-annual coupons with one year maturity and $100 face value. Under the absence of arbitrage assumption, what would be the price of this bond if:

i. Bond A is correctly priced and Bond B is incorrectly priced?

ii. Bond B is correctly priced and Bond A is incorrectly priced?

 Taylor Systems has just issued preferred stock. The stock has a 9 ​% annual dividend and a $ 75 par value and was sold at ​$72.00 per share. In​ addition, flotation costs of ​$6.00 per share were paid. Calculate the cost of the preferred stock.

Are these two statements correct?
Statement 1: Alpha is the difference between a real return and a benchmark return. If the benchmark is
too low (high), the alpha will be too high (low). This is the “joint hypothesis problem.” Any test of
market efficiency is also jointly a test of the underlying assumed equilibrium model.
Statement 2: Long-run abnormal returns are more difficult to establish than short-run abnormal returns.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

4. Are these two statements correct?
Statement 1: Because empirical researchers established that excess returns were proportional to betas,
Fama and French were motivated to develop the Fama-French Three Factor Model.
Statement 2: Two of the “net stock” anomalies concern SEO’s and share repurchases. The anomaly is
that firms issuing shares and firms repurchasing shares experience abnormal negative returns (relative
to their peers or relative to benchmarks) for 3-5 years following the event.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 6.6 percent; preferred stock, 6 percent; retained earnings, 11 percent; and new common stock, 12.2 percent.

a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, K_e.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  b. If the firm has $10 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 50 percent of the capital structure, but will all be in the form of new common stock, K_n.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  d. The 6.6 percent cost of debt referred to earlier applies only to the first $20 million of debt. After that, the cost of debt will be 8.2 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)

e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the ​$20,000 purchase price of the bike. She is in the 25​% income tax bracket. She can either borrow the money at an interest rate of 4​% from the motorcycle​ dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 6​%. Interest payments on the mortgage would be tax deductible for​ Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on​ Bella's federal tax return.

a. Calculate the ​after-tax cost of borrowing from the motorcycle dealership.

b. Calculate the ​after-tax cost of borrowing through a second mortgage on​ Bella's home.

c. Which source of borrowing is less costly for​ Bella?

d .Should Bella consider any other factors when deciding which loan to take​ out?

The 2017 financial statements for Growth Industries are presented below.

INCOME STATEMENT, 2017

Sales $ 310,000

Costs 205,000

EBIT $ 105,000

Interest expense 21,000

Taxable income $ 84,000

Taxes (at 35%) 29,400

Net income $ 54,600

Dividends $ 21,840

Addition to retained earnings 32,760

BALANCE SHEET, YEAR-END, 2017

Assets

Current assets

cash 7,000

accounts receivable 12,000

inventories 31,000

total current assets 50,000

net plant and equipments 250,000

total assets 300,000

liabilities

current liabilities

accounts payable 14,000

total current liabilities 14,000

long term debt 210,000

stockholders equity

common stock plus addition paid in capital 15,000

retained earnings 61,000

total liabilities and stockholders equity 300,000

Sales and costs are projected to grow at 40% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 70% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.40. What is the required external financing over the next year?

You have been tasked with fielding an interactive video communications systems. Your job is to provide the U.S. Army with the least expensive system (for the next 5 years) from the following alternatives:

1. Intertactical. An interactive communications system designed to rely on current satellite systems. The Army must spend $10,590,843.42 now. (t = 0) and $1.7 million this year. (t = 1), increasing that investment by 13% in subsequent years for 4 additional years. (t = 2 through 5).

2. TacLine. Provides interactive communications that operate through existing phone lines. The Army must spend $4 million now (t = 0) and $3 million dollars this year (t = 1), increasing its investment by $500,000 each year thereafter for 4 additional years (t = 2 through 5).

(a) Draw and label a cash flow diagram for each of these ventures.

(b) Prepare a cash flow (CF) table in Excel for each of these ventures.

(c) Using an annual interest rate of 8%, conduct a present worth analysis for the first venture (Intertactical).

(d) Using an annual interest rate of 8%, conduct a present worth analysis for the second venture (TacLine).

(e) Are these two ventures equivalent? Why or why not?

You must evaluate a proposal to buy a new milling machine. The base price is $143,000, and shipping and installation costs would add another $9,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $50,050. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $54,000 per year. The marginal tax rate is 35%, and the WACC is 13%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. The cost of research is an incremental cash flow and should be included in the analysis.
   3. Only the tax effect of the research expenses should be included in the analysis.
   4. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   5. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   
   -Select-I II III IV V

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-Yes No

Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $725,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 14%, and its tax rate is 30%.

What would the depreciation expense be each year under each method? Round your answers to the nearest cent.

Year. Scenario 1 (Straight-Line) Scenario 2 (MACRS)

1 $ $
2 $ $
3 $ $
4 $ $

Which depreciation method would produce the higher NPV?

How much higher would the NPV be under the preferred method? Round your answer to two decimal places. Do not round your intermediate calculations.

$

a. What is the relationship between discounting and​ compounding?

b. What is the relationship between the​ present-value factor and the annuity​ present-value factor?

c. What will 4,400 invested for 13 years at 12 percent compounded annually grow to?

ii. How many years it will take 570 to grow to 2727.22 if it is invested at 11 percent compounded annually?

iii. At what rate would 1500 have to be invested to grow to 6339.35 in 11years?

with only a part time job and the need for a professional wardrobe, Rachel quickly maxed out her credit card the summer after graduation. With her first full-time paycheck in August, she vowed to pay $230 each month toward paying down her $6,277 outstanding balance and not to use the card. The card has an annual interest rate of 23 percent. How long will it take Rachel to pay for her wardrobe? Should she shop for a new card? Why or why not?

Define organizational commitment, and explain why it is important. Discuss why employers work to reduce rates of turnover.