Which of the following statements is correct, assuming positive interest rates and holding other things constant?

A) Banks A and B offer the same nominal annual rate of interest, but A pays interest daily and B pays semiannually. A deposit in Bank B will have a higher value in five years.

B) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays monthly. A deposit in Bank B will have a higher value in five years.

C) Banks A and B offer the same annual rate of interest, but A pays interest quarterly and B pays semiannually. A deposit in Bank A will have a higher value in five years.

D) Banks A and B offer the same nominal annual rate of interest, but A pays interest weekly and B pays quarterly. A deposit in Bank B will have a higher value in five years

Right now, the Federal Reserve is pursuing a policy of quantitative easing for the third time in the last four years. This means introducing hundreds of billion dollars into the economy in an effort to stimulate investment within the private sector. Describe the mechanisms the Fed uses to do this, and explain why you think this would or would not be effective at stimulating investment.

Table 12.1

Refer to Table 12.1 and look at the period from 1973 through 1980.

1. Calculate the average return for Treasury bills and the average annual inflation rate for this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

b.            Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c.            What was the average real return for Treasury bills over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

There are many different bond portfolio management strategies, e.g., passive, indexing, immunization, and active.  explain each strategy how it can be used to manage a bond portfolio.

Calculate “Operating” Cash Flow, ΔNet Working Capital, Net Capital Spending, Cash Flow from Assets, Cash Flow to Creditors, and Cash Flow to Shareholders. Please show work and equations.

Problem: Sam has requested that you (1) identify all of the cash flows for this project, (2) calculate the project's NPV and IRR, and (3) provide your recommendation regarding whether the project should be accepted or rejected. The details of your cash-flow projections should be clearly presented. Show all work.

ABC Company is examining a new capital-investment proposal that would greatly increase the production of diapers. The proposal involves an investment in some machines that would increase the firm's efficiency at producing and preparing for export the top-quality diapers for which the region has become well-known. The purchase price of this machinery is $840,000 and installation costs would total $60,000. The equipment would have a useful life of 5 years and, for tax purposes, depreciation charges would be according to the 7-year-asset MACRS schedule. The machinery cost and the installation costs should be capitalized at t=0 and fully depreciated using the MACRS schedule. Management expects the machinery to be sold for a scrap value of $210,790 at the end of year 5. Ramon Rodriguez, the firm's accountant, pointed out that the portion of the factory that would house this new equipment machinery underwent a major 'renovation' 15 months ago with a total cost of $105,200. Because the project would not have been feasible without the renovation, Ramon suggests that the costs of the renovation should be allocated to the project as one of its initial expenses. Interest charges associated with this investment’s financing have been estimated at approximately $70,000 per year, for each year of the project's estimated useful life. The incremental sales (revenues) projections for this investment are shown near the end of this problem statement. Variable operating costs, excluding depreciation, are projected to be 40% of same-year sales. Incremental fixed costs (for maintenance, etc.) are projected to be $25,000 in the first year. For each of the remaining years of operation, this fixed-cost component is projected to increase by 2% per year. If the new machinery is purchased, some of ABC Company’s Net Working Capital (NWC) accounts will be affected. The schedule near the end of the problem statement shows balances for Accounts Receivable, Inventory, and Accounts Payable across the project’s life. Of course, you’ll need to use this information to build the NWC Tracker, which in turn feeds into the ΔNet Working Capital term in the cash-flow worksheet. The Chief Financial Officer of ABC Company, Sam Sand, requests your assistance in preparing an analysis of the net cash flow projections for the proposed investment. Sam believes that the systematic risk of this project is similar to the average systematic risk of other ABC projects. The firm-level required return (also called “hurdle rate” in business lingo) is 10%/year. Sam also indicates that 30% is the appropriate tax rate for this entire analysis. You also have the following information: Sales projections are these for years 1-5: $300,000, $420,000, $510,000, $600,000, and $480,000. The MACRS depreciation schedule for a 7-year asset is as follows: year 1: 14.29%; year 2: 24.49%; year 3: 17.49%; year 4: 12.49%; year 5: 8.93%; year 6: 8.92%; year 7: 8.93%; and year 8: 4.46%. Next, here is the schedule for the various working-capital accounts that will be affected if the project is undertaken:

Respond to the following in a minimum of 175 words:

• How would you choose to invest your retirement savings? Why did you choose that option(s)?
• What should you take into consideration when beginning to plan for investments?
• How could you address investment risk in your plan?

A company’s Balance Sheet (in millions)

Assets                                                             Liabilities & Equity

Current                        $  80              

Net Fixed                    $120                            Bonds ($1000 Par)                  130

                                                                        Preferred stocks ($100 Par)   40

Total                           $200                            Common Stock ($1 par)         30

                                                                        Total                                       $200

The company's bonds have 10 years to mature, pay 10% coupon rate semi-annually and comparable bonds' YTM is 14%.

The company’s applicable tax rate is 40%.

The market price of common stock is $10.50 per share.

The common stock is constantly growing at a rate of 6%. The same growth rate is expected to continue for long time in the future. The most recent dividend on the common stock was $1.15.

The flotation cost for new common stocks is 10%.

The market value of the preferred stock is $45 and it pays quarterly dividend of $1.25.

The flotation cost on issuing new preferred stock is 7%

What is the cost of issuing new common stock?

Wilbur and Orville are brothers.​ They're both serious​ investors, but they have different approaches to valuing stocks.​ Wilbur, the older​ brother, likes to use the dividend valuation model. Orville prefers the free cash flow to equity valuation model. As it turns​ out, right​ now, both of them are looking at the same stock Wright First​ Aerodynmaics, Inc.​ (WFA). The company has been listed on the NYSE for over 50 years and is widely regarded as a​ mature, rock-solid,​ dividend-paying stock. The brothers have gathered the following information about​ WFA's stock:

Current dividend ​(Upper D 0​)=​$1.90​/share

Current free cash flow ​(FCF 0​)=$1.5 million

Expected growth rate of dividends and cash flows ​(g​)=8​%

Required rate of return ​(r​)=12​%

Shares outstanding = 400,000 shares

How would Wilbur and Orville each value this​ stock?

The stock price from​ Wilbur's valuation is?

The stock price from​ Orville's valuation is?

AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineers. (7.12)

a. You have been asked by management to determine the PW of the EVA of this equipment, assuming the following estimates: capital investment = $345,000; market value at end of year six = $120,000; annual revenues = $120,000; annual expenses = $8,000; equipment life = 6 years; effective income tax rate = 50%; and after-tax MARR = 10% per year. MACRS depreciation will be used with a five-year recovery
period.

b. Compute the PW of the equipment’s ATCFs. Is your answer in Part (a) the same as your answer
in Part (b)

Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.

Preferred Stock:  10,000 outstanding with par value of $100 and a market value of 105 and $10 annual dividend.

Common Stock: 84,000 shares outstanding, selling for $56 per share, the beta is 2.08

The market risk premium is 5.5%, the risk free rate is 3.5% and Huntington’s tax rate is 32%.

Huntington Power Co. is evaluating two mutually exclusive project that is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2.1% to the cost of capital for both projects.

Project A is a five-year project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls into the five-year MACRS class. The project is estimated to generate $2,050,000 in annual sales, with costs of $950,000. The project requires an initial investment in net working capital of $285,000 and the fixed asset will have a market value of $225,000 at the end of five years when the project is terminated.

Project B requires an initial fixed asset investment of $1.0 million. The marketing department predicts that sales related to the project will be $920,000 per year for the next five years, after which the market will cease to exist. The machine will be depreciateddown to zero over four-year using the straight-line method (depreciable life 4 years while economic life 5 years). Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales.  The project will also require an addition to net working capital of $150,000 immediately. The asset is expected to have a market value of $120,000 at the end of five years when the project is terminated.

Use the following rates for 5-year MACRS: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%

1. What is project B’s cash flows for year 0-5, NPV, IRR and PI for project B

Angel Inc. recently hired you as a consultant to estimate the company’s WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,225.00. (2) The company’s tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? Do not round your intermediate calculations.

Question 3
The salesman from SuperFast Machines claims that if you trade-in your old machine for one of his new machines, you could save your company $60,000 a year. As his new machine costs $120,000 after the trade-in, the investment pays for itself in 2 years. Since the machine has a life of 3 years and a salvage value of $30,000, the salesman claims that this deal lets you use the machine for free in year 3 as well as receiving a $30,000 when the machine is sold. Having learnt about capital budgeting techniques, you are quite skeptical of his claims. Use the data below to do your own sums.

• Cost of new machine $120,000
• Salvage value of machine at end of life $30,000
• Useful life 3 years
• Operating cost savings $60,000
(excluding depreciation) from new machine
• Depreciation policy Depreciate to zero
You have also obtained the following financial information regarding the company and the market.

Shares
• Issued 2,000,000 shares.
• Current share price = $10
• Company just paid a dividend of $1.20 per share. Dividends are expected to be maintained at this level for the foreseeable future.
• Beta of shares = 1.0

Bonds
• Issued 20,000, 5% coupon bonds with par value of $1,000 with remaining maturity of 10 years.
• Bonds are currently selling at the par value.

Market
• 10-year Treasury bond yield = 4%
• 10-year AAA bond yield = 4.5%
• 10-year AA bond yield = 5%
• Expected return of the stock market = 12%
• Corporate tax rate = 20%
(a) Compute the cost of equity, cost of debt and the weighted average cost of capital.

(b) Explain which capital budgeting method the salesman is using when he claims that the machine pays for itself in 2 years.

(c) Calculate the operating cash flows related to this project.

(d) Calculate the cash flows from assets for the project.

(e) Determine whether the machine should be bought.

(f) Discuss two (2) advantages of using the NPV versus the payback period.

Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.

Preferred Stock:  10,000 outstanding with par value of $100 and a market value of 105 and $10 annual dividend.

Common Stock: 84,000 shares outstanding, selling for $56 per share, the beta is 2.08

The market risk premium is 5.5%, the risk free rate is 3.5% and Huntington’s tax rate is 32%.

Huntington Power Co. is evaluating two mutually exclusive project that is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and decided to apply an adjustment factor of +2.1% to the cost of capital for both projects.

Project A is a five-year project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls into the five-year MACRS class. The project is estimated to generate $2,050,000 in annual sales, with costs of $950,000. The project requires an initial investment in net working capital of $285,000 and the fixed asset will have a market value of $225,000 at the end of five years when the project is terminated.

Project B requires an initial fixed asset investment of $1.0 million. The marketing department predicts that sales related to the project will be $920,000 per year for the next five years, after which the market will cease to exist. The machine will be depreciateddown to zero over four-year using the straight-line method (depreciable life 4 years while economic life 5 years). Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales.  The project will also require an addition to net working capital of $150,000 immediately. The asset is expected to have a market value of $120,000 at the end of five years when the project is terminated.

Use the following rates for 5-year MACRS: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%

1. What is project A’s cash flows for years 0-5, NPV, IRR, and PI

Using historical prices of the Australian All Ordinaries Index (AORD) and the following four companies traded on the Australian Stock Exchange: Rio Tinto Limited (RIO.AX), ANZ Ltd (ANZ.AX), Wesfarmers Ltd (WES.AX) and Telstra Corp. (TLS.AX) provided above, answer the following questions:

1. Using the All Ordinaries index as a proxy for the Australian market portfolio, comment on the performance of the Australian stock market from Jan 2013 to May 2019.

1.1 Computer monthly and yearly holding period returns of the above stocks and index using adjusted Close Price (Adj Close). Briefly comment on their performance from Jan 2013 to May 2019.