Waste Management, Unlimited (WM) has a $220 million, 9.2% coupon (paid semiannually), outstanding bond issue, which matures in exactly 8 years, and WM is considering refunding the debt. The call price per $1,000-par-value bond is $1,092. The replacement debt would have a 7.76% coupon (paid semiannually). The firm's tax rate is 30%. What is the net advantage to refunding (NA) in this case?

Waste Management, Unlimited (WM) has a $220 million, 9.2% coupon (paid semiannually), outstanding bond issue, which matures in exactly 8 years, and WM is considering refunding the debt. The call price per $1, 000-par-value bond is $1, 092. The replacement debt would have a 7. 76% coupon (paid semiannually). The firm's tax rate is 30%. What is the net advantage to refunding (NA) in this case?

23) Possible outcomes for three investment alternatives and their probabilities of occurrence are given next.      

Using the coefficient of variation, rank the three alternatives in terms of risk from lowest to highest. (Do not round intermediate calculations. Round your answers to 3 decimal places.)

Bacon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

What is the initial cash outlay for this replacement project?

What is the operating cash flow of the project?

What is the terminal cash flow of th

Should you replace the existing assembly line? Provide all the details.

Consider an option on a non-dividend paying stock when the stock price is $67, the exercise price is $61, the risk-free rate is 0.5%, the market volatility is 30% and the time to maturity is 6 months. Using the Black-Scholes Model

(i) Compute the price of the option if it is a European Call.

(ii) Compute the price of the option if it is an American Call.

(iii) Compute the price of the option if it is a European Put.

(iv) Assuming two dividend payments $1.75 and $2.75, two months and five months from now, compute the price of the option if it is a European Call.

(v) Refer to the dividend information provided in (iv) above. Compute the price of the option if it is an American Call. Provide a graphical illustration to demonstrate how the price of this American Call and the payoff from the same change with respect to changes in the stock price.

Use the Black-Scholes formula to find the value of a call option based on the following inputs. (Round your final answer to 2 decimal places. Do not round intermediate calculations.)

Call value            $

CoolTech Inc. is considering a new refrigerated warehouse which will cost $7,000,000 and is expected to have revenues of $900,000 at the end of each of the next 5 years and expenses of $200,000 for years 1-3 and $250,000 for years 4-5. The warehouse is depreciated for 40 years on a straight line basis and expects to have a salvage value of $1,000,000. At the end of 5 years, they expect to sell the warehouse for $6,000,000. Working capital requirements will be $125,000 up front. CoolTech’s tax rate is 40% and their cost of capital is 12%.

CoolTech’s IRR is __________%. Answer in percentage, rounded to two decimal places.

Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a 6.0 percent coupon, pay interest semi-annually, and mature in 7.5 years. The company also has 9,500 shares of 5% preferred stock at a market price of $40 per share. This month, the company paid an annual dividend in the amount of $1.20 per share. The dividend growth rate is 5.0 percent. The common stock is priced at $30 a share and there are 34,500 shares outstanding. The company is considering a project that is equally as risky as the overall company. This project has initial costs of $630,000 and operating cash flows of $80,000 a year for the next 10 years and salvage value of $20,000 at the end of 10 years. The net working capital (NWC) is expected to increase by $10,000 a year until the end of the project life. All the NWCs will be recovered when the project is completed. The project will be depreciated straight-line to zero over the project’s 10-year life. The tax rate is 21%.

1. (15 points) What is Kirksville’s weighted average cost of capital?

2. (10 points) What is the net present value (NPV) of this project? Should you accept the project? Explain why.

3. (5 points) What is the internal rate of return (IRR) of this project? Should you accept the project if you apply the IRR decision rule?

Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line method. The new assembly line will increase output and thereby raises sales by $10,000 per year and will reduce production expenses by $5,000 per year. The existing assembly line can currently be sold for $15,000. To support the increased business resulting from installation of the new assembly line, accounts payable would increase by $5,000 and accounts receivable by $12,000. At the end of 4 years, the existing assembly line is expected to have a market value of $4,000; the new assembly line would be sold to net $15,000 before taxes. Finally, to install the new assembly line, the firm would have to borrow $80,000 at 10% interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm pays 21% taxes and its shareholders require 10% return.

(A)    (6 points) What is the initial cash outlay for this replacement project?

(B)    (5 points) What is the operating cash flow of the project?

(C)    (5 points) What is the terminal cash flow of th

(D)    (4 points) Should you replace the existing assembly line? Provide all the details.

Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

(a) (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

(b) (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.

(c) (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?

(d) (5 points) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

On June 15, you took a long forward contract (delivery on December 15) on a dividend-paying stock when the stock price was $30 and the risk-free interest rate (with discrete compounding) is 12% per annum. The amount of the dividends were known as $0.75 on Aug 15, and Nov 15. It is now September 15 and the current stock price and the risk-free interest rate are, respectively, $31 and 10%. What is the value of your long forward position now? Assume the forward contract prices are arbitrage free prices.

) Consider the following situation:

The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

1. (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

2. (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.

3. (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?
4. ) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

Use the Black-Scholes model to find the value for a European put option that has an exercise price of $34.00 and 0.3333 years to expiration. The underlying stock is selling for $26.00 currently and pays an annual dividend yield of 0.03. The standard deviation of the stock’s returns is 0.3500 and risk-free interest rate is 0.08. (Round your final answer to 2 decimal places. Do not round intermediate calculations.)

Put value            $

Your 21 year old client just graduated from college and started a job with monthly salary of $5,000 per month. He wants to retire when he is 60 years old and wants to start saving for retirement right away. We cannot be sure of how long we live after retirement, but the client wants to be extra careful and save for 30 years of after retirement life. Market expectation for average annual inflation for the future is 1.7% (Let’s assume inflation to be 0 after retirement period). Because of inflation, he will need substantially higher retirement monthly income to maintain the same purchasing power. He plans to purchase a lifetime annuity from an insurance company one month before he retires, where the retirement annuity will begin in exactly 39 years (468 months). The insurance company will add a 2.00 percent premium to the pure premium cost of the purchase price of the annuity. The pure premium is an actuarial cost of his anticipated lifetime annuity. He has just learned the concept of time value of money and never saved anything earlier. He will make the first payment in a month from now and the last payment one month before he retires (a total of 467 monthly payments).

1) Given a rate of return of 4% for the foreseeable future, how much does he need to save each month until the month before he retires?

Compute the payback statistics (Not discounted) for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriare cost of capital is 10 percent and the maximum allowable payback is
five years.

Time:                  0        1      2        3         4       5
Cash flow:        -75   -75     0     100     75     50

a. 3.67 years, accept
b. 4.67 years, accept
c. 3.67 years, reject
d. 4.67 years, reject