1. Explain how uncertainty concerning future interest rates would affect the decision to refund a bond issue.

2. Define the following: direct lease, sale-leaseback arrangement, leveraged lease, and financial (capital) lease.

3. What elements must be included in a lease in order for it to be considered a financial (capital) lease?

Finco Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $100. The company feels that sales will be 12,500, 13,000, 14,000, 13,200, and 12,500 units per year for the next 5 years. Variable costs will be 25% of sales, and fixed costs are $300,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $1,500,000. The company plans to use a vacant warehouse to manufacture and store the calculators. Based on a recent appraisal the warehouse and the property is worth $2.5 million on an after-tax basis. If the company does not sell the property today then it will sell the property 5 years from today at the currently appraised value. This project will require an injection of net working capital at the onset of the project in the amount of $100,000. This networking capital will be fully recovered at the end of the project. The firm will need to purchase some equipment in the amount of $1,200,000 to produce the new calculators. The machine has a 7-year life and will be depreciated using the straight-line method. At the end of the project, the anticipated market value of the machine is $150,000. The firm requires a 10% return on its investment and has a tax rate of 21%.

Calculate the after tax salvage value at the end of year 5. (Round to two decimals)

Calculate the operating cash flows at the end of year 1. (Round to two decimals)

Calculate the initial cash outflow (e.g. the time 0 cash flow). (Enter a negative value and round to two decimals)

Calculate the cash flow from assets at the end of year 5. (Round to two decimals)

Calculate the net present value for the project. (Round to 2 decimals)

Jill buys a house for $800k, lives there for exactly 10 years and sells it.

Suppose Jill’s annual cost of ownership is exactly equal to the annual rent she would have paid to live in the same house.

Suppose the price of Jill’s house grows 3.4% annually.

Buying expenses are 5% of purchase price and selling expenses are 8% of sale price.

Compute Jill’s annual IRR from owning net of renting.

(hint: look at the buy vs rent slides, assume no mortgage.)

Refer to the search you performed in the Learning Activities on the U.S. Securities and Exchange Commission's (SEC) website. This search should have produced a variety of financial documents for the publically traded companies you searched. Identify one of said companies from the SEC site and discuss the nature of the information provided in the documents. What statements were provided? Why were these particular documents provided? What was there purpose?

300-400 words, APA Citation/References

What is the relationship between risk and return? What is the significance of this relationship for the investor?

WACC and Company Valuation Mini Case Study Brian Jones is a 30-year-old managing director of Full Charge Corporation. Recently promoted to the role upon the retirement of his father, he is the third generation of his family to run the business. Historically Full Charge Corporation had been a significant player in the market for battery production for diesel and petrol fuelled vehicles. More recently, the business has pivoted toward addressing demand for batteries used in electric vehicles. Despite strong and steady profitability in recent years, Full Charge’s share price had been relatively stagnant at around $25 per share. Brian felt that this was in part due to the financial policies followed by his father, which he viewed as overly conservative. Full Charge Corporation have historically been 100% equity financed with no debt in the capital structure. Full Charge Corporation are active in the production of a technology that will help reduce environmentally harmful emissions and thus they benefit from a major tax break. More specifically, they pay zero corporation tax. Noting that unconventional monetary policies had supressed yields (and thus lowered borrowing costs) in the aftermath of the financial crisis, Brian proposed that Full Charge make a significant change to its capital structure. He proposed that the company buy back $500m of its outstanding shares using cash raised by issuing new debt. He estimated that the cost of this debt would be around 4% based on prevailing market yields on the debt of firms with similar levels of credit quality. Brian was confident that this policy would make shareholders (of which he was one) better off. In aggregate, those who sold would receive $500m in cash, but Brian projected the share price for the remaining shareholders would also rise as a result of his actions. Historically Full Charge had a policy of returning all company profits to shareholders in the form of a dividend, and Brian was clear that this policy should continue. Whilst reducing the share-count would mean that in aggregate less dividends would be distributed, he was confident that the dividend paid per share would increase. His accounting department prepared the following basic set of pro forma financial statements for the coming year (for the all equity-financed firm)… Full Charge Corp Pro- Forma Financial Statement All figures (except per share) in $m Shares Outstanding Measured in Millions Income Statement Revenue 1500 Operating Expenses 1375 Operating Profit 125 Net Income 125 Dividends 125 Shares Outstanding 62.5 Dividends Per Share 2.00 Balance Sheet Current Assets 450 Fixed Assets 550 Total Assets 1000 Total Debt 0 Total Equity 1000 Total Capital 1000 Inflation was currently running at close to zero. Revenue and operating expenses were thus projected to remain at the same amount per year indefinitely. Brian observed that the company’s equity beta was around 0.8 whilst the market risk premium was around 5%. He estimated the current cost of equity of the no-debt firm as 8%. On the basis of an estimated cost of debt of 4%, Brian argued that any increase in debt would lead to a lowering of the company’s capital cost. He thought “If we aggressively seek the best deals for raw materials, why shouldn’t we extend the same philosophy to our capital?” Brian’s colleague and MBA graduate, Amanda, expressed some concerns about the restructuring. Firstly, she asserted that the proposed action might boost EPS, however adding debt to the capital structure would magnify the sensitivity of EPS to changes in operating profit. Furthermore, she expressed doubt as to whether or not the restructuring would have the share price impact Brian predicted. Provide some financial analysis to help support Amanda’s line of reasoning. (For ease of exposition, assume that there are neither distress costs nor signalling value associated with capital structure decisions). Given the growth in the market for electric vehicles, the government is weighing up whether to drop the tax exemption enjoyed by Full Charge Corporation. More specifically, there is debate about the introduction of a 20% corporation tax rate for companies in this market. What would this proposed tax change mean for the post restructuring weighted average cost of capital (WACC) and the share price of Full Charge? (For the scenario where corporate taxes apply, assume that the post-restructuring share count equals 39.4m). Again, assume there are neither distress costs nor signalling implications associated with capital structure decisions. Explain the underlying mechanisms that lead to any changes in the WACC and share price.

1. How does a crossing system differ from an electronic exchange?

2. What is a specialist? What is a market maker? When trading, what advantage do the two have over you?

3. Describe some alternatives to trading on the main stock exchanges

Assume that the company has the following capital structure:

What will be the cost of capital if the company decide to raise the needed capital proportionally and with following costs? Please use the following information to calculate the weighted cost of capital:

1. Bond:

A 30-year bond with a face value of $1000 and coupon interest rate of 13% and floatation cost of $20 (Tax is 35%)

2. Preferred stock:

Face value of $35 that pays dividend $5 and floatation cost of $2

3. Common stock:

Market value of $54 with floatation cost of $3.5. Last dividend was $6. The dividend will expect to grow at 7%.

In​ mid-2015, Cisco Systems had a market capitalization of $ 128 billion. It had​ A-rated debt of $ 22 billion as well as cash and​ short-term investments of $ 61 ​billion, and its estimated equity beta at the time was 1.38

.a. What is​ Cisco's enterprise​ value?

b. Assuming​ Cisco's debt has a beta of​ zero, estimate the beta of​ Cisco's underlying business enterprise.

a. What is​ Cisco's enterprise​ value?

​Cisco's enterprise value is $89 billion. ​ (Round to the nearest​ integer.)

b. Assuming​ Cisco's debt has a beta of​ zero, estimate the beta of​ Cisco's underlying business enterprise.

The beta of​ Cisco's underlying business enterprise is: ​(Round to two decimal​ places.)

25. please answer all questions round to 4 decimal places

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,455.00 to install, $5,130.00 to operate per year for 7 years at which time it will be sold for $6,941.00. The second, RayCool 8, costs $41,330.00 to install, $2,082.00 to operate per year for 5 years at which time it will be sold for $8,917.00. The firm’s cost of capital is 6.16%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,548.00 to install, $5,135.00 to operate per year for 7 years at which time it will be sold for $6,971.00. The second, RayCool 8, costs $41,800.00 to install, $2,115.00 to operate per year for 5 years at which time it will be sold for $9,029.00. The firm’s cost of capital is 5.06%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the firm’s production process more efficient which in turn increases incremental cash flows. The GSU-3300 produces incremental cash flows of $25,232.00 per year for 8 years and costs $104,695.00. The UGA-3000 produces incremental cash flows of $27,599.00 per year for 9 years and cost $126,254.00. The firm’s WACC is 9.79%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the firm’s production process more efficient which in turn increases incremental cash flows. The GSU-3300 produces incremental cash flows of $25,825.00 per year for 8 years and costs $103,756.00. The UGA-3000 produces incremental cash flows of $27,104.00 per year for 9 years and cost $126,558.00. The firm’s WACC is 9.57%. What is the equivalent annual annuity of the UGA-3000? Assume that there are no taxes.

CME Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. Note: Assume that both the old and the new equipment will have terminal values of $0 at the end of year 5. The WACC for Cuda Marine Engines, Inc. is 10%.

15. 15- Determine the net present value (NPV).

16. 16- Determine the internal rate of return (IRR).

17- Make the recommendation to accept or reject the replacement, and justify your answer.

Campbell, a single taxpayer, earns $295,000 in taxable income and $6,400 in interest from an investment in State of New York bonds. (Use the U.S. tax rate schedule). Required: If Campbell earns an additional $20,500 of taxable income, what is her marginal tax rate on this income? What is her marginal rate if, instead, she had $20,500 of additional deductions? (For all requirements, do not round intermediate calculations.)

2018 Tax Rate Schedules

Individuals

Schedule X-Single

Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing a capital expansion program that may include purchase of a piece of manufacturing equipment for $1.6 million. The company’s tax rate is 25%, its required rate of return is 11%, the estimated salvage or recovery value of the equipment at the end of 3 years is $450,000. Given the high-tech nature of its industry, the conservative approach is to use a depreciable life of 3 years on a straight line basis. The alternative is to lease the same piece of equipment for $425,000 over the same period. Should ABC lease or buy? Show your work to justify your decision or recommendation.