1. Assume you will retire at 67. You decide to open a retirement account that earns 8% interest. You will put $125 per month into this account starting now (age of 38 years old). How much money will you have in this account when you retire?

2. Assume you will retire at 67. You decide to open a retirement account that earns 8% interest. You put $125 per month into this account starting now (38 years old), for a 10-year period. After that, you stop contributing to this account, and the account continues to earn 8% interest. How much money will you have at age 67?

3. Assume you do not start saving now (age 38 years old), but wait for 10 years. You will retire at 67, and earn 8% on your monthly deposits of $150. How much will you have at 67?

4. Assume you will retire at 67. (you are currently age 38 years old) You decide to open a retirement account that earns 8% interest. You will put $325 per month into this account starting ten years from now. How much money will you have in this account when you retire?

Scooby Industries just received a patent on a new cancer treatment. The firm must now decide if it is worthwhile to start manufacturing the drug. To do this, the firm must buy new machines for a total of $860,000, which it will depreciate on a straight-line basis (to zero) over the next 7 years (Years 1 and 7 are complete years! Do not use the ½ year convention!). Scooby expects the machine to have no (economic) salvage value in 7 years, so it will be scrapped at that time. In each of the next 7 years, the firm expects to sell 11,000 units of this new treatment at a per unit price of $55. The variable cost of producing, marketing, and distributing this treatment will be $10 per unit, and the firm will have fixed costs (excluding depreciation) of $200,000 each year. The firm's tax rate is 35% (on both income and capital gains), and the discount rate is 10%. A. What is the incremental Net Income and cash flow in each of the next seven years? B. Calculate the NPV and the IRR for this project. Based on this information, should the company start manufacturing the drug? C. Calculate the NPV break-even point (in units) of this project.

The following options prices were observed for calls and puts on Lannister Ltd for the trading day of July 6 2019. Use this information in Questions 3-8. The stock was priced at $163.37. The expirations were July 17, August 21 and October 16. The continuously compounded risk-free rates associated with the three expirations were 0.0517, 0.0542 and 0.0565, respectively. The options have European expiries.

Question: Showing all formula and workings where applicable; Let the standard deviation of the continuously compounded return on the stock be 20 percent. Ignore dividends. Respond to the following:

1. What is the theoretical fair value of the October 165 call? Calculate this answer by hand and then re-calculate it using BlackScholesMertonBinomial10e.xlsm.
2. Based on your answer in part a, recommend a riskless strategy.
3. If the stock price decreases by $1, how will the option position offset the loss on the stock?
4. Use the Black-Scholes-Merton European put option pricing formula for the October 160 put option. Repeat parts a, b and c of Question 3 with respect to the put.
5. Buy 100 shares of Lannister Ltd at $163.37 and short one October 165 call. Hold the position until expiration. Determine the profits and graph the results. Identify the strategy, breakeven stock price at expiration, the maximum profit, and the maximum loss. Discuss any special considerations associated with this strategy. Note: use the OptionStrategyAnalyzer10e.xlsm to obtain the required payoff diagram.
6. Buy 100 shares of Lannister Ltd at $163.37 and go long one October 160 put. Hold the position until expiration. Determine the profits and graph the results. Identify the strategy, breakeven stock price at expiration, the maximum profit, and the maximum loss. Discuss any special considerations associated with this strategy. Note: use the OptionStrategyAnalyzer10e.xlsm to obtain the required payoff diagram.
7. Construct an options strategy by going short one October 160 call and long one October 165 call using Lannister Ltd options. Hold the position until expiration. Determine the profits and graph the results. Identify the strategy, breakeven stock price at expiration, the maximum profit, and the maximum loss. Discuss any special considerations associated with this strategy. Note: use the OptionStrategyAnalyzer10e.xlsm to obtain the required payoff diagram.
8. Construct an options strategy by going long one October 165 put and long one October 165 call using Lannister Ltd options. Hold the position until expiration. Determine the profits and graph the results. Identify the strategy, breakeven stock price at expiration, the maximum profit, and the maximum loss. Discuss any special considerations associated with this strategy. Note: use the OptionStrategyAnalyzer10e.xlsm to obtain the required payoff diagram

NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses.

a. Calculate the NPV for each type of truck. Do not round intermediate calculations. Round your answers to the nearest dollar.

Electric-powered truck $

Gas-powered truck $

b. Calculate the IRR for each type of truck. Do not round intermediate calculations. Round your answers to two decimal places.

Electric-powered truck %

Gas-powered truck %

Which type of the truck should the firm purchase?

electic-powered

gas-powered

Required Rate of Return

Suppose r_RF = 5%, r_M = 9%, and r_A = 15%.

1. Calculate Stock A's beta. Round your answer to two decimal places.
   
   
2. If Stock A's beta were 1.8, then what would be A's new required rate of return? Round your answer to two decimal places.
   %

Portfolio Required Return

Suppose you manage a $3.925 million fund that consists of four stocks with the following investments:

If the market's required rate of return is 9% and the risk-free rate is 6%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?

Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 30%, r_d = 6%, r_ps = 7.9%, and r_s = 10%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

%

After-Tax Cost of Debt

LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 14%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 30%, what is LL's after-tax cost of debt? Round your answer to two decimal places.

%

Your investment club has only two stocks in its portfolio. $30,000 is invested in a stock with a beta of 0.4, and $60,000 is invested in a stock with a beta of 2.2. What is the portfolio's beta? Round your answer to two decimal places.

AA Corporation’s stock has a beta of 1.3. The risk-free rate is 7% and the expected return on the market is 11%. What is the required rate of return on AA's stock? Round your answer to two decimal places.

Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some $60 par preferred stock with a 7% dividend. A similar stock is selling on the market for $66. Burnwood must pay flotation costs of 7% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

NEW PROJECT ANALYSIS

You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $27,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $49,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $21,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

1. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

2. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.

   In Year 1 $

   In Year 2 $

   In Year 3 $

3. If the WACC is 11%, should the spectrometer be purchased?

1) An unexpected change in exchange rates impacts a firm's expected cash flows at three levels, depending on the time horizon used (Short Run, Medium Run, and Long Run). Describe the three operating exposure's phases of adjustment assuming that parity conditions do not hold among foreign exchange rates, national inflation rates, and national interest rates (disequilibrium).

An asset costs $950,000 and will be depreciated in a straight-line manner over its four-year life. It will have no salvage value. The corporate tax rate is 22 percent and the appropriate interest rate is 8 percent.

a. What would the lease payment have to be to make both the lessor and lessee indifferent about the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. Assume that the lessee pays no taxes and the lessor pays taxes. For what range of lease payments does the lease have a positive NPV for both parties? (Enter your answers from lowest to highest. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

2) Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

7) A.What is the major difference between "currency risk" and "risk of noncompletion"? How are these risks handled in a typical international trade transaction? B. Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.