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.

1.. Suppose $2000 is invested at 6% annual interest rate for 10 years and the interest is compounded monthly. How much will the investment be worth at the end of the 10 years?

2. Suppose John invests his tax refund of $1666 in an account that earns interest compounded continuously at the rate of 3.5%. How much will John have in 7.5 years? Show your work details.

3. What is the present value of an account that will be worth $10,000 in 5 years if the annual interest rate is 10% and the interest is compounded continuously? Show your work details.

4.A company shows the following profit figures for the years 2000, 2004, and 2008. In 2000 the profit was $250 million; in 2004, the profit was $400 million; and, in 2008, the profit was $550 million. If x is the number of years after 2000, write a linear function representing this profit. Using this linear model determine what the projected profit will be in the year 2020. Show work details.

5. The table shows the year and the number of people unemployed in a particular city for several years. Determine whether the trend appears to be approximately linear. If so, and assuming the trend continues, in what year will the number of unemployed reach 15 people?

Year                          1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Number Unemployed 750   670   650   605   550   510   460   420   380   320

6. Wilbur and Cody are selling pies for a school fundraiser. Customers can buy cherry pies and blackberry pies. Wilbur sold 8 cherry pies and 2 blackberry pies for a total of $110. Cody sold 7 cherry pies and 6 blackberry pies for a total of $177. What is the cost each of one cherry pie and one blackberry pie? Show work details.

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. Compute the monthly return correlation coefficients between each pair of two stocks and between each stock and the market index. which pair of stock has the highest and lowest correlation? Which stock (s) has the highest and lowest correlations with the market?

Hint: use Excel function CORREL() to compute the correlation coefficient between two data series.

1.1. Can you suggest some economic reasons to explain the high and low correlation between stocks in (1)? If you were to form a portfolio of two stocks, which ones would you choose to maximise the benefits of diversification? Give reasons for your answer.

Having a sound business plan is essential for securing finance, regardless of the type of loan sought. Explain. (100–150 words)

Financial Management

Question 1

John met his insurance agent to discuss the purchase of an insurance plan to fund his 8 year-old daughter's university education in 11 years' time. The payout from the insurance company is as follows:

* Receive $30,000 at the begining of each year for 4 years with the first receipt starting 11 years from today.

The insurance company had 3 payment proposals:

Proposal 1:

* Pay $35,000 today

Proposal 2:

* Beginning 2 years from today, pay $8,000 each year for the next 8 years.

Proposal 3:

* Beginning 2 years from today, make payments each year for the next 8 years. The first payment is $7,000 and the amount increases by 5% each year.

(a) Calculate the present value of each proposal. Use a 10% discount rate. (7m)

(b) Which proposal should John choose? Explain. (5m)

(c) If the discount rate is not given to you, what would be an appropriate discount rate to use? (3m)

The MoMi Corporation’s cash flow from operations before interest and taxes was $3 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 15% of pretax cash flow each year. The tax rate is 35%. Depreciation was $250,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 8% per year, and the firm currently has debt of $4.5 million outstanding. Use the free cash flow approach to value the firm’s equity. (Round answer to nearest whole number. Enter your answer in dollars not in millions.)

explain how forward contracts differ from futures contracts? As it relates to future contracts, explain your understanding of marking to market.

protective put, covered calls, straddle, spreads, and collars. explain how these strategies work, and provide a specific example.

MGM Co. has decided to sell a new line of golf clubs. The clubs will sell for $850 per set and have a variable cost of $400 per set. The company has spent $300,000 for a marketing study that determined the company will sell 68,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,400 sets of its high-priced clubs. The high-priced clubs sell at $1,200 and have variable costs of $660. The company will also increase sales of its cheap clubs by 14,400 sets. The cheap clubs sell for $420 and have variable costs of $210 per set. The fixed costs each year will be $10,400,000. The company has also spent $2,500,000 on research and development for the new clubs. The plant and equipment required will cost $38,500,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,900,000 that will be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 12 percent.

Suppose you feel that the values are accurate to within only +/- 10 percent. What are the best-case and worst-case NPVs? (hint: the price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain) *(Can Not use Excel)

Suppose that an US airline receives a considerable portion of its revenues in euros, and is concerned about exchange rate risk. Two hedging choices the firm is considering are (i) futures contracts on the euro and (ii) call or put options on the euro.

Explain whether this firm should buy or sell futures contracts on the euro. Alternatively, the firm could hedge using options. In that case, should the firm use call or put options and should the firm buy or sell these options?

Discuss the advantages and disadvantages of hedging using options as compared to futures contracts.