Consider a project of ABC Ltd with the following characteristics:

Cash inflows: $500,000 per year for the indefinite future; Cash costs: 72% of sales;
Initial investment: $475,000;
Corporate tax: 34%;

The cost of capital for a project of an all-equity firm: 20%.

1. a) Will you accept this project?

2. b) If ABC Ltd finances the project with $150,000 in debt, will you accept this project?

You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company's weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company's weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project is financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Based on the scenario above, post your reactions to the following questions and concerns:

What is your reaction to Harriet's suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field?

Describe how financial intermediation and financial innovation affect banking.

Part A: New Equipment

1. Rhonda is debating about buying a new ice cream machine for one of her stores. The current machine is valued at $10,000 this year and will generate $2,500 of profit for the store. The value of the machine at the end of the year will be $8,250. Her other option is to purchase a new piece of equipment for $15,000. The new equipment will generate $4,000 in profit and will be valued at $12,500. Calculate the holding period return for both assets.
2. Rhonda also has the option of purchasing a new espresso maker that will allow her to expand her offerings at one location. She has the savings to purchase the equipment, but would lose the 4.5% annual interest that the savings generates. She expects the espresso machine to generate profits of $3,000 each year over the next 5 years. After five years she could sell the machine for $4,000. What is the present value of the machine to her?

1. Based on the holding period returns calculated in Part A.1 which option should Rhonda choose?
2. If she can purchase the espresso machine in Part A.2 for $20,000, should she?

Please show your work so I can understand the formulas. Thank you!!

Part B: New Location

1. Rhonda has found a location for the next store she plans to open. The store front will require $30,000 in renovations before it is ready to open. She would like the initial investment to be paid off in 5 years. Assuming a discount rate of 4.5%, what will her annual profits for the store need to be if she wishes to recover the $30,000 in 5 years (assuming equal profits each year)?
2. What if the discount rate increased to 7.75%? What would her annual profits need to be to recover the $30,000 in 5 years?

If Rhonda expects profits from the new location in Part B to be $7,250 annually, should she open the new location? First, if the discount rate is 4.5%? Then, if the discount rate is 7.75%?

Please show your work so I can understand how you get to the answers.  

Thank you!

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.97.

What are the Sharpe and Treynor ratios for the fund? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

FastTrack​ Bikes, Inc. is thinking of developing a new composite road bike. The development will take six years and the cost is $ 188000 per year. Once in​ production, the bike is expected to make $ 282000 per year for 10 years. Assume the cost of capital is 10 %.

a. Calculate the NPV of this investment​ opportunity, assuming all cash flows occur at the end of each year. Should the company make the​ investment?

b. By how much must the cost of capital estimate deviate to change the​ decision? ​(Hint​: Use Excel to calculate the​ IRR.)

c. What is the NPV of the investment if the cost of capital is 13 %​? Note​: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.

Polecat plc has 18 million $0.50 ordinary shares in issue. The current stock market
value of these is $1.70 per share. The directors have decided to make a one-for-three
rights issue at $1.25 each. Julie owns 3,000 Polecat ordinary shares.
Assuming that the rights issue will be the only influence on the share price: 
(a) What, in theory, will be the ex-rights price of the shares (that is, the price of the
shares once the rights issue has taken place)?
(b) For how much, in theory, could Julie sell the ‘right’ to buy one share?
(c) Will it matter to Julie if she allows the rights to lapse (that is, she does nothing)?

Calculate the following time value of money problems:

1. If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%?
2. What is the future value if you plan to invest $200,000 for 5 years and the interest rate is 5%?
3. What is the interest rate for an initial investment of $100,000 to grow to $300,000 in 10 years?
4. If your company purchases an annuity that will pay $50,000/year for 10 years at a 11% discount rate, what is the value of the annuity on the purchase date if the first annuity payment is made on the date of purchase?
5. What is the rate of return required to accumulate $400,000 if you invest $10,000 per year for 20 years. Assume all payments are made at the end of the period.

Question 1-- NPV Profiles: Graph the NPV profiles for both projects on a common chart., making sure you identify the "crucial" points.

0 -$725 -$850

1 100 200

2 250 200

3 250 200

4 200 200

5 100 200

6 100 200

7 100 200

Note: First column is time, second column is Project A cash flow , third column is Project B flow. This is a two-part question. Answer for first ? is needed to solve ? 2.

Question 2-- IRR Applicability:For what range of possible interest rates would you want to use IRR to choose between the those to projects? For what range would you NOT want to use IRR?

Why might providers needing to bear financial risk in value-based payment models lead to more mergers among provider organizations?

5. QRS Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model? Briefly discuss.

Elliot Karlin is a​ 35-year-old bank executive who has just inherited a large sum of money. Having spent several years in the​ bank's investments​ department, he's well aware of the concept of duration and decides to apply it to his bond portfolio. In​ particular, Elliot intends to use $1 million of his inheritance to purchase 4 U.S. Treasury​ bonds:

1. An 8.59%​, 13-year bond​ that's priced at $1,091.27 to yield 7.48%.

2. A 7.795%​, 15-year bond​ that's priced at $1019.97 to yield 7.57%.

3. A​ 20-year stripped Treasury​ (zero coupon)​ that's priced at $199.67 to yield 8.22%.

4. A​ 24-year, 7.46% bond​ that's priced at $958.15 to yield 7.85%.

Note that these bonds are semiannual compounding bonds.

a. Find the duration and the modified duration of each bond.

b. Find the duration of the whole bond portfolio if Elliot puts $250,000 into each of the 4 U.S. Treasury bonds.

c. Find the duration of the portfolio if Elliot puts $300,000 each into bonds 1 and 3 and $200,000 each into bonds 2 and 4.

d. Which portfolio dash—b or c —should Elliot select if he thinks rates are about to head up and he wants to avoid as much price volatility as​ possible? Explain. From which portfolio does he stand to make more in annual interest​ income? Which portfolio would you​ recommend, and​ why?

a. The duration and modified duration can be calculated using a​ spreadsheet, such as Excel. It gives the precise duration measure because it avoids the​ rounding-off errors, which are inevitable with manual calculations.

Bond​ 1: 13​ years, 8.59%​, priced to yield 7.48%.

The duration of this bond is __ years. Round to two decimal​ places.)

The modified duration of this bond is __ years.​ (Round to two decimal​ places.)

Bond​ 2: 15​ years, 7.795% priced to yield 7.57%.

The duration of this bond is ___ years.​(Round to two decimal​ places.)

The modified duration of this bond is ___ years.(Round to two decimal​ places.)

Bond​ 3: 20​ years, zero​ coupon, priced to yield 8.22%.

The duration of this bond is __ years.​(Round to two decimal​ places.)

The modified duration of this bond is ___ years.​(Round to two decimal​ places.)

Bond​ 4: 24​ years, 7.46%​, priced to yield 7.85%.

The duration of this bond is __ years.(Round to two decimal​ places.)

The modified duration of this bond is ___ years.(Round to two decimal​ places.)

b. Find the duration of the whole bond portfolio if Elliot puts $250,000 into each of the 4 U.S. Treasury bonds.

The duration of this portfolio is __ years.(Round to two decimal​ places.)

c. Find the duration of the portfolio if Elliot puts $300,000 each into bonds 1 and 3 and $200,000 each into bonds 2 and 4.

The duration of this portfolio is __ years.(Round to two decimal​ places.)

Charisma Inc., has debt outstanding with a face value of $4.5 million. The value of the firm if it were entirely financed by equity would be $18.3 million. The company also has 340,000 shares of stock outstanding that sell at a price of $41 per share. The corporate tax rate is 21 percent. What is the decrease in the value of the company due to expected bankruptcy costs?

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 $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. 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 $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses.

1. 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	$

2. 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?
   -Select-Electric-poweredGas-poweredItem 5