Assume that the % expected return for security A and the market M for a good, normal and bad economy (probabilities .3,.4,.3) are 20, 16, and 10 for A and 8, 4, and 12 for M. Also assume that you invest 40% in A and 60% in M. Compute the standard deviation for a portfolio of A and M.

1. How does financing with bonds differ from financing with stock? Think about this in terms of company ownership and risk to company. Why not borrow money from a bank?

What is the net present value (NPV) of a project that has an initial cash outflow of $19,851, at time 0, and the following cash inflows? The required return is 13.0%.  DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ROUND ANSWER TO THE NEAREST DOLLAR.

a. After completing its capital spending for the year, U Manufacturing has $1,000 extra cash. U’s managers must choose between investing the cash in Treasury bonds that yield 8% or paying the cash out to investors who would invest in the bonds themselves.

i. If the corporate tax rate is 35%, what personal tax rate would make the investors equally willing to receive the dividend or to let U invest the money?

ii. Is the answer to part i) reasonable? Explain.

b. The desire for high current income is a valid explanation of preference for high current dividend policy. Comment on the validity of this statement.

HKW Corporation is considering buying a machine that costs $540,000. The machine will be
depreciated over 5 years by the straight-line method and will have zero salvage value. The
company can also lease the machine with year-end payments of $145,000. The company can
issue bonds at 9% interest rate. If the corporate tax rate is 35%, should the company buy or
lease? Explain.

Give an example of a situation where a building contractor may want to use the discounted cash flow (DCF) analysis method.

Paul owns a 20-year U.S. Treasury bond that he bought 4 years ago. The bond has a par value of

$1,000 and a coupon rate of 6 percent. Interest is paid semi-annually. The bond’s yield-to-maturity

is 8 percent. What is the current price of the bond?

XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of 8% paid annually. The current market interest rates on these bonds are 7%. In one year, the interest rate on the bonds will be either 10% or 4% with equal probability.

a. If the bonds are noncallable, what is the price of the bonds today?

b. If the bonds are callable one year from now at $1,100, what is the price of the bonds today?

c. What is the compensation for bearing the call risk of XYZ’s callable bonds?

show your steps, ty.

1. OmniCable Corporation is considering two mutually-exclusive capital projects, Project A and Project B. The estimated annual after-tax cash flows are detailed below. The company’s estimated weighted-average cost of capital (WACC) is 6.8%. (a) Which of the two projects, if either, should the company pursue? (b) Why? (c) What additional information would make your decision easier?

      (in $ millions)

Year              Project A                               Project B

0                    (3,525)                                (3,050)

1                        (614)                                    (120)

2                         923                                       725

3                     1,336                                   1,286

4                    2,086                                   1,525

5                    1,915                                   1,398

Deltona, USA is a development company that currently is financed with 100 percent equity. There are 15,000 shares outstanding at a market price of $50 a share. Deltona has earnings before interest and taxes (EBIT) of $20,000. The firm has decided to issue $250,000 of debt at a rate of 8 percent and use the proceeds to repurchase shares. Theresa owns 500 shares of Deltona and wants to use homemade leverage to offset the leverage used by Deltona. Theresa should

Select one:

a. sell 133 shares and invest the proceeds into the debts of Deltona.

b. buy an additional 167 shares.

c. sell 167 shares and invest the proceeds into the debts of Deltona.

EOQ

Thomas Corporation produces heating units. The following values apply for a part used in their production (purchased from external suppliers):

Required:

1. For Thomas, calculate the ordering cost, the carrying cost, and the total cost associated with an order size of 120 units. If required, round your answers to the nearest cent.

2. Calculate the EOQ and its associated ordering cost, carrying cost, and total cost. If required, round your answers to the nearest cent.

3. What if Thomas enters into an exclusive supplier agreement with one supplier who will supply all of the demands with smaller, more frequent orders? Under this arrangement, the ordering cost is reduced to $ 0.39 per order.

Calculate the new EOQ. (Round your answer to one decimal place.)

units

Pearl Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $105,000, and $145,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $12,500,000 in debt and 1,050,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock?

8. Suppose New York wants to build a new facility to replace Madison Square Garden. Assume that the cost of building a new arena in midtown Manhattan is $2.5 billion and that all the costs occur right away. Also assume that New York will receive annual benefits of $110 million for the next 25 years, after which the new arena becomes worthless. Does it make financial sense to build the new facility if interest rates are 6 percent? At what interest rate will we be indifferent between accepting and rejecting this project?

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $153,000, and shipping and installation costs would add another $7,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $68,850. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $35,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   3. The cost of research is an incremental cash flow and should be included in the analysis.
   4. Only the tax effect of the research expenses should be included in the analysis.
   5. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   
   -Select-IIIIIIIVVItem 1

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-YesNo