Give your experience with managers in the past, what problems do you see for managers who let employees decide for themselves the best way to do things and give them the power to obtain needed equipment?

47.         (BONUS) Suppose that Disney wants to follow up on the success of Frozen, with a sequeal this fall. The movie will cost $165 million to produce (INVESTED TODAY), and the producers expect the movie to generate a cash flow of $160 million in the first year. After the first year, cash flows will decline to $15 million in year 2.

However, the movie will also create synergy within the company.

Disney will build a new Olaf ride at Epcot for $40 million (invested TODAY). Disney suspects that the ride will bring visitors to the park and increase merchandise sales. Disney estimates that sales will increase by $12 million per year in PERPETUITY. The after-tax operating margin on these sales is 50% for Disney. If the cost of capital is 10%, what is the combined NPV of this opportunity?

You work for a California textbook company. Henry is auctioning off the rights to his online textbooks sales in Switzerland, which are expected to bring in the following EUR cash flows over the next three years:

                                       Year 1 Year 2 Year 3

EUR Cash Flows 1,000 1,100 1,200

To prepare your bid, you need to calculate the net present value (NPV) of these cash flows in USD terms. You believe that relative PPP is a reasonable tool to use.

The spot exchange rate is 1.20 USD per EUR. Expected US inflation is 2%, and expected inflation in Switzerland is 1%. Your USD discount rate is 9%.

The NPV of these cash flows in USD is: ????

You have a Brazilian partner, who ask for your estimates of the net present value of the EUR cash flows in Brazilian real (BRL) terms.

He asks you to convert the cash flows into BRL (using relative PPP), and to use a BRL discount rate of 25%.

The spot exchange rate is 4 BRL per USD. Expected BRL inflation is 12%. All other information is the same as above.

The NPV of these cash flows in BRL terms is: ????

3. A financial institution has the following assets (market values):

$120 million in cash reserves,

$120 million in Treasury bills and notes,

$200 million in mortgage loans,

$40 million in corporate bonds, and

$150 million in commercial loans.

If assets are liquidated on short notice, the institution expects to receive

99% of the fair market value of the treasury debt,

90% of the fair market value of the mortgages,

95% of the fair market value of the bonds, and

$75% of the fair market value of the commercial loans.

What is the financial institution’s liquidity index?

1) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. What is the expected rate of return on a portfolio that is equally invested in the two assets?

A) 12.12%

B) 11.15%

C) 12.24%

D) 11.24%

2) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has a beta of 0.50, what are the portfolio weights?

A) 0.46; 0.54

B) 0.63; 0.37

C) 0.57; 0.43

D) None of these

3) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has an expected return of 10.5 percent, what is the beta?
A) 0.90

B) 0.93

C) 0.98

D) 0.89

4) A stock has a beta of 1.08 and has expected rate of return of 11.6 percent. A risk-free asset currently earns 3.6 percent. If a portfolio of the two assets has a beta of 2.16, what are the portfolio weights? How do you interpret the weights of the two assets in this case? Explain.

A) 1.50; -0.50

B) 0.82; 0.18

C) 0.65; 0.35

D) 2.00; -1.00

Isabella Construction and Interior Design is an all-equity company in Central Michigan. The CFO John Thornton Jr. is considering moving to a capital structure with 25% debt and 75% equity and using the all the newly raised capital to repurchaseshares of the common stock. The firm’s tax rate is 22%, its current beta is 1.40, and it has 25,000 shares of common stock with a market price of $312 per share. Assume MM propositions hold.
a. How many shares of common stock will remain after the repurchase?
b. If the risk-free rate is 3.5% and the market risk premium is 8.0%, by how much would the cost of equity for the levered firm increase, compared to the cost of equity of the unlevered firm?
c. What will be the change in the WACC, if the company can borrow at 7.25 percent?

An investment bank agrees to underwrite an issue of 18 million shares of stock for Looney Landscaping Corp.

a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corp. for the 18 million shares of stock. The investment bank then sells those shares to the public for $11.25 per share. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.25, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?

b. Suppose, instead, that the investment bank agrees to underwrite the 18 million shares on a best efforts basis. The investment bank is able to sell 16.5 million shares for $10.00 per share, and it charges Looney Landscaping Corp. $0.325 per share sold. How much money does Looney Landscaping Corp. receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.25, how much money does Looney Landscaping Corp. receive? What is the profit to the investment bank?

(For all requirements, enter your answers in dollars, not in millions. Negative amounts should be indicated by a minus sign.)

A company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

1. What is each project's NPV? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A: $  

   Project B: $  

2. What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: %

   Project B: %

3. What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: %

   Project B: %

4. From your answers to parts a-c, which project would be selected?

If the WACC was 18%, which project would be selected?

4. A loan of $50,000 is to be repaid by 10 annual payments which are made at the beginning of the year. The first 6 payments are $K each and the remaining 4 payments are $2K each. Construct the amortization schedule if the annual effective interest rate is 6%.

In 100 words or less, what does a bond's duration tell an investor about that bond's exposure to risk?

Garvezzi Vineyards is a large winery in Northeast Ohio, and it has been under new ownership for a couple of years now. The new owners are young entrepreneurs who want to expand the product line of wines by introducing wine cocktails, but the efforts have not been successful so far. The owners borrowed heavily from the local banks and currently the winery has a debt-to-equity ratio of 1. The lending experts at First State Bank of Ohio estimate that the winery will be able to maintain the current level of annual cash flows of 10.35 million dollars for the next three years at most. The interest expense for this year is 1.6 million and it will be increasing by 7 percent annually for the next three years. Experts expect that starting in year 4 both cash flows and interest expense will be decreasing by 3 percent a year forever. The combined federal and state tax rate is 24 percent. The unlevered equity cost is 14 percent. Apply the compressed APV approach to determine the value of operations of the winery today.

A. Insurance coverage relies on the law of large numbers, meaning:

A. Events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.

B. Events that are statistically difficult to predict for a large number of individuals are more predictable for an individual.

C. Insurers can adequately predict the losses expected for an individual, but are unable to predict the losses expected for large numbers of individuals.

B. Which of the following is not a category of property risk?

A. Loss of value from economic obsolescence.

B. Liability losses resulting from negligent use of property.

C. Loss of property due to fire, wind, theft, or others hazards.