Suppose a two-stock portfolio is created with 50% invested in bond X and 50% invested in bond Z.

Determine the portfolio returns in each city.


Determine the expected rate of returns for bond X, bond Z, and the Portfolio.


Determine the standard deviations for bond X, bond Z, and the Portfolio

A project has annual cash flows of $5,500 for the next 10 years and then $7,500 each year for the following 10 years. The IRR of this 20-year project is 12.34%. If the firm's WACC is 12%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Acme Storage has a market capitalization of 92 million, and debt outstanding of 43 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest of 7.8% on its debt and has a corporate tax rate of 30%.

a. If Acme's free cash flow is expected to be $12.15 million next year and is expected to grow at a rate of 2% per year, what is Acme's WACC?
b. What is the value of Acme's interest tax shield?
Click the icon to see the Worked Solution (Formula Solution).
a. If Acme's free cash flow is expected to be $12.15 million next year and is expected to grow at a rate of 2% per year, what is Acme's WACC?
The WACC is %_________. (Round to the nearest integer.)
b. What is the value of Acme's interest tax shield?
The value of Acme's interest tax shield is__________ $ million. (Round to two decimal places.)

Hardmon Enterprises is currently an​ all-equity firm with an expected return of 11.1%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets.

a. Suppose Hardmon borrows to the point that its​ debt-equity ratio is 0.50. With this amount of​ debt, the debt cost of capital is 4% What will be the expected return of equity after this​ transaction?

b. Suppose instead Hardmon borrows to the point that its​ debt-equity ratio is 1.50. With this amount of​ debt, Hardmon's debt will be much riskier. As a​ result, the debt cost of capital will be 6%. What will be the expected return of equity in this​ case?

c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this​ argument?

Earleton Manufacturing Company has $2 billion in sales and $900,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

1. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answer completely. Round your answer to the nearest whole number.
   $  
2. 
   
3. What is Earleton's target fixed assets/sales ratio? Do not round intermediate calculations. Round your answer to two decimal places.
   %
4. 
   
5. If Earleton's sales increase 40%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest whole number.
   $

Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $45,000) and concluded the following:

• You can extract 2,500 tons of iron ore per year.
• There are 10,000 tons of iron ore underneath this land. Once all the ore has 
been extracted, the project will cease to produce any revenues.
• The price of ore will remain constant for the next 4 years. Currently ore sells 
for $120 per ton.
• The operating cost to extract the ore will be $80 per ton for the next 4 years.
• We can invest in the equipment for this project right now for $100,000.
• The equipment will be fully depreciated over a period of four years using the 
straight-line method.
• At the end of year 4, we can sell the equipment involved in the project for 
$25,000
• The expansion requires additional working capital (NWC) of $15,000 from 
the start (at time t=0) until the end of year 4. At time t=4, working capital 
decreases to $0.
• The tax rate is assumed to be 35%. Your cost of capital is 11%.

Please provide the Free Cash Flow for each year of this project (times t=0 through t=4) and compute the project’s NPV.

(Enter the full dollar amount for each cash flow/NPV. Round your answer to the nearest dollar. For example, a cash flow of $273,610.68 would be entered as 273611. Negative values should be entered appropriately using the "-" symbol before the dollar amount.)

T = 0 Cash Flow:

T = 1 Cash Flow:

T = 2 Cash Flow:

T = 3 Cash Flow:

T = 4 Cash Flow:

Project NPV:

REGRESSION AND INVENTORIES

Jasper Furnishings has $250 million in sales. The company expects that its sales will increase 11% this year. Jasper's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:

Inventories = $40 + 0.26(Sales)

1. Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company's year-end inventory level? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.
   $ million
2. 
   
3. What are your forecasts of the company's year-end inventory turnover ratio? Round your answer to two decimal places.

1. Project L requires an initial outlay at t = 0 of $40,000, its expected cash inflows are $15,000 per year for 9 years, and its WACC is 10%. What is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

2. Project L requires an initial outlay at t = 0 of $43,775, its expected cash inflows are $9,000 per year for 8 years, and its WACC is 13%. What is the project's IRR? Round your answer to two decimal places.

3. Project L requires an initial outlay at t = 0 of $55,000, its expected cash inflows are $11,000 per year for 9 years, and its WACC is 9%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

C. What is the project's Year 2 net cash flow?

D. What is the project's Year 3 net cash flow?

E. What is the NPV?

(Related to Checkpoint 13.2 and Checkpoint​ 13.3) ​ (Comprehensive risk​ analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of ​$95 ​each, and the company analysts performing the analysis expect that the firm can sell 105,000 units per year at this price for a period of five​ years, after which time they expect demand for the product to end as a result of new technology. In​ addition, variable costs are expected to be ​$18 per unit and fixed​ costs, not including​ depreciation, are forecast to be ​$1,100,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $9.1 million that has no residual or salvage​ value, and will have an expected life of five years. In​ addition, the firm expects it will have to invest an additional ​$304,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided​ here: 

Initial cost of the machine    $9,100,000
Expected life    5 years
Salvage value of the machine    $0
Working capital requirement    $304,000
Depreciation method    straight line
Depreciation expense    $1,820,000 per year
Cash fixed costs—excluding depreciation    $1,100,000 per year
Variable costs per unit   $18
Required rate of return or cost of capital    9.1%
Tax rate    34%

a.  Calculate the​ project's NPV.

b.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the number of units sold.

c.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent decrease in the price per unit.

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 8 percent increase in the annual fixed operating costs.

f.  Use scenario analysis to evaluate the​ project's NPV under​ worst- and​ best-case scenarios for the​ project's value drivers. The values for the expected or​ base-case along with the​ worst- and​ best-case scenarios are listed​ here:

   Expected or Base Case   Worst Case   Best Case
Unit sales    105,000   72,450   137,550
Price per unit    $95   $83.60   $112.10
Variable cost per unit    $(18)   $(19.80)   $(16.56)
Cash fixed costs per year    $(1,100,000)   $(1,298,000)   $(1,001,000)
Depreciation expense    $(1,820,000)   $(1,820,000)   $(1,820,000)

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Sales for 2016 were $225 million and net income for the year was $6.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $2.7 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

1. If sales are projected to increase by $70 million, or 31.11%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

   Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity	$

A stock is currently priced at $49.00. The risk free rate is 5.9% per annum with continuous compounding. In 8 months, its price will be $57.33 with probability 0.46 or $42.63 with probability 0.54.

Using the binomial tree model, compute the present value of your expected profit if you buy a 8 month European call with strike price $53.00. Recall that profit can be negative.

How are financial institutions profitable from risk management ?