Solar Charge is a company that manufactures solar panels for use in residential buildings. It has received an unsolicited request from a foreign buyer, willing to buy 100,000 units at $1200 each (Ex-works). It will take a year to fulfill the order and the purchaser will pay the entire amount owing when a shipment is completed. The cost of producing each unit is $1000 and the company would have to take out a loan to finance the production of the order. Its cost of capital is 10 percent per annum. The manager of the export office recommends that the company respond favourably to the foreign request, especially since it sells the panels on the domestic market for only $1100 per unit. What does the finance department say?

Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $32,000 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following:

• The fair value of the equipment is $215,000.
• The applicable discount rate is an 8 percent annual rate.
• The economic life of the asset is 10 years.
• Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term.
• The asset is a standard piece of equipment.

a. Is the lease an operating lease or a financing lease?

• Operating lease

• Financing lease

b. What will be the lease expense shown on the income statement at the end of year 1?

c. What will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

d. What will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 6% rate. Dantzler's WACC is 11%.

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

   $   million

2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.

   $   million

3. Suppose Dantzler has $33 million of debt and 39 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

   $  

Suppose Ford's stock price is currently $10, and in the next six months it will either fall to $8 or rise to $15. The six-month risk-free interest rate is 1% (it is not the yearly rate). What is the current value of a six-month call option with an exercise price of $10? Explain your answer.

Note: std of the u and d are not needed...

Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights:

35​%

​long-term debt,

10​%

preferred​ stock, and

55​%

common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is

24​%.

Debt The firm can sell for

​$1030

a

11​-year,

​$1,000​-par-value

bond paying annual interest at a

7.00​%

coupon rate. A flotation cost of

3​%

of the par value is required.Preferred stock  

9.50​%

​(annual dividend) preferred stock having a par value of

​$100

can be sold for

​$92.

An additional fee of

​$4

per share must be paid to the underwriters.Common stock  The​ firm's common stock is currently selling for

​$70

per share. The stock has paid a dividend that has gradually increased for many​ years, rising from

​$2.70

ten years ago to the

​$4.00

dividend​ payment,

Upper D 0D0​,

that the company just recently made. If the company wants to issue new new common​ stock, it will sell them

​$3.50

below the current market price to attract​ investors, and the company will pay

​$2.00

per share in flotation costs.  

a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

a.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

nothing​%.

​(Round to two decimal​ places.)

All

techniqueslong dash—Decision

among mutually exclusive investments   Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and​ after-tax cash inflows associated with these projects are shown in the following table.

a.  Calculate the payback period for each project.

b.  Calculate the net present value​ (NPV) of each​ project, assuming that the firm has a cost of capital equal to

12​%.

c.  Calculate the internal rate of return​ (IRR) for each project.

d.  Indicate which project you would recommend.

a.  The payback period of project A is

years.  ​(Round to two decimal​ places.)

NPVlong dash—Mutually

exclusive projects   Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table:

LOADING...

. The​ firm's cost of capital is

8​%.

a.  Calculate the net present value

​(NPV​)

of each press.

b.  Using​ NPV, evaluate the acceptability of each press.

c.  Rank the presses from best to worst using NPV.

d.  Calculate the profitability index​ (PI) for each press.

e.  Rank the presses from best to worst using PI.

a. The NPV of press A is

​$nothing.

Initial investment  

$85,100   $59,700   $130,200
Year          
1   $18,500   $12,000   $50,100
2   $18,500   $13,700   $30,000
3   $18,500   $15,700   $20,200
4   $18,500   $17,700   $19,700
5   $18,500   $19,700   $19,900
6   $18,500   $25,300   $30,000
7   $18,500   $0   $40,200
8   $18,500   $0   $50,300

  ​(Round to the nearest​ cent.)

Let’s consider a retirement planning problem.

Suppose you just have had your 55th birthday and you plan to retire in five years. As far as your retirement goal is concerned, all you want is to maintain your living standard at the same level as when you start your retirement. You expect to “stick around” until 90 and you plan to leave nothing to “no one”. Therefore, your “sole” concern is maintaining your living standard during your retirement years.

Your current living expense per month is $20,000 (which include everything that you can possibly lay your fingers on) and you expect it to go up in exactly the same pace as the Composite CPI (of Hong Kong). The average yearly rate of increase of the index for the next five years is 3%. You do, however, expect the index to pick up its (yearly) pace afterwards (indeed, throughout your entire retirement period) by 2 percentage points. That is, the expected yearly inflation rate as measured by the CPI is 5% per year during your retirement years.

To facilitate the planning of your retirement, you listed out the following relevant questions which you would like to think over.

(i) State the approximate AND exact relationships between nominal rate of return, real rate of return and (expected) inflation rate. What is the name of this relationship?

(ii) Using the PVA formula, estimate how much money do you need to have in your investment account at the beginning of your retirement to achieve your “sole” retirement goal IF the expected yearly investment return is

- 7%

- 10%

- 4%

[Note: Marks would only be given for using the PVA formula in the calculations. Although some of you may be tempted to use the present value growing annuity formula (which was NOT covered in the Introduction to financial management course) to answer this question, I would strongly urge you NOT to use that formula. Instead, please draw on the insights derived from Part (i) above to construct the relevant equation and carry out the calculations.]

(iii) Based on your answer to Part (ii) above, what conclusion can you draw with respect to the relationships between (a) nominal cash flow, (b) real (inflation-adjusted) cash flow, (c) nominal interest rate and (d) real interest rate when using the PVA formula to answer Part (ii)?

You have just purchased a car and, to fund the purchase, you borrowed $25,500. If your monthly payments are $360.24 for the next 7 years, what is the APR of the loan?

3. (a) Define the current ratio and return on assets ratio. (b) State what financial management problem each of these financial ratios could be used to identify. (c) What would be a good benchmark to use for each of these financial ratios?

7. Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations; (b) avoid product defects on new products; (c) offer more credit to its customers when it already has a bad debt problem; (d) improve its credit rating with suppliers after paying some late; (e) lower its cost of financing when the market interest rate has increased.

1. How would each of the following events change the equilibrium financial market value of a company? (a)an increase in its cost of production; (b) an increase in its cost of financing; (c) an increase in the market’s discount rate; (d) an increase in its sales revenue; and (e) an increase in its projected future profits.

Secured Problem 1 - Structuring a Secured Loan Transaction

Marine Systems, Inc. is a retail seller of personal watercraft, which it manufactures from component parts. Marine Systems operates five stores in the Seattle area along with a separate manufacturing facility. It leases the premises for the stores and manufacturing facility. Its total inventory of watercraft and component parts has a wholesale value of $800,000, which Marine Systems sells at a 75% markup. Marine Systems also owns $150,000 in display cases, cash registers, tools, computers, and the like.

Marine Systems currently owes its various unsecured creditors approximately $500,000. After deducting its monthly payments to these creditors and overhead costs, Marine Systems nets $5000 per month. Marine Systems regularly sells watercraft to the City of Seattle and The University of Washington. Marine Systems invoices both purchasers with payment due within 30 days after delivery. Presently, each customer owes $25,000.

The job of a commercial attorney is to identify risks and propose ways to minimize them. Answer the following questions:

a.      Marine Systems has asked Credit, Inc. for a $150,000 loan to expand its workforce. Credit, Inc. is inclined to make the loan but requests advice as to whether it should demand security. What do you advise?

1. What are the advantages of a secured credit transaction for the creditor?

2. Why would Marine Systems, the debtor, agree to a secured debt transaction? In other words, can Marine Systems benefit from the transaction?
3. What is Marine Systems’ balance sheet (i.e., assets v. liabilities)

4. How big is the risk if the loan were unsecured? What is the worst case scenario?

5. If Marine Systems wanted an unsecured loan, would a higher interest rate compensate Credit Inc., for the risks?

b.      If Credit, Inc. wants a security interest, what collateral would you recommend? There are risks associated with all of these categories of collateral. How will you protect the secured creditor from these risks?

1. Marine Systems’ $5,000 monthly profit?

2. Inventory?

3. Equipment

4. Accounts Receivable?