ABCCo Inc. is currently an all-equity firm. Because of strong investment opportunities, it needs to raise $5,500,000 in additional funds. By investing in these opportunities, it expects future earnings to be a constant $1,000,000 per year. The firm’s unlevered cost of equity is 13%, and its before tax cost of debt is 7.5%.

If there are no corporate taxes,

A) What is the value of ABCCo if it issues new equity to raise the funds?

B) What is the value of ABCCo if it issues debt to raise the funds?

C) If ABCCo issues debt, what will the new cost of equity be?

D) If ABCCo issues debt, what will the new weighted average cost of capital be?

If corporate taxes are 35%,

E) What is the value of ABCCo if it issues new equity to raise the funds?

F) What is the value of ABCCo if it issues debt to raise the funds?

G) If ABCCo issues debt, what will the new cost of equity be?

H) If ABCCo issues debt, what will the new weighted average cost of capital be?

The current stock price for a company is $40 per share, and there are 6 million shares outstanding. The beta for this firms stock is 1, the risk-free rate is 4.4, and the expected market risk premium is 6.2%. This firm also has 280,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 22 years to maturity, a face value of $1,000, and a current price of 1,026.81. If the corporate tax rate is 35%, what is the Weighted Average Cost of Capital (WACC) for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

We are evaluating a project that costs $101,421, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 4,240 units per year. Price per unit is $55, variable cost per unit is $26, and fixed costs are $83,123 per year. The tax rate is 35 percent, and we require a 13 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-8 percent. What is the NPV of the project in best-case scenario?

Lakonishok Equipment has an investment opportunity in Europe. The project costs 15.7 million euros and is expected to produce cash flows of 1.2 million euros in Year 1, 8.4 million euros in Year 2, and 11.5 million euros in Year 3. The current spot exchange rate is 0.821 euros per 1 U.S. dollar. The current risk-free rate in the United States is 3.3 percent, compared to 1.5 percent in Europe. The appropriate discount rate for the project is estimated to be 8.2 percent, the U.S. cost of capital for the company. The subsidiary can be sold at the end of three years for an estimated 7.6 million euros. What is the NPV of the project ignoring taxes?

[Round the final answer to the nearest cent]

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 55% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 11% of total sales, and the federal-plus-state tax rate is 40%.

1. What is the expected return on equity under each current assets level? Round your answers to two decimal places.
   

   Restricted policy		%
   Moderate policy		%
   Relaxed policy		%

2. 
   
3. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?
   1. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
   2. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
   3. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.
   4. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
   5. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.

1. Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 11.5 percent and the rate on a 1-year Treasury bond is 13.5 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now? Calculate your answer using the geometric average. State your answer as a percentage to 2 decimal places (i.e. xx.xx)

5 points   

QUESTION 94

1. Your grandparents deposited $5,570 for you when you were born 18 years ago. Today, the account (to which no other deposits have been made) is worth $206,637. What annually compounded rate of return has the account earned? State your answer as a percentage to 2 decimal places (i.e. xx.xx)

Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.

P0 = D1 Ke − g P0 = Price of the stock today

D1 = Dividend at the end of the first year

D1 = D0 × (1 + g) D0 = Dividend today

Ke = Required rate of return

g = Constant growth rate in dividends

D0 is currently $2.00, Ke is 10 percent, and g is 4 percent.

Under Plan A, D0 would be immediately increased to $2.50 and Ke and g will remain unchanged.

Under Plan B, D0 will remain at $2.00 but g will go up to 5 percent and Ke will remain unchanged.

a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $2.50 (1.04). Ke will equal 10 percent, and g will equal 4 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g) or $2.00 (1.05). Ke will be equal to 10 percent, and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)

c. Which plan will produce the higher value?

. Using the information below, find the expected return and beta of the portfolio.

Education: Assume people live 2 years: youth (year 1) and adult (year 2). Youths either go to school or work. If they go to school, they earn zero. If they work they earn $1000. As adults, everyone works. An educated adult earns $3000 while an uneducated adult earns $1800. The interest rate is 12% and the government pays the full cost of schooling at $350 per year.   

Earnings

Earnings: Year 1 Year 2

A. Earnings profile: no school $1000 $1800

B. Earnings profile: with school 0 $3000

C. Earnings gain from schooling -$1000 +$1200

Therefore, calculate the present discounted value of the benefits of schooling and the rate of return for both the individual and society.

Net Private Benefit?

Private Rate of Return?

Net Social Benefit?

Social Rate of Return?

It is late June, and Sandra, head of operations at Mintendo, and Bill, head of sales of We “R” Toys, are about to get together to discuss production and marketing plans for the next six months.  Mintendo is the manufacturer of the popular Game Girl hand-held electronic game that is sold exclusively through We “R” Toys retail stores.  The second half of the year is critical to Game Girl’s success, because a majority of its sales occur during the holiday shopping period.

Sandra is worried about the impact that the upcoming holiday surge in demand will have on her production line.  Costs to subcontract assembly of the Game Girls are expected to increase, and she has been trying to keep costs down given that her bonus depends on the level of production costs.

Bill is worried about competing toy stores gaining share during the Christmas buying season.  He has seen many companies lose their share by failing to keep prices in line with the performance of their products.  He would like to maximize the Game Girl market share.

Both Sandra and Bill’s teams produce the following joint forecast of demand for the next six months:

We “R” Toys sells Game Girls for $50 apiece.  At the end of June, the company has an inventory of 50,000 Game Girls.  Capacity of the production facility is set purely by the number of workers assembling the Game Girls.  At the end of June, the company has a workforce of 299 employees, each of whom works eight hours of regular time (non-overtime) at $15/hour for 20 days each month.  Work rules require that no employee work more than 40 hours of overtime per month.  The various costs are shown below:

Sandra, concerned about controlling costs during the periods of surging demand over the holidays, proposes to Bill that the price be lowered by $5 for the month of September.  This would likely increase September’s demand by 50 percent due to new customers being attracted to Game Girl.  Additionally, 30 percent of each of the following two months of demand would occur in September as forward buys.  She believes strongly that this leveling of demand will help the company.

Bill counters with the idea of offering the same promotion in November, during the heart of the buying season.  In this case, the promotion increases November’s demand by 50 percent due to new customers being attracted to Game Girl.  Additionally, 30 percent of December’s demand would occur in November as forward buying. Bill wants to increase revenue and sees no better way to do this than to offer a promotion during the peak season.

Question: Which option delivers the maximum profit for the supply chain:  Sandra’s plan, Bill’s plan, or no promotion plan at all? An Excel file of the S&OP model supporting your conclusion must be submitted to the drop box.

Malik David purchased 100 shares of the Canadian Textile Fund at CAD 25 at the beginning of the year and was subject to a front-end load of 4.5%. The net asset value of the fund increased by 11% during the year while the fund's expense ratio was 1.2%. The annual return earned by David if he sells at year's end is closest to:

Group of answer choices

4.50%.

4.86%.

5.30%.

9.82%.

Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 0.5%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

I keep getting the wrong answer! Not sure of what I am doing wrong

Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 10%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 35% of its assets with debt, which will have a 7% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 35% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.