1. Cranberry Inc. is considering the production of a new smart phone that will require an initial investment of $2 million. The project is expected to yield cash flows for 5 years. The firm expects to sell 5,500 units per year for a net cash flow of $140 each for the first 2 years. After the first two years of sales, their main competitor is expected to launch a new smart phone. As a result, two things could happen:

• Sales for the rest of the project could decline to 4,000 units per year (30% probability), OR
• Sales for the rest of the project will decline to 3,000 units per year (70% probability)
• Assume that Cranberry pays no taxes and that the relevant cost of capital is equal to 15%.

Required

1. What is the NPV of the project?
2. Cranberry has the option to abandon the project after two years. If Cranberry decides to abandon the project, the firm can salvage the assets for $1,300,000 at the end of year 2. Compute the NPV of the project with this option and compute the value of the option.

1. A firm's market values of equity and debt are $750,000 and $250,000, respectively. In addition, the firm's book values of equity and debt are $700,000 and $300,000, respectively. The before-tax cost of debt = 6%; RF = 4%; beta (13) = 0.8; the market risk premium = 10%; and the tax rate = 20%.

Calculate the WACC (weighted average cost of capital).

2. A firm has the following capital structure based on market values: equity 65 percent and debt 35 percent. The current yield on government T-bills is 2 percent, the expected return on the market portfolio is 10 percent, and the firm's beta is approximated at 2.1. The firm's common shares are trading at $25, and the current dividend level of $3 per share is expected to grow at an annual rate of 4 percent. The firm can issue debt at a 3 percent premium over the current risk-free rate. The firm's tax rate is 40 percent, and the firm is considering a project to be funded out of internally generated funds that will not alter the firm's overall risk. This project requires an initial investment of $12 million and promises to generate net annual after-tax cash flows of $2 million perpetually.

Should this project be undertaken?

3. A firm wishes to raise funds in the following proportions: 20 percent debt, 20 percent preferred shares and 60 percent common equity. Assume the cost of internally generated funds is 15 percent. Annual after-tax cost of debt is 5.86%. Cost of preferred equity is 6.12%. It believes all of the common equity component can be raised using internally generated funds.

• Find the WACC
• Determine the marginal cost of capital (MCC) if the firm must raise funds beyond a break point (i.e. break point is the maximum investment in which all targeted equity can be financed internally). Assume the cost of new common equity issues is 20 percent.
• Explain the concept of WACC and MCC. In what circumstances would you use one over the other?

Project L requires an initial outlay at t = 0 of $75,104, its expected cash inflows are $13,000 per year for 11 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places.

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CBA Corporation's outstanding bonds are selling at $950. The bonds have a face value of $1000, annual coupon rate of 8.5%, and 10 years until maturity. CBA is planning to sell new bonds to raise additional capital. New bonds will be as risky as the old bonds. However, the firm will incur flotation costs of 10% on new bond issue.

A. Calculate investors required rate of return on new bonds.

B. Calculate the before-tax cost of (new) debt.

A store has 5 years remaining on its lease in a mall. Rent is $2,100 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

1. Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

   -Select-YesNoItem 1

2. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.

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3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.

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Milton Industries expects free cash flows of $ 8 million each year.​ Milton's corporate tax rate is 40 %​, and its unlevered cost of capital is 13 %. Milton also has outstanding debt of $ 33.57 ​million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without​ leverage? b. What is the value of Milton Industries with​ leverage?

The current stock price for a company is $49 per share, and there are 3 million shares outstanding. The beta for this firms stock is 1.4, the risk-free rate is 4.8, and the expected market risk premium is 5.6%. This firm also has 270,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 8%, 24 years to maturity, a face value of $1,000, and an annual yield to maturity of 7%. If the corporate tax rate is 31%, 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).

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 3.0%. The probability distributions of the risky funds are:   

The correlation between the fund returns is .0667.

Suppose now that your portfolio must yield an expected return of 9% and be efficient, that is, on the best feasible CAL.

a. What is the standard deviation of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1. What is the proportion invested in the T-bill fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-2. What is the proportion invested in each of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stocks: ???%

Bonds: ???%

A financial institution has the following market value balance sheet structure:

a. The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,300. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.)
b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk?
c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,707 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends.
d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,300?
e. What factors have caused the changes in operating performance and market value for this FI?

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.