Suppose that a manufacturer has an ongoing need for silver as a raw material in the production process, and is concerned about the risk of the price of silver going up. The firm is considering two hedging choices: futures contracts and option contracts. Suppose that the firm decides to hedge using futures contracts. Should it buy or sell futures contracts? Explain.

Consider the following mutually exclusive investments

1. Find IRRs for both projects
2. “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph.
3. Solve for the crossover rate
4. Please describe as fully as possible which project is the best and under which circumstances.

Jones Smith holds the following portfolio:

Jones plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?

A 10-year bond that makes semi–annual coupon payments is currently selling at par value of $1000. The annual coupon rate is 8% and the initial YTM is 8%. In 6 months the interest rate falls to 7%. What is your semi-annual holding period return?

Home Depot Inc has 750 bonds outstanding that are selling for $980 each, 2,500 shares of preferred stock with a market price of $50 a share, and 30,000 shares of common stock valued at $55 a share. What weight should be assigned to the common stock when computing the firm's weighted average cost of capital?

Y Company (Y) is considering a new project that involves the production of additional product for which cash out flows and inflows have already estimated.Y has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 2.028125, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par. The return on market portfolio is 12.5 percent, T-bonds (risk free assets) are yielding 4.5 percent, and Y's tax rate is 32 percent. What WACC should Y apply to this new project's cash flows if the project has the same risk as Y 's typical project?

Your company plans to produce a product for two more years and then to shut down production. You are considering replacing an old machine used in production with a new machine. The Old machine originally cost $ 631 and was bought Three (3) years ago (i.e. it has depreciated for three years). It could be sold today for $ 326 or sold in two years for $ 242 . The New machine would cost $ 635 and could be sold in two years for $ 463 . The new machine is more efficient than the old machine and would reduce waste, and therefore the cost of materials, by $ 492 per year. Due to the lower waste, we could also have a one-time reduction in inventory of 92 . The firm's tax rate is 36 %. Both machines are in the 4 year MACRS class, use these rounded depreciation amounts of 15%, 45%, 33% and 7% in your calculation. What are the total Operating Cash Flows in the first year (Year 1) with the new machine? Enter your answer to the nearest $.01. Do not use $ or , in your answer. Use a - sign if the cash flows are negative.

Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital, has $4.05 million of EBIT, and is in the 25% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 13% interest on its debt, whereas LL has a 25% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure.

1. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.
   
   ROE for firm LL:   %
   ROE for firm HL:   %
2. 
   
3. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 25% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places.
   
     %

Walmart's bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

You are considering the following two mutually exclusive projects. If the cost of capital for both projects is 7%, which statement concerning capital-budgeting rules listed will be correct in this situation?

Time

Year

0

Year

1

Year

2

Year

3

Project

A

-

$567

$300

$400

$300

Project

B

-

$296

$500

$100

$50

a)

Both NPV and IRR will choose the correct

project(s).

b)

Neither NPV nor IRR will choose the correct project(s).

c)

NPV will choose the correct project(s), IRR will not.

d)

IRR will choose the correct project(s), NPV will not.

Consider the following information:

State Probability Stock A Stock B Stock C

Boom 0.32 0.07 0.04 0.08

Bust 0.68 0.11 0.03 0.12

What is the expected return of a portfolio that has invested $3,235 in Stock A, $15,297 in Stock B, and   $6,349 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).

This is a challenging question. Please allocate time wisely.) Cipro Milda is planning a college fund for her child. When the child joins college in 15 years, the tuition payment for the first semester is expected to be $21,000. Thereafter, tuition payments will be due every six months for the following semester. These payments are expected to increase at an annual inflation rate of 6 percent. The child will graduate in eight semesters, so she will have to make a total of eight tuition payments. If she can earn 10 percent annual rate compounded monthly, how much will she have to deposit monthly in the college fund so that the balance in the fund is zero when the last tuition payment is made? She plans to continue making these deposits until the last tuition bill is paid.

The CEO of a growing cyber-security firm was awarded 25,000 stock options as part of her pay package. She can exercise the options -turn them into stock- in two years. The company’s stock price was $35.00 per share at the time of the stock option grant. Shortly after the option award was received, she went to an investment banking firm and bought put options at a strike price of $35.00. The option expires in two years.

(i) What does the put option do for the CEO? Carefully explain why your stated result occurs.

(ii) Stock options and stock ownership are included in compensation packages to create incentives for CEOs to create value for shareholders. Does this put option purchase change those incentives? If so, how?

(iii) If you were a shareholder in this company, would you want to be informed about these types of transactions by the CEO?