Bob and Donna have been married for 35 years and have filed joint returns since their marriage. The couple has three children: Jack (age 11), Bonnie (age 16), and Margie (age 22). All three children live with Bob and Donna. In addition, none of the children provide more than half of their own support. Margie is a full-time student at a local university and does not have any gross income.

Assume the original facts, except that Margie is married. She and her husband live with Bob and Donna and they file a joint return. They have a $2,000 tax liability for the year. Can Bob and Donna claim Margie as a dependent on their tax return? Why or why not?

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equip- ment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%. a. Define “incremental cash flow.” (1) Should you subtract interest expense or dividends when calculating project cash flow? (2) Suppose the firm spent $100,000 last year to rehabilitate the production line site. Should this be included in the analysis? Explain. (3) Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be included in the analysis? If so, how? (4) Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 per year. Should this be considered in the analysis? If so, how?

Using a dividend discount model, what is the price for this stock? Stock covariance with the market= 0.5 Market variance = 0.25 Stock covariance with a second risk factor= 0.6 Variance of the second factor= 0.3 Market Premium:3% Second factor risk premium=1% Risk free rate =2 % Current earnings per share= $5, The ROE is expected to shrink (decrease) at the rate 10% for first 5 years The ROE is expected to grow at the rate 8% forever after the first 5 years Payout for the first 5 years: 50% Payout after 5 years: 50%

1. You have had a portfolio made up of three assets. For each of these three assets, pricing data are below:

The common stock pays a common dividend of $2 at the end of each year. The preferred stock pays a dividend of 5% based upon a face value of $100 at the end of each year. The bonds have a coupon rate of 5% and carry a current YTM of 4.5%. You bought 100 shares of Common Stock A, 50 shares of Preferred Stock B, and 3 Coupon Bonds C, all at the beginning of the period (Year 0).

1. What is your total dollar return on portfolio over the entire period? What is your holding period return on the portfolio over the entire period?

As a manager at a car insurance company, you know that out of every 100 drivers, there are 30 risky drivers and 70 safe drivers. A risky driver costs your company $5,000 per year to insure, and a safe driver costs only $500. You design a policy that you think will appeal to safe drivers and expect that out of every 100drivers insured by this policy, 20 will be risky drivers and 80 will be safe drivers. The price (premium) for this policy is $2,000 per year. The policy ends up appealing more strongly to risky drivers than expected, so that out of every 100 drivers insured, 40 are risky drivers and only 60 are safe drivers.

1. For every 100 drivers insured, what economic profit do you expect to make?

2. For every 100 drivers insured, what economic profit do you actually make?

3. Why is there a difference between the expected profit and actual profit? What changes to the insurance policy could you make to restore the policy to profitability?

A price floor (or a price support) is a government regulated price that is higher than the equilibrium price. This regulation is meant to help the supplier. Under what conditions (comment on the price elasticity of demand and supply) will this result in a net decrease of producer surplus?

The price of a stock is $40. The price of a one-year put with strike price $30 is $0.70 and a call with the same time to maturity and a strike of $50 costs $0.50. Both options are European.

(a) An investor buys one share, shorts one call and buys one put. Draw and comment upon the payoff of this portfolio at maturity as a function of the underlying price.

(b) How would your answer to (a) change if the investor buys one share, shorts two calls and buys two puts instead.

At the beginning of 2019, three entrepreneurs decided to form a small business and organize as a corporation. Their business is called The Property People, and they will serve homeowners who require assistance with home maintenance and small home improvement projects. Until the business is established, the owners will not leave their full-time jobs. However, they all have flexibility to arrange their work schedules and cover for one another. Each investor received 100 shares of stock. In return for the shares of stock, the company received a total of $10,000 in cash from two investors who each contributed $5,000 in cash; the other investor contributed equipment valued at $5,000. The equipment has a useful life of 10 years, and the company records depreciation using the straight-line method (i.e., equal amounts each period).

During the first six-months of the year, The Property People completed jobs totaling $94,000. On June 30th, at the end of first six months, the company owners had received cash payments of $72,000. The owners expect to collect the remainder of the outstanding balance. At the end of June, the owners were offered an opportunity to purchase some generators at a terrific bargain price. The owners decided that in addition to providing maintenance they will also sell and install generators. At the end of June, they purchased the generators paying $4,000 in cash. They are storing the generators in their garages, and they are confident they will be able to sell them to customers in the future (no generators were sold in June). Expenses for the first six months total $48,000, which they have paid in cash except for $6,000 that they currently owe to suppliers. The only other cash outlay is the $1,800 annual premium for liability insurance they paid at the beginning of the year.

Upload an Excel file that includes the following components:

1. An income statement for the six months ended June 30, 2019. The company uses accrual accounting and follows generally accepted accounting principles.
2. A balance sheet as of June 30, 2019.

A bond is in a risk class that pays 5% per year. The bond pays annual interest of $400 (and the first interest payment is one year from today) and will mature in 10 years at a value of $10,000. What is the price of the bond?