Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $24,000 the fourth year, $28,000 the fifth year, and $34,000 the sixth year. The project would cost the firm $72,000. If the firm's cost of capital is 12%, what is the modified internal rate of return?

18.17%

20.10%

15.71%

13.51%

16.66%

You are evaluating a potential investment in equipment. The equipment's basic price is $163,000, and shipping costs will be $4,900. It will cost another $21,200 to modify it for special use by your firm, and an additional $8,200 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the end of three years. The equipment is expected to generate revenues of $151,000 per year with annual operating costs of $77,000. The firm's marginal tax rate is 40.0%. What is the after-tax operating cash flow for year 2?

$79,914

-$8,871

$74,000

-$14,785

$88,785

Project A has the following Cash Flows: Cost = $1,200,000; Cash flows the following years as follows: Year 1 = $274,600; Year 2 = $298,000; Year 3 = $303,950; Year 4 = $312,875; and Year 5 = $374,600. Calculate the Traditional Payback. Assume cash flows are even throughout the year. Calculate the Net Present Value using the WACC = 8.28%.

Which of the following are correct?
i. The liquidity premium for a 2-year government bond is higher than the liquidity premium for a 5-year government bond.
ii. The liquidity premium for a 3-year government bond is lower than the liquidity premium for a 3-year corporate bond.
iii. The expected return from holding an illiquid two year zero-coupon bond to maturity is higher than the expected return from buying a liquid one-year zero-coupon bond (and holding it to maturity) followed by investing in another liquid one-year zero coupon bond (and holding it to maturity).
iv. The expected one-year rate in one year's time is lower under the Liquidity Premium Hypothesis than the expected one-year rate in one year's time under the Pure Expectations Hypothesis (assuming that two-year bonds are illiquid and one-year bonds are liquid).

The correct answer is:

1. Suppose the data on today’s and future expected interest rates is given:

a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have?

b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds are 0.2%, 0.3% and 0.4%, respectively. Recalculate today’s interest rates on 2-year, 3-year and 4-year bonds using the liquidity premium theory. Use the yields to plot the yield curve on the same graph as expectations hypothesis yield curve from part (a). What do you notice?

Trevor is a single individual who is a cash-method, calendar-year taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $8,000 to charity, and pay $2,800 in state income taxes.

A. Assume that Trevor combines his anticipated charitable contributions for the next two years and makes the combined contribution in December of year 1. Estimate Trevor’s taxable income for each of the next two years using the 2018 amounts for the standard deduction.

B. Trevor plans to purchase a residence next year, and he estimates that additional property taxes and residential interest will cost $2,000 and $10,000, respectively, each year. Assume that Trevor makes the charitable contribution for year 2 and pays the real estate taxes for year 2 in December of year 1. Estimate Trevor’s taxable income for year 1 and year 2 using the 2018 amounts for the standard deduction

Golden Manufacturing Company started operations by acquiring $150,000 cash from the issue of common stock. On January 1, Year 1, the company purchased equipment that cost $120,000 cash, had an expected useful life of five years, and had an estimated salvage value of $4,000. Golden Manufacturing earned $72,000 and $83,000 of cash revenue during Year 1 and Year 2, respectively. Golden Manufacturing uses double-declining-balance depreciation.

What is Golden's straight line rate?

What is the Depreciation Expense for Year 1?

What is Net Income for Year 1?

What is the Book Value of the equipment at the end of Year 1?

What are the Cash Flows from Operating Activities for Year 1?

What is the Depreciation Expense for Year 2?

What is Net Income for Year 2?

What is the book value of the equipment at the end of Year 2?

What are the Cash Flows from Operating Activities for Year 2?

1. Suppose the data on today’s and future expected interest rates is given:

a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have?

b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds are 0.2%, 0.3% and 0.4%, respectively. Recalculate today’s interest rates on 2-year, 3-year and 4-year bonds using the liquidity premium theory. Use the yields to plot the yield curve on the same graph as expectations hypothesis yield curve from part (a). What do you notice?

1. Develop a valuation model for a corporate bond with a par value at maturity of $1,000, a maturity of 20 years, a coupon interest rate of 7%, and a yield to maturity of 4%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond).
2. Given the problem above, identify how the bond price will be expected to adjust across time as the bond approaches maturity. You should calculate the price after each 2-year period has passed – i.e., after year 2, year 4, year 6, year 8, year 10, year 12, year 14, year 16, year 18, and year 20. Graph the resulting movement in the price across time using the resulting values. Explain how this movement in the bond price across time is important for the investor.