An analyst evaluating securities has obtained the following information. The real rate of interest is 2.9% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.6% next year, 3.6% the following year, 4.6% the third year, and 5.6% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%

a. What is the yield on a 1-year T-bill? Do not round intermediate calculations. Round your answer to one decimal place.

  b. What is the yield on a 5-year T-bond? Do not round intermediate calculations. Round your answer to one decimal place.

   c. What is the yield on a 5-year corporate bond? Do not round intermediate calculations. Round your answer to one decimal place.

Victoria Company purchased a $100,000 conveyor belt for use in its main factory. It has a 4 year useful life and a $0 salvage value. For the following 4 years Victoria recorded sales revenue of $300,000 each year and $200,000 in expenses, NOT INCLUDING DEPRECIATION nor INCOME TAX EXPENSE. Victoria uses straight-line depreciation method for financial accounting (“book”) purposes and MACRS for tax accounting purposes. Under MACRS, Victoria can apply accelerated depreciation for the asset using the following percentages:

YEAR 1 - 50%, YEAR 2 - 30%, YEAR 3 - 15%, and YEAR 4 - 5%. The income tax rate is 40%

a. Prepare the complete JOURNAL ENTRY to record income tax expense for YEAR 2.

b. Prepare the complete JOURNAL ENTRY to record income tax expense for YEAR 4.

c. What is the BALANCE of the Deferred Tax Asset or Liability account at the end of YEAR 3?

Assume monetary benefits of an information system of $50,000 the first year and

increasing benefits of $5,000 a year for the next four years (year 1 = 50,000; year 2-

55,000; year 3 = 60,000; year 4 = 65,000; year 5 – 70,000). One-time development

costs were $90,000 and recurring costs beginning in year 1 were $40,000 over the

duration of the system’s life. The discount rate for the company was 10 percent.

Using a 5-year horizon, calculate the net present value of these costs and

benefits. Also calculate the overall return on investment of the project and then

present a break-even analysis. At what point does break-even occur?

Deliverables:

1. Prepare a worksheet (in MS Excel) for the economic analysis. Choose

appropriate format for the worksheet. Use currency symbols for the numbers

indicating monetary values. You must use formula (MS Excel) for your

calculations in the worksheet.

Question 4/ Firm D is planning its first dividend in 3 years from now. The dividend per share by the end of year 3 is $1.4. Firm C has an equity Beta of 1.2. The T-bill rate is 2.5% and the return on the equity market index is 7.5%. The dividends are expected to grow from year 3 to years 6 by 13.5% and during year 6 by 9.5%. From year 6 to year 11 they are expected to grow by 10%. However starting from year 11 there will be no growth of dividends forever.

a/ Compute the intrinsic value of the stock now? (Show your steps)
b/ Compute the intrinsic value of the stock at the end of year 2? (Show your steps)

c/ Compute the intrinsic value of the stock at the end of year 8? (Show your steps)

d/ Compute the intrinsic value of the stock at the end of year 50? (Show your steps)

An analyst evaluating securities has obtained the following information. The real rate of interest is 2.3% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.1% next year, 3.1% the following year, 4.1% the third year, and 5.1% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%.

a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places.
  %

   b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places.
  %

   c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places.
  %

Project cash flow and NPV.  The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of ​$4,000,000 and will be depreciated using a​ five-year MACRS​ life, LOADING... . The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as​ follows: Year​ one:  260 Year​ four:  370 Year​ two:  270 Year​ five:  330 Year​ three:  330 If the sales price is ​$28,000 per​ car, variable costs are ​$20,000 per​ car, and fixed costs are ​$1,100,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$500,000 at the end of year five. Net working capital increases by ​$500,000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

Bennett Griffin and Chula Garza organized Cole Valley Book Store as a corporation; each contributed $70,100 cash to start the business and received 5,600 shares of common stock. The store completed its first year of operations on December 31, current year. On that date, the following financial items for the year were determined: December 31, current year, cash on hand and in the bank, $68,750; December 31, current year, amounts due from customers from sales of books, $42,000; unused portion of store and office equipment, $73,500; December 31, current year, amounts owed to publishers for books purchased, $13,600; one-year note payable to a local bank for $3,900. No dividends were declared or paid to the stockholders during the year.

What was the amount of net income for the year? (Hint: Use the retained earnings equation [Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings] to solve for net income.)

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $9,500. The estimated useful life was five years and the residual value was $500. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,200 hours; year 2, 2,300 hours; year 3, 2,400 hours; year 4, 2,100 hours; and year 5, 1,000 hours.

Assume NGS sold the hydrotherapy tub system for $2,850 at the end of year 3.The following amounts were forecast for year 3: Sales Revenues $43,000; Cost of Goods Sold $34,000; Other Operating Expenses $4,300; and Interest Expense $900. Create an income statement for year 3 for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don't forget to include a loss or gain on disposal for each method.).

1. One year ago, you bought a put option on 200,000 euros with an expiration date of one year. You paid a premium on the put option of $.05 per unit. The exercise price was $1.32. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 3%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4%. Today the put option will be exercised (if it is feasible for the buyer to do so).

a. Determine the total dollar amount of your profit or loss from your position in the put option.

b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 200,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

A machine costs $10,000 and has a discount rate of 7.5%. Calculate the profitability index of the project if the net present value of cash inflows is $4,600 in year 1, $3,400 in year 2, $2,600 in year 3, and $1,500 in year 4 when the machine is sold to salvage dealer.
A. 2.38
B. 2.21
C. 2.04
D. 1.21
E. 1.04

. A project costs $6,000 and has a discount rate of 7.5%. Calculate the profitability index of the project that has cash flows of $5,200 in year 1 and $4,500 in year 2.
A. 1.62
B. 1.14
C. 1.80
D. 1.46
E. 1.14

A project costs $15,350 and has a discount rate of 8.5%. Calculate the profitability index of the project that has cash flows of $3,500 in years 1 and 2, $4,000 in year 3, $3,200 in year 4 and $2,800 in year 5.
A. 0.88
B. 0.75
C. 0.24
D. 0.12
E. 1.28