The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $17 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4 million with a 0.2 probability, $2.4 million with a 0.5 probability, and $0.8 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital ratio is 0.

Debt/Capital ratio is 10%, interest rate is 9%.

Debt/Capital ratio is 50%, interest rate is 11%.

Debt/Capital ratio is 60%, interest rate is 14%.

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $671,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $1.80 per trap and believes that the traps can be sold for $8 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 11%. Use the MACRS depreciation schedule.

a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)

A firm’s product sells for $12 per unit. The unit variable cost is $8. The operating fixed costs total $100,000 per year. The firm pays $20,000 interest and $3,000 preferred dividends each year. The tax rate for this firm is 40%.

1. What is the firm’s operating breakeven point (rounded to the whole unit)? Select one:

a. 25,000 units

b. 30,000 units

c. 45,000 units

d. 50,000 units

e. None of the above

2. What is the DOL at 50,000 units per year (rounded to the first decimal place)?Select one:

a. 2.0

b. 2.5

c. 4.5

d. 5.0

e. None of the above

3. What is the DFL at 50,000 units per year (rounded to the first decimal place)? Select one:

a. 0.3

b. 1.3

c. 2.3

d. 3.3

e. None of the above

4. What is the DTL at 70,000 units per year (rounded to the first decimal place)?Select one:

a. 1.1

b. 1.5

c. 1.8

d. 2.3

e. None of the above

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows:

a. Assume that an individual investor wants to select one market segment for a new investment. A forecast shows stable to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage?

b. At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?

Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow:

Required:

Use the step method to allocate the service costs, using the following:

The order of allocation starts with Maintenance. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

b. The allocations are made in the reverse order (starting with Cafeteria). (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

21. Suppose the US experiences a natural disaster in which a tornado passes through most of the country. This tornado ended up destroying the infrastructure of some highways, factories, and houses across the nation. Unfortunately, 5% of the population did not survive. Assuming the production function is Y = A K 0.3 N 0.7, respond to the following questions:

    Part 1:
    Given this natural disaster, how would the factors of production included in the production function above be impacted? Would total factor productivity (A), physical capital (K), and labor (N) increase, decrease, or remain unchanged? Justify your answer.

    Part 2:
    Given the economic shock experienced by this economy, would the marginal product of labor (MPN) and the marginal product of capital (MPK) be impacted in your view? If so, would they increase or decrease? Justify your answer graphically. Please use Y in your y-axis and K or N in the x-axis, be sure to label it properly. (Hint: it can be helpful to recall how the MPN and MPK are represented in the production function graph and how this shock will impact the production curve.)

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $15 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.3 million with a 0.2 probability, $1.7 million with a 0.5 probability, and $0.9 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital Ratio = 0

Debt/Capital Ratio = 10%, Interest Rate = 9%

Debt/Capital Ratio = 50%, Interest Rate = 11%

Debt/Capital Ratio = 60%, Interest Rate = 14%

1. You've estimated the following expected returns for a stock, depending on the strength of the economy:

a. What is the expected return for the stock?

b. What is the standard deviation of returns for the stock?

2. You observed the following returns for a stock and Treasury bills:

a. What was the excess return for the stock in 2016?

b. What was the (arithmetic) average return for the stock?

c. What was the (arithmetic) average return for T-bills?

d. What was the average excess return?

2. Below are the returns for different asset classes for a particular year:

a. What was the excess return for corporate bonds?

b. What was the excess return for small company stocks?

c. What was the excess return for large company stocks?

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $20 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.2 million with a 0.2 probability, $2.9 million with a 0.5 probability, and $0.4 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital ratio is 0.

Debt/Capital ratio is 10%, interest rate is 9%.

Debt/Capital ratio is 50%, interest rate is 11%.

Debt/Capital ratio is 60%, interest rate is 14%.

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $20 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 25%. The CFO has estimated next year's EBIT for three possible states of the world: $4.3 million with a 0.2 probability, $3.5 million with a 0.5 probability, and $700,000 with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places.

Debt/Capital ratio is 0.

Debt/Capital ratio is 10%, interest rate is 9%.

Debt/Capital ratio is 50%, interest rate is 11%.

Debt/Capital ratio is 60%, interest rate is 14%.