o The initial capital cost will be $500,000 paid at the beginning of year 1 (i.e., immediately). The impact on cottage owners will involve a loss of $50,000 at the end of each year for the first four years (because of the construction activities affecting property values) but cottage owners will benefit by $55,000 per year in perpetuity from the end of year 5 onwards. The benefits from recreational fishing will not start until the end of year 5 and will be $35,000 per year in perpetuity. Development, stocking and management costs of the recreational fishery will start at the beginning of year 3 and continue forever. These costs are $10,000 per year

0. The province is considering a water resource development that will enhance recreational fishing and recreational cottage values (property values).

   1. a) Calculate the net present value using a 5% discount rate. Interpret the result. (15 points)

   2. b) Calculate the gross benefit cost ratio using a discount rate of 5%. Interpret the result. (5 points)

   3. c) Which value best approximates the internal rate of return: 4 %, 5%, 6%, 7%, 8%, or 9%? (Note – you are not being asked to calculate the internal rate of return!) (5 points)

Riley, Incorporated reports the following amounts at the end of the year:

In addition, the company had common stock of $74,000 at the beginning of the year and issued an additional $7,800 during the year. The company also had retained earnings of $27,300 at the beginning of the year and paid dividends of $1,700 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.

Ward Corp. is expected to have an EBIT of $2,750,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $182,000, $119,000, and $132,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $21,500,000 in debt and 820,000 shares outstanding. At Year 5, you believe that the company's sales will be $17,600,000 and the appropriate price–sales ratio is 2.8. The company’s WACC is 9.3 percent and the tax rate is 35 percent. What is the price per share of the company's stock?

Dollar Return on Foreign Investments -

(A) Over the past year, the dollar has depreciated by about 10 percent against the euro. A year ago you took out a home equity loan in the U.S. at an interest rate of 8 percent and you invested the money in a German mutual fund that paid a 5 percent euro return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(B) You can borrow or invest in the U.S. at an annual rate of 6 percent. Suppose you logon to your favorite financial website and see that you could borrow or invest in Japan at a 5 percent annual rate. The current exchange rate between the dollar and the yen is $0.01/yen. You can use the futures market to lock it in at an exchange rate for one year from now at $0.0095/yen. Is there a profit opportunity here? Prove it by borrowing (either $1 million or $100 yen) in one country and investing in the other? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Inflation and Exchange Rates -

(C) Suppose gold sells for $1,000 per ounce in the U.S. and it sells for 1,000 Canadian dollars per ounce in Canada. Suppose further, the exchange rate is $1 per Canadian dollar. If U.S. inflation is 6 percent next year, Canadian inflation is 2 percent, and exchange rates do not change, how could you make an arbitrage profit in the gold market? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(D) Suppose U.S. interest rates on a risk-free, one-year bond are 4 percent and European interest rates on a risk-free, one-year bond are 6 percent. Suppose further than inflation is 2 percent in the U.S. and 4 percent in Europe. Assume it takes one year for the exchange rate to adjust to inflation differences. What is the predicted change in the $/euro exchange rate for the next year? Given that, what would the dollar return on a European bond be for this year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Dollar Return on Foreign Investments -

(A) Over the past year, the dollar has appreciated by about 8 percent against the peso. A year ago you borrowed in the U.S. at an interest rate of 4 percent and you invested the money in a Mexican mutual fund that paid a 12 percent peso return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(B) Explain the following statement: If inflation differences are the only reason that interest rates are higher in one country than another, it is highly unlikely that arbitrage profits will exist in these countries' financial markets. (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Inflation and Exchange Rates -

(C) Suppose oranges sell for $2 per dozen in the U.S. and they sell for 200 pesos per dozen in Mexico. Suppose further the exchange rate is $0.01 per peso. If U.S. inflation is 2 percent next year, Mexican inflation is 12 percent, and exchange rates do not change, how could you make an arbitrage profit in the orange market? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(D) Suppose U.S. interest rates on a risk-free, one-year bond are 3 percent and Mexican interest rates on a risk-free, one-year bond are 12 percent. Suppose further that inflation is 2 percent in the U.S. and 7 percent in Mexico. Assume it takes one year for the exchange rate to adjust to inflation differences. What is the predicted change in the $/peso exchange rate for the next year? Given that, what would the dollar return on a Mexican bond be for this year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

At December 31 of the current year, Vulcan Company had a balance of $728,000 in its Accounts Receivable account and a credit balance of $6,000 in the Allowance for Doubtful Accounts. The company has aged its accounts as follows:

In the past, the company has experienced losses as follows: 1% of current balances, 5% of balances 0-60 days past due, 15% of balances 61-180 days past due, and 30% of balances over 180 days past due. The company bases its bad debts expense on the aging analysis.

Required:

1. Prepare the adjusting journal entry to record the bad debts expense for the year.
2. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet.
3. On January 15 of the subsequent year, Vulcan Company wrote off the account of Moon, $1,385. Give the entry for the write-off.
4. On February 20 of the subsequent year, Vulcan Company collected the $1,385 on the Moon account written off on January 15. Give the entry or entries for the recovery.

Pearl Corp. is expected to have an EBIT of $3,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $155,000, and $195,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $17,500,000 in debt and 1,350,000 shares outstanding. At Year 5, you believe that the company's sales will be $27,030,000 and the appropriate price-sales ratio is 2.6. The company’s WACC is 9.1 percent and the tax rate is 21 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Consider a one year American put option on 100 ounces of gold with a strike of $2300 per ounce. The spot price per ounce of gold is $2300 and the annual financing rate is 7% on a continuously compounded basis. Finally, gold annual volatility is 15%. In answering the question below use a binomial tree with two steps.

A. Compute u, d, as well as p for the standard binomial model.

A ten-year Treasury note with a 5.000% coupon rate is sold at par value in the primary market (assume par value is $100). Bill purchases the Treasury note at a price of 103.000 when it has five years left to maturity and it has a 4.326% yield-to-maturity. Bill holds the Treasury note for three years and then sells it to George in the secondary market. George then holds the Treasury note to maturity. Assume three years from when Bill purchases the Treasury note, yield-to-maturities (interest rates) will be:

• 3.800% on T-notes with 1-year to maturity
• 4.000% on T-notes with 2-years to maturity
• 4.200% on T-notes with 3-years to maturity
• 4.400% on T-notes with 4-years to maturity
• 4.600% on T-notes with 5-years to maturity
• 5.2000% on T-notes with 10-years to maturity

1. Complete a time line for George’s Treasury note (while owned by George). You should include as much information as possible. You can let price be an unknown variable (i.e., Price = ? or PV = ?) as it will be calculated below.

0                           1     

|----------------------|-----------------      

2.         Enter the variables into the financial calculator box needed to solve for George’s purchase price.

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.