Hermon Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows.

What would be the expected net present value (NPV) of this project if the project’s cost of capital is 14%?

$28,964

$26,551

$19,310

$24,137

Hermon now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to abandon the project at the end of year 2, the company will receive a one-time net cash inflow of $3,000 (at the end of year 2). The $3,000 the company receives at the end of year 2 is the difference between the cash the company receives from selling off the project’s assets and the company’s -$3,000 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project.

Using the information in the preceding problem, find the expected NPV of this project when taking the abandonment option into account.

$34,115

$31,490

$23,618

$26,242

What is the value of the option to abandon the project?

$2,316

$2,210

$2,105

$1,789

A) We are evaluating a project that costs $111518, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 4266 units per year. Price per unit is $51, variable cost per unit is $24, and fixed costs are $83124 per year. The tax rate is 39 percent, and we require a 13 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-9 percent. What is the NPV of the project in best-case scenario? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

B)

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $188569 on research and development for the new clubs. The plant and equipment required will cost $2838154 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $125395 that will be returned at the end of the project. The OCF of the project will be $810877. The tax rate is 32 percent, and the cost of capital is 7 percent. What is the NPV for this project? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

(a) Magnus, a lawyer working for a large firm and earning $60,000 per year is contemplating setting up his own law practice. He estimates that renting an office would cost $10,000 per year, hiring a legal secretary would cost $20,000 per year, renting the required office equipment would cost $15,000 per year and purchasing the required supplies, paying for electricity, telephone and so forth would cost another $5,000. Magnus estimated that his total revenues for the year would be $100,000 and he is indifferent between keeping his present occupation with the large law firm and opening his own law office.

(i) How much would be the explicit cost of Magnus for running his own law office?

(ii) How much would the accounting costs be?

(iii) How much would the implicit cost be?

(iv) How much would the economic costs be?

(v) Should Magnus (the lawyer) go ahead and start his own practice?

(b) A profit maximizing firm in a competitive market is currently producing 50 units of output. It has average revenue of $2, total variable cost of $80 and a total fixed cost of $60. As the manager, you are required to advise management on what to do.

(i) Use a graph to demonstrate the circumstances that would prevail in a competitive market.

(ii) Identify costs, revenue, and the economic losses or profits on your graph.

(iii)Determine whether this firm will shut down, exit or choose to remain in the market.

(iv)Explain your answer.

You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 6.6 percent coupon bonds are selling at a price of $964.67. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions.   What is the current YTM of the bonds? What is the after-tax cost of debt for this firm if it has a marginal tax rate?

On January 8, the end of the first weekly pay period of the year, Regis Company's payroll register showed that its employees earned $22,760 of office salaries and $70,840 of sales salaries. Withholdings from the employees' salaries include FICA Social Security taxes at the rate of 6.20%, FICA Medicare taxes at the rate of 1.45%, $13,260 of federal income taxes, $1,360 of medical insurance deductions, and $960 of union dues. No employee earned more than $7,000 in this first period.

Calculate below the amounts for each of these four taxes of Regis Company. Regis’s merit rating reduces its state unemployment tax rate to 5% of the first $7,000 paid each employee. The federal unemployment tax rate is 0.60%. (Round your answers to 2 decimal places.)

Prepare the journal entry to record Regis Company's January 8 (employee) payroll expenses and liabilities. (Round your answers to 2 decimal places.)

Prepare the journal entry to record Regis’s (employer) payroll taxes resulting from the January 8 payroll. Regis’s merit rating reduces its state unemployment tax rate to 5% of the first $7,000 paid each employee. The federal unemployment tax rate is 0.60%. (Round your answers to 2 decimal places.)

Jesper Manufacturing is preparing its master budget for the first quarter of the upcoming year. The following data pertain to Jesper Manufacturing's operations:

a. Actual sales in December were $76,000. Selling price per unit is projected to remain stable at $9 per unit throughout the budget period. Sales for the first five months of the upcoming year are budgeted to be as follows:

b. Sales are 30% cash and 70% credit. All credit sales are collected in the month following the sale.

c. Jesper Manufacturing has a policy that states that each month's ending inventory of finished goods should be 10% of the following month's sales (in units).

d. Of each month's direct material purchases, 20% are paid for in the month of purchase, while the remainder is paid for in the month following purchase. Two kilograms of direct material is needed per unit at $1.40/kg. Ending inventory of direct materials should be 20% of next month's production needs.

e. Monthly manufacturing conversion costs are $6,500 for factory rent, $2,900 for other fixed manufacturing expenses, and $1.40 per unit for variable manufacturing overhead. No depreciation is included in these figures. All expenses are paid in the month in which they are incurred.

f. Computer equipment for the administrative offices will be purchased in the upcoming quarter. In January, Jesper Manufacturing will purchase equipment for $5,800 (cash), while February's cash expenditure will be $11,600 and March's cash expenditure will be $15,800.

g. Operating expenses are budgeted to be $1.20 per unit sold plus fixed operating expenses of $1,400 per month. All operating expenses are paid in the month in which they are incurred.

h. Depreciation on the building and equipment for the general and administrative offices is budgeted to be $5,600 for the entire quarter, which includes depreciation on new acquisitions.

i. Jesper Manufacturing has a policy that the ending cash balance in each month must be at least $4,400. It has a line of credit with a local bank. The company can borrow in increments of $1,000 at the beginning of each month, up to a total outstanding loan balance of $130,000. The interest rate on these loans is 1% per month simple interest (not compounded). Jesper Manufacturing pays down on the line of credit balance if it has excess funds at the end of the quarter. The company also pays the accumulated interest at the end of the quarter on the funds borrowed during the quarter.

j. The company's income tax rate is projected to be 30% of operating income less interest expense. The company pays $10,800 cash at the end of February in estimated taxes.

Requirements:

1. Prepare a schedule of cash collections for January, February, and March, and for the quarter in total.

2. Prepare a production budget. (Hint: Unit sales = Sales in dollars / Selling price per unit.)

3. Prepare a direct materials budget.

4. Prepare a cash payments budget for the direct material purchases from Requirement 3.

5. Prepare a cash payments budget for conversion costs. 6. Prepare a cash payments budget for operating expenses.

7. Prepare a combined cash budget.

8. Calculate the budgeted manufacturing cost per unit. (Assume that fixed manufacturing overhead is budgeted to be $0.80 per unit for the year.)

9. Prepare a budgeted income statement for the quarter ending March 31. (Hint: Cost of goods sold = Budgeted cost of manufacturing each unit x Number of units sold.)

10. Prepare a partial budgeted balance sheet for March 31. Include Loans Payable and Income Tax Payable.

NOTE: Only need requirements 1,2,3,8,9,10.

The bond is expected to be a 4-year, $100,000 face value, 4% bond with an effective annual yield of 8%. Interest will be payable semiannually. If all goes well, the bond will be issued on March 1, 2021, and the first interest payment date will be September 1, 2021. The bonds are expected to be callable at 101 at any time on or after March 1, 2023.

Include an amortization schedule using the effective interest method.

A) Determine the AGI this year for the taxpayer(s).

B) Determine the amount of itemized deductions the taxpayer(s) has (have) available this year.

C) Using the 2017 standard deduction amounts (assuming no additional amounts for age or blindness) from Appendix D in of your book, state whether the taxpayer(s) itemize or take the standard deduction. I am not asking for you to state the amount of either the standard deduction or the itemized deductions chosen.

D) Use the individual tax formula and a flat 20% tax rate on all types of taxable income to determine the amount of taxes due or refund amount. Remember to clearly marking the answer as either the amount of tax due or a refund due (e.g. refunds are negative amounts as represented with parentheses or a negative sign, alternatively you can just write “refund” next to it). Assume AMT does not apply, and there are no tax credits available.

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2. Shela is single and works for a law firm. In the 2017 tax year, she made $110,000 this year in salary and $10,000 of gross interest income from a corporate bond. Her law firm withheld $16,000 of tax from her salary this year. In addition to the above, the following occurred this year:

- She paid $7,000 in interest on her mortgage for her primary residence.

- She had a rental loss (had greater expenses as a landlord than revenue) by $2,000.

- She sold stock she had held for 9 months at $4,000 less than her tax basis at the time of the sale.

- Shela owned a 20% interest in a partnership during the year. The partnership had a $20,000 loss from operations during the year and made no distributions.

- Shela volunteers for the Red Cross using her legal skills to do administrative work for the charity. She estimates her time volunteering is worth $5,000.

Wrangler Company is a U.S. firm conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table:

The spot rates as of today are:

(a) Based on the information provided, determine the net transaction exposure of each foreign currency in dollars.

(b) Assume that the Canadian dollar net inflows may range from C$20,000,000 to C$60,000,000 over the next year. Explain the risk of hedging C$50,000,000 in net inflows. How can Wrangler Company avoid such a risk? Is there any tradeoff resulting from your strategy to avoid that risk?