1. What are flotation costs and why they must be included in the initial cost of a project? Explain in detail.

2. Tell me the differences between the standard deviation and beta in the measurement of risk in the capital market.

Explain effectiveness of Cost Model Data Set in your examples.

Can increasing revenue overcome an increase in the percentage of food cost?

Discuss the three common methods for allocating joint product cost.

A residence was constructed in 1986 for $72,000 on a lot that cost $14,000. Before the property was converted to rental use in the current year, a finished porch costing $8,000 was added and a $3,000 casualty loss was claimed. If the fair market value on the date of conversion to rental use was $84,000 ($74,000 for the house and $10,000 allocated for the land), what is the depreciable basis?

• A.$84,000
• B.$74,000
• C.$72,000
• D.$77,000

During the current year, Liquid Corporation, a calendar-year taxpayer, purchased and placed in service the following assets on the following dates:

The three assets are all 5-year property under MACRS. The Sec. 179 and bonus depreciation deductions were not elected. What is Liquid’s depreciation deduction?

• A.$1,720
• B.$3,440
• C.$6,880
• D.$3,640

​(Individual or component costs of capital​) Compute the cost of the​ following:
a. A bond that has ​$1,000 par value​ (face value) and a contract or coupon interest rate of 6 percent. A new issue would have a floatation cost of 7percent of the ​$1,130 market value. The bonds mature in 6 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 36 percent.
b. A new common stock issue that paid a ​$1.80 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant​ dividend-earnings ratio of 30 percent. The price of this stock is now ​$32​, but 8 percent flotation costs are anticipated.
c. Internal common equity when the current market price of the common stock is ​$49. The expected dividend this coming year should be ​$3.50​, increasing thereafter at an annual growth rate of 9 percent. The​ corporation's tax rate is 36 percent.
d. A preferred stock paying a dividend of 9 percent on a ​$140 par value. If a new issue is​ offered, flotation costs will be 14 percent of the current price of ​$175.
e. A bond selling to yield 9 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 36 percent. In other​ words, 9 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows​ (principal and​ interest).

a. What is the firm's after-tax cost of debt on the bond?

____% (Round to two decimal places)

b. What is the cost of external common equity?

____% (round to two decimal places)

c. What is the cost of internal common equity?

____% (Round to two decimal places)

d. What is the cost of capital for the preferred stock?

____%

e. What is the after-tax cost of debt on the bond?

____%

​(Individual

or component costs of

capital​)

Compute the cost of the​ following:

a. A bond that has

​$1000

par value​ (face value) and a contract or coupon interest rate of

6

percent. A new issue would have a floatation cost of

7

percent of the

​$1,130

market value. The bonds mature in

9

years. The​ firm's average tax rate is 30 percent and its marginal tax rate is

32

percent.

b. A new common stock issue that paid a

​$1.70

dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of

11

percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant​ dividend-earnings ratio of 30 percent. The price of this stock is now

​$28​,

but

8

percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is

​$48.

The expected dividend this coming year should be

​$3.30

increasing thereafter at an annual growth rate of

9

percent. The​ corporation's tax rate is

32

percent.

d. A preferred stock paying a dividend of

9

percent on a

​$140

par value. If a new issue is​ offered, flotation costs will be

9

percent of the current price of

​$165165.

e. A bond selling to yield

1111

percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of

32

percent. In other​ words,

11

percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows​ (principal and​ interest).

Consider the following information on an inventory management system:

            Item Cost:                                $10

            Order Cost:                              $250

            Annual Holding Cost:              33% of item cost

            Annual Demand:                     25,750

            Average Demand:                   515 per week

            Std. Dev. of Demand:              125 per week

            Leadtime:                                2 weeks         

1. Ignoring the uncertainty in the demand (i.e. looking only at average values), find the optimal order quantity and the reorder point. What is the annual inventory holding and ordering cost for this policy?

2. Consider now the uncertainty. The order quantity remains the same. If the target is to have a 98% fill rate, what should be the reorder point? What is the safety stock? How much additional inventory cost is incurred due to the safety stock? What should be the reorder point?