On January 1, Year One, Landon Corporation decides to lease a truck for $20,000 per year for three years. The annual incremental borrowing rate for Landon is 10 percent. The truck has a life of five years. Landon cannot buy or obtain title to the truck. The present value of an annuity due of $1 for three years at an annual interest rate of 10 percent is $2.73554. At the last moment, Landon changes the contract to four years instead of three. No other changes are made. The present value of an annuity due of $1 for four years at an annual interest rate of 10 percent is $3.48685.

a. How did the change from three years to four years affect the expense to be reported by Landon

in Year One?

b. How did the change from three years to four years affect the expense to be reported by Landon

in Year Two?

c. After changing the contract to four years, what net book value will be shown for the leased truck

at the end of Year One?

d. After changing the contract to four years, what lease liability balance will be shown at the end of

Year One?

(a) Ericson Corporation’s total assets are projected to increase by $30 million next year. Ericson is also scheduled to repay $14 million in debt next year. Other than this repayment, no changes in liabilities are currently scheduled. Ericsons’s income is projected to be $4 million, half of which will be paid as a dividend. What is the amount of Ericson’s External Funds Needed (EFN) for next year?

(b) Ericson’s $4 million net income consists of $33 million in revenues, less $25 million in various cash-based costs, and $4 million in depreciation expense.   Also, of the $30 million increase in assets, $2 million is attributable to an increase in inventory and receivables.   No other changes in working capital are anticipated.   What is the amount of Ericson’s operating cash flow?

(c) Evaluate the following statement: In order to maximize shareholder value, it is important that the company always select those investments that provide the highest internal rate of return.

(d) Evaluate the following statement: In order to maximize shareholder value, it is important that the company select projects whose payoffs have low correlations with each other, since this reduces the risk of the company.

1. Which of the following about maturity gap is true?
   1. It can be used for forecasting the change in market value of equity
   2. It takes into account the schedule of the cash flows of an asset ot a liability
   3. It focuses only on the changes in net interest income resulting from the changes in interest rates
   4. It takes into account the time value of money

2. Suppose the bank has a negative maturity gap of 2 years. If interest rates increase by 2 percentage points, the market value of equity will
   1. Increase because of the exposure to reinvestment risk
   2. Decrease because of the exposure to reinvestment risk
   3. Increase because of the exposure to refinancing risk
   4. Decrease because of the exposure to refinancing risk

3. Maturity gap is
   1. The difference between the size of assets and liabilities
   2. The difference between rate-sensitive assets and rate-sensitive liabilities
   3. The difference between duration of assets and duration of liabilities
   4. None of the above
4. Refer to the following balance sheet information:

5. Assets	amount, $ mln	Liabilities	amount, $ mln
   Cash	10	Deposits	50
   T-bills	20	CDs	20
   Loans	50	Equity	10
   	80		80

   Calculate the average maturity of assets and liabilities. (2 points)

We are evaluating a project that costs $650,000, has a life of 5 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 45,000 units per year. Price per unit is $56, variable cost per unit is $26, and fixed costs are $860,000 per year. The tax rate is 21 percent and we require a return of 14 percent on this project.

a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b-1. Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places, e.g., 32.16.)

b-2. What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

c. What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

We are evaluating a project that costs $690,000, has a life of 5 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 51,000 units per year. Price per unit is $75, variable cost per unit is $50, and fixed costs are $790,000 per year. The tax rate is 25 percent and we require a return of 13 percent on this project.

a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

b-1. Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places, e.g., 32.16.)

b-2. What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

c. What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

7. Determinants of market interest rates

Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic:

Component: Real Risk-Free Rate, Maturity Risk Premium, Inflation Premium, Nominal Risk-Free Rate, Default Risk Premium, Liquidity Risk Premium

Symbol: rRF, LP, DRP, IP, MRP, r*

We are evaluating a project that costs $520,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 73,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 21 percent and we require a return of 15 percent on this project. a. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b-1. Calculate the base-case cash flow and NPV. (Do not round intermediate calculations and round your NPV answer to 2 decimal places, e.g., 32.16.) b-2. What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c. What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

b) Bond with 10 year maturity, a face value or $1,000, a coupon rate of 7% (coupon is paid annually) and assume that the yield to maturity on the bond is 7%. Compute the duration of this bond.

c) Next, we are going to analyze the effect of time to maturity on the duration of the bond. Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a yield to maturity of 7% for maturities of 2 to 18 years in 1-year increments (so here we are going to vary the time to maturity and see how duration changes if N=2, 3 … etc.). What happens to duration as maturity increases?

d) (5 points) Next, we are going to analyze the effect of the yield to maturity on the duration of the bond. Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a maturity of 10 years as the interest rate (or yield to maturity) on the bond changes from 2% to 12% (consider increments of 1% - so you need to compute the duration for various yields to maturity 2%, 3%, …, 12%) . What happens to duration as the interest rate increases?

Suppose, the government of Australia incurs a budget deficit of $50 billion due to increased government spending in 2020 as result of Covid 19. Because of this, the government borrowing in 2021 increases by the same amount.

1. Show this development using a graph representing the market for loanable funds for Australia[1]. Explain in writing the effect of this on interest rates. .

Graph

Effect on interest rate (1 mark)

2. Compare the size of equilibrium changes in 1) investment, 2) public saving, 3) private saving and 4) national saving (public saving + private saving) with $50 billion increase in borrowing.
   Compare the changes (increase/decrease) in these variables indicating same, less or more than the $50 billion.

3. Will the equilibrium quantity of national savings change by more or less than the initial change in public saving? Explain your answer (in 50 words or less)

[1] Make sure to label the variables represented on the X-axis and Y-axis of the graph clearly. Also mark the curves in the graphs clearly indicating what they represent (i.e. demand or supply of loanable funds)

** the question was only given like this, there's no more additional details

Following is the seven-year forecast for a new venture called Johnson Transformers:

(all amounts in $000)

Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2026 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75%

Determine the NPV of Johnson Transformers Free Cash Flow for the years 2020 -2026. HINT: Remember to account for loss carry-forwards when determining income taxes.