What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.

Q1:

The cost, in dollars, to produce Q designer dog leashes is ??= 7Q + 10 and the demand function is given by ?= -2Q + 59.

a) Find the TR function. Which type of function TR is? Which type of turning point is going to have? Explain.

b) Find the values of Q at which TR is zero. At which value of Q total revenue is a maximum?

c) Find the profit function. Describe the main characteristics of the profit function.

d) Find the values of Q at which profit is zero. At which value of Q profits are maximum? Find the maximum profit.

e) Find the values of Q at the BEP algebraically and graphically and explain your findings.

Q2:

A profit function is given by: ??????=4Q^3 - 40Q^2 + 96Q

Q 0 . 1 2 3 4 5 6 7 8 9 10

Profit

a) Compute profits for the values of Q in the above table.

b) Graph the profit function.

c) Identify the following: type of function, the roots and the turning points indicating their type.

d) Indicate the range of values of Q in which the company is making negative profits.

To upgrade technology. The price of the machine being considered is $210,000. Installation cost are $20,000. They expect the increased sales (net of expenses except for depreciation) or EBITDA to be 80,000 for year 1, 130,000 year 2, and 70,000 year 3. The machine can be sold for $40,000 at the end of the project. Tax rate 40%. MACRS 3 years.
a. What is the terminal value?
b. If WACC is 10.65%, what is the NPV?
c. Using same information. But now WACC is 10.65%, what is the IRR?
d. Using same information, with WACC 10.65%. What is the payback period?
e. Based on NPR and IRR, should they purchase the new equipment?

4.

The cost of retained earnings

If a firm cannot invest retained earnings to earn a rate of return (insert answer here) the required rate of return on retained earnings, it should return those funds to its stockholders.

The cost of equity using the CAPM approach

The current risk-free rate of return (rRFrRF) is 3.86% while the market risk premium is 5.75%. The D’Amico Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, D’Amico’s cost of equity is (insert answer here).

The cost of equity using the bond yield plus risk premium approach

The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Hoover’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Hoover’s cost of internal equity is:

a. 20.21%

b. 17.79%

c. 16.17%

d. 19.40%

The cost of equity using the discounted cash flow (or dividend growth) approach

Tucker Enterprises’s stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $1.38 in one year. Analysts project the firm’s growth rate to be constant at 5.72%. Using the cost of equity using the discounted cash flow (or dividend growth) approach, what is Tucker’s cost of internal equity?

a. 13.88%

b. 11.66%

c. 14.99%

d. 11.10%

Estimating growth rates

It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate:

Suppose Tucker is currently distributing 45% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 8%. Tucker’s estimated growth rate is (insert answer here) %.

Upton Umbrellas has a cost of equity of 12.1 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 39 percent. The company's bonds sell for 103.7 percent of par. The debt has a book value of $423,000 and total assets have a book value of $957,000. If the market-to-book ratio is 2.89 times, what is the company's WACC?

5.62%

8.35%

10.26%

8.49%

9.96%

Daily Enterprises is purchasing an $8 million machine. It will cost $100,000 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have a market value of $1 million after the 5th year. The machine will generate incremental revenues of $5.0 million per year along with incremental costs of $2.4 million per year. Daily’s marginal tax rate is 30%, and the firm will run the project for 5 years. If the cost of capital is 11%, what is the NPV for this project?

Question 23 options:

Daily Enterprises is purchasing an $8 million machine. It will cost $100,000 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have a market value of $1 million after the 5th year. The machine will generate incremental revenues of $4.75 million per year along with incremental costs of $2.4 million per year. Daily’s marginal tax rate is 30%, and the firm will run the project for 5 years. If the cost of capital is 11%, what is the NPV for this project?

Suppose you want to test the claim that mean cost of textbooks for a stats class (offered by several different universities) is more than $150 at the \alpha ?=.05 significance level. (a) Explain, in the context of the problem, what it would mean to make a type I error. (b) Explain, in the context of the problem, what it would mean to make a type II error. (c) How does the the significance level relate to the type I and/or type II error?