X Company is considering a new processor that costs $150,000. Shipping and setup costs for the new processor are estimated to be $15,000. X’s working capital requirement is expected to increase by $17,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The new processor’s useful life is expected to be 5 years and its salvage value at that point is estimated to be $60,000. The new processor is being depreciated using a 5-year ACRS life. Assume a tax rate of 35% and a cost of capital of 12%. Estimated incremental revenues and incremental cash operating expenses for the new processor before tax for each year are shown in the table below.

Q1. What is the cost of the initial outlay?

Q2. Given the initial outlay for the new processor, assume the following yearly incremental after-tax cash flows (below) . Assume a cost of capital of 12%. What is the NPV of the Project?

Q3. Given the initial outlay for the new processor, assume the following yearly incremental cash flows (below). Assume a cost of capital of 12%. What is the IRR of the Project?

Java 14-8

Finish the JInsurance application that allows the user to choose insurance options in JCheckBoxes. Use a ButtonGroup to allow the user to select only one of two insurance types—HMO (health maintenance organization) or PPO (preferred provider organization). Use regular (single) JCheckBoxes for dental insurance and vision insurance options; the user can select one option, both options, or neither option.

As the user selects each option, display its name and price in a text field; the HMO costs $200per month, the PPO costs $600 per month, the dental coverage adds $75 per month, and the vision care adds $20 per month. When a user deselects an item, make the text field blank.

----------------------------------------------------------Code given-----------------------------------------------------

import java.awt.*;
import javax.swing.*;
import java.awt.event.*;
public class JInsurance extends JFrame implements ItemListener {
FlowLayout flow = new FlowLayout();
ButtonGroup insGrp = new ButtonGroup();
JCheckBox hmo = new JCheckBox("HMO", false);
JCheckBox ppo = new JCheckBox("PPO", false);
JCheckBox dental = new JCheckBox("Dental", false);
JCheckBox vision = new JCheckBox("Vision", false);
JTextField insChoice = new JTextField(20);
String output, insChosen;
public JInsurance() {
// Write your code here
}
public static void main(String[] arguments) {
JInsurance iFrame = new JInsurance();
iFrame.setSize(400, 100);
iFrame.setVisible(true);
}
@Override
public void itemStateChanged(ItemEvent check) {
// Write your code here
}
}

8. (Asset Substitution/Risk-Shifting – the Over-Investment Problem)
Consider Baxter, Inc., which is facing a financial distress.
 Baxter has a loan of $1 million due at the end of the year.
 Without a change in its strategy, the market value of its assets will be $900,000 at that time, and Baxter will default on its debt.
 Baxter is considering a new strategy
 The new strategy requires no upfront investment, but it has only a 50% probability of success.
 If the new strategy succeeds, it will increase the value of the firm’s assets by $400,000 (i.e., to $1.3 million).
 If the new strategy fails, the value of the firm’s assets will fall by $600,000 (i.e., to $300,000).

(i) What is the NPV of the new strategy? Should the manager invest in the new strategy if her goal is to maximize firm value? (Note: the new strategy requires no investment, only affects future expected payoff). (assume 0% discount rate).


(ii) Calculate the values of the firm’s assets, debt, and equity (1) without a change to strategy and (2) with a change to strategy (assume 0% discount rate).
(1) Without a change to strategy:

(2) With a change to strategy: (Calculate payoffs for Assets/Debt/Equity State-by-State!)

(iii) Will the manager invest in the new strategy, if her goal is to maximize shareholders’ wealth? Explain.

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project? Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not? Alternatively, Lando can issue new equity of $30 million to finance the project.

(d) What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

(Total = 25 marks)

Dexter Brothers Inc. reported net income available to common shareholders of $4,200,000 last financial year. The company has paid $1.20 dividend per share for the 1,000,000 common shares outstanding. The company’s capital structure is included of 40 percent debt, 10 percent preferred shares and 50 percent common shares. The company were taxed at 40 percent. *

(a) If the common shares are priced at $50 and the dividend is expected to grow at 5 percent per year for the foreseeable futures, determine the company’s cost of retained earnings. (b) If underpricing and flotation costs on new common share amount to $10.00 per share, compute the company’s cost of new common share financing. (c) The company can issue $2.00 dividend preferred shares for a market price of $25.00 per share. Flotation costs would amount to $3.00 per share. Calculate the cost of new preferred stock financing. (d) The company is considering to issue new bond with a par value of $1,000, 8 percent coupon rate with 5 years maturity. The company’s old bond currently trading at $1,100 per bond. Flotation cost would amount to $25 per bond. Calculate the new cost of debt financing. (e) Determine the Dexter Brothers new weighted average cost of capital (WACC) if the company decided to issue new shares. (f) Currently Dexter Brothers is in view of accepting a new project offering return of 8 percent. Should the company accept or reject the project. Justify your answer.

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state.

Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d) What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year. Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state. Investors are all risk neutral and the risk free rate is zero. (a) What are the expected values of the firm's equity and debt without the new project? Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt. (b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy? (c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not? Alternatively, Lando can issue new equity of $30 million to finance the project. (d) What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not? (e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year. Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state. Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not? Alternatively, Lando can issue new equity of $30 million to finance the project.

(d) What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question. (120 words)

The below is for a hypothetical study demonstrating the application of the concepts for superiority and non-inferiority testing.

A study investigated a new agent for the treatment of arthritis. Participants were randomized to receive either the current widely used (and effective) treatment or to the new experimental treatment. After 3 weeks they recorded if, based on a clinical assessment, there were improvements in symptoms (recorded as yes/no). Because of the potential large impact of age the investigators used a multiple regression model to test for differences adjusting for age. (Technically since the outcome is binary they used what is called a logistic regression model, but the analytic approach is the same.) Investigators want to test if the new treatment is non-inferior to the current treatment. Treatment is coded as 0=usual treatment and 1=new treatment so that a positive coefficient represents greater improvement with the new treatment. The study was done on a large sample and you may use the normal distribution for testing coefficients. Prior to testing the investigators selected (+/-) 0.40 for the non-inferiority parameter (delta).

A. Based on the above table, what is the 95% confidence interval for the coefficient for the treatment effect (beta1)?

B. Is the p-value for testing the superiority of the new treatment greater than or less than 0.05?

C. What can you conclude from the above analyses concerning the superiority of the new treatment?

D. Using the above non-inferiority parameter, what can the investigators conclude about the non-inferiority of the new treatment? Justify your response.

The firm Lando expects cash flows in one year’s time of $90 million if the economy is in a good state or $40 million if it is in a bad state. Both states are equally likely. The firm also has debt with face value $65 million due in one year.

Lando is considering a new project that would require an investment of $30 million today and would result in a cash flow in one year’s time of $47 million in the good state of the economy or $32 million in the bad state. Investors are all risk neutral and the risk free rate is zero.

(a) What are the expected values of the firm's equity and debt without the new project?

Lando can finance the project by issuing new debt of $30 million. If the firm goes bankrupt the new debt will have a lower priority for repayment than the firm’s existing debt.

(b) If the new project is accepted, what will be the value of the firm’s cash flow in each state after paying the original debtholders? What payment must Lando promise to the new debtholders in the good state of the economy?

(c) What will be the expected value of Lando’s equity? Will Lando’s managers choose to accept the project? Why/why not?

Alternatively, Lando can issue new equity of $30 million to finance the project.

(d)What proportion of its equity must Lando give to the new equityholders? Will Lando’s managers choose to accept the project now? Why/why not?

(e) Briefly discuss the agency problem of debt overhang with reference to your answers to the previous parts of the question.