2. You work in the Finance Department for Flynn, Inc. Your firm needs to raise $6,500,000,000 ($6.50B) to finance new capital investments. Your boss is considering raising this capital using a rights offering. He has asked you to analyze the effect of such an offering on the firm’s shareholders. The firm has 750,000,000 shares outstanding. These are currently selling on the stock exchange for $32.52. Calculate the current market value of firm equity. To raise the needed $6,500,000,000 in new capital, your boss is considering issuing new shares at a subscription price of $25 in the rights offering. How many new shares will the firm need to issue to raise the $6,500,000,000? Calculate the number of rights that will be needed to purchase a new share. During the subscription period, what will be the market value of a right? After the rights offering, what will be the firm value? The number of outstanding shares? The share price?

1. Suppose utility for a consumer of movies (x) and golf (z) is U = 20x^0.6z^0.4. The consumer has set aside $1000 to consumer movies and golf for a year.
   1. If the price of movies is $20 and the price of golf is $30, what is the utility-maximizing consumption of movies and golf? (Use demand functions formula to solve).
   2. Show the optimal consumption bundle on a graph, showing a budget line (with intercepts), an indifference curve, and the optimal choice.
   3. Now suppose the price of golf falls to $25. What is the new utility-maximizing consumption of movies and golf?
   4. Show the new situation on your graph, including the new BL (with intercepts), new indifference curve, and new optimal choice. Also, show the price-consumption line.
   5. What is the price elasticity of demand for golf? To calculate, use the midpoint method, where percentage change for a variable x is (change in x)/(average x).

You work in the Finance Department for Flynn, Inc. Your firm needs to raise $7,250,000,000 ($7.25B) to finance new capital investments. Your boss is considering raising this capital using a rights offering. He has asked you to analyze the effect of such an offering on the firm’s shareholders.

The firm has 1,100,000,000 shares outstanding. These are currently selling on the stock exchange for $24.52.

Calculate the current market value of firm equity.

To raise the needed $7,250,000,000 in new capital, your boss is considering issuing new shares at a subscription price of $20 in the rights offering.

How many new shares will the firm need to issue to raise the $7,250,000,000? Calculate the number of rights that will be needed to purchase a new share.

During the subscription period, what will be the market value of a right?

After the rights offering, what will be the firm value? The number of outstanding shares? The share price?

X Company is trying to decide whether to continue using old equipment to make Product A or replace it with new equipment that will have lower operating costs. The following information is available:

• The new equipment will cost $53,000. Disposal value at the end of its 6-year useful life will be $6,000.
• The old equipment was purchased 3 years ago for $20,000. It can be sold immediately for $5,000 but will have zero disposal value in 6 years.
• Maintenance work, costing $4,000, will be necessary on the new equipment in Year 4.
• The new equipment will result in $9,000 of operating cost savings each year.

Assuming a discount rate of 8%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]

Crazy Cliff’s Car Coral crushes competition causing college customers considerable consternation. Crazy Cliff’s has no debt and considering opening a new dealership – Crazier Cliff’s. Crazy Cliff requires that all new projects have a return on equity of 18%. The new dealership is expected to increase net income by $200,000 per year over the projects 10-year life. The new dealership will be placed on land Crazy Cliff purchased for $400,000 2 years ago; the land could be sold today for $450,000. Crazy Cliff plans on operating the dealership out of a brand-new double-wide that can be purchased for $80,000 and will be depreciated to zero over 10 years. The double-wide has no salvage value and the land is expected to be sold for $500,000. Assume a tax rate of 25%. What are the IRR and payback period of the project? Should the project be accepted?

You are considering buying a new​ car, because you think it will save you money. Your think your old car will cost​ $2,200 in gas and maintenance next year​ (Year 1), and you expect that to increase by​ 6% every year until the end of Year 10. A new car will cost you​ $16,500 now​ (Year 0). You think it will cost​ $500 in gas and maintenance next year​ (Year 1), and you expect that to increase by​ 4% every year until the end of Year 10. You need to decide if the new car is worth the investment. Assume an annual interest rate of​ 5% a. What is the equivalent present value of the maintenance costs of the old​ car? b. What is the equivalent present value of the maintenance costs of the new​ car? c. Is the new car worth the​ investment?

A systems analyst tests a new algorithm designed to work faster than the currently-used algorithm. Each algorithm is applied to a group of 51 51 sample problems. The new algorithm completes the sample problems with a mean time of 24.43 24.43 hours. The current algorithm completes the sample problems with a mean time of 24.68 24.68 hours. The standard deviation is found to be 3.481 3.481 hours for the new algorithm, and 3.420 3.420 hours for the current algorithm. Conduct a hypothesis test at the 0.05 0.05 level of significance of the claim that the new algorithm has a lower mean completion time than the current algorithm. Let μ1 μ 1 be the true mean completion time for the new algorithm and μ2 μ 2 be the true mean completion time for the current algorithm. Step 2 of 4: Compute the value the test statistic. Round to two decimal places.

SOS Ltd is currently an all-equity firm and has a market value of $800,000. SOS is evaluating whether a levered capital structure would maximize the wealth of shareholders. The cost of equity is currently 15%. The new capital structure under consideration is an issue of $400,000 new perpetual debt with an 8% interest rate. There are currently 32,000 shares outstanding and a tax rate of 35% applies to this firm. If SOS finally changes to the new levered capital structure,

(a) Calculate the WACC under the levered capital structure. (Show your calculations).

(b) What are the stock prices of SOS before and after announcement of the new capital structure? Explain the price change briefly. (Show your calculations).

(c) Suppose the actual stock price of SOS after announcement of the new capital structure is lower than your answer in part (d) above, what could be the possible reasons for this?

Part III: Process Selection

Merrimac Manufacturing Company has always produced a certain component part at 50AED per part with an annual fixed investment of 10,000AED. Although the business is making a modest profit now, Merrimac suspects that if it invests in new equipment, it could recognize a substantial increase in profits. The new equipment costs 25,000AED to purchase and install. Merrimac estimates that with the new equipment, it will costs 40AED to produce the component part.

1. If the estimated demand is less than 1000 parts, Merrimac should or not purchase the new equipment?
2. Would your decision change if Merrimac’s annual demand increased to 2000 parts? Increased to 5000 parts?
3. Knowing that customers will be charged 65AED per part and considering the new equipment, how many component parts will Merrimac has to produce to break even? You have to calculate the break-even point.

1. Suppose utility for a consumer of movies (x) and golf (z) is U =  20x^0.6z^0.4.  The consumer has set aside $1000 to consumer movies and golf for a year.
   1. If the price of movies is $20 and the price of golf is $30, what is the utility-maximizing consumption of movies and golf?  (Use demand functions formula to solve).
   2. Show the optimal consumption bundle on a graph, showing a budget line (with intercepts), an indifference curve, and the optimal choice.
   3. Now suppose the price of golf falls to $25.  What is the new utility-maximizing consumption of movies and golf?
   4. Show the new situation on your graph, including the new BL (with intercepts), new indifference curve, and new optimal choice.  Also, show the price-consumption line.
   5. What is the price elasticity of demand for golf?  To calculate, use the midpoint method, where percentage change for a variable x is (change in x)/(average x).