Your firm is thinking of expanding. If you invest​ today, the expansion will generate $ 11 million in FCF at the end of the​ year, and will have a continuation value of either $ 147 million​ (if the economy​ improves) or $ 55 million​ (if the economy does not​ improve). If you wait until next year to​ invest, you will lose the opportunity to make $ 11 million in FCF but you will know the continuation value of the investment in the following year​ (that is, in a year from now you will know what the investment continuation value will be in the following​ year). Suppose the​ risk-free rate is 5 %​, and the​ risk-neutral probability that the economy improves is 42 %. Assume the cost of expanding is the same this year or next year.

a. If the cost of expanding is $ 78 ​million, should you do so​ today, or wait until next year to​ decide?

b. At what cost of expanding would there be no difference between expanding now and​ waiting? To what profitability index does this​ correspond?

Ron and Anne have taxable income of $400,000 (all ordinary) before considering the tax effect of their asset sales (shown below).  What is their tax liability for 2018 assuming they file a joint return?

$25,000 of the rental house gain is 25% gain

The couple also had a $10,000 long term capital loss carryforward from prior years.

Show your work/netting of gains and losses

Question 3/ Firm C is planning its first dividend in 4 years from now. Firm C retention ratio is 65%. Firm C current net income is $2millions with 500,000 shares outstanding. The net income is expected to grow by 1% during the next 4 years. The dividends are expected to grow during year 5 by 11.5% and during year 6 by 9.5%. From year 6 to year 14 they is no expected growth in dividends. However starting from year 15 there will be a constant dividend growth rate of 5% forever. The required rate of return on the stocks is 8%.

a/ Compute the intrinsic value of the stock now? (Show your steps)
b/ Compute the intrinsic value of the stock at the end of year 2? (Show your steps)

c/ Compute the intrinsic value of the stock at the end of year 8? (Show your steps)

d/ Compute the intrinsic value of the stock at the end of year 14? (Show your steps)

A state legislator wants to determine whether his voters' performance rating (0 - 100) has changed from last year to this year. The following table shows the legislator's performance from the same ten randomly selected voters for last year and this year. Use this data to find the 90% confidence interval for the true difference between the population means. Assume that the populations of voters' performance ratings are normally distributed for both this year and last year.

Step 3 of 4 :  

Calculate the margin of error to be used in constructing the confidence interval. Round your answer to six decimal places.

Step 4 of 4 :

Construct the 90% confidence interval. Round your answer to one decimal place.

1) A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 9% per year. She is considering leaving her job to attend business school for two years at a cost of $50,000 per year. She has been told that her starting salary after business school is likely to be $105,000 and that amount will increase by 10% per year. Consider a time horizon of 10 years, use a discount rate of 10%, and ignore all considerations not explicitly mentioned here. Assume all cash flows occur at the start of each year (i.e., immediate, one year from now, two years from now,..., nine years from now). Also assume that the choice can be implemented immediately so that for the MBA alternative the current year is the first year of business school. What is the net present value of the more attractive choice?

a-1. Compute the gross profit percentage for both years. (Round your percentage answers to the nearest whole number. i.e. 0.1234 as 12%.)

a-2. Compute the inventory turnover for both years. (Round your answers to 1 decimal place.)

a-3. Compute the accounts receivable turnover for both years. (Round your answers to 1 decimal place.)

b. Which of the following show a positive or negative trend?

a-1. Gross profit percentage

Year 2%

Year 1%

a-2. Inventory turnover times times

Year 2

Year 1

a-3. Accounts receivable turnover times times

Year 2 ,

Year 1

Trend

b. Gross profit rate

Inventory turnover

Accounts receivable turnover

Growth in net sales

Susan is beginning to plan college savings accounts for her two children. Her son Bobby is 8 and will begin college in 10 years when he turns 18. Her daughter Mallory is 2 and will begin college in 16 years when she is 18. Susan plans to deposit $10,000 per year starting next year into a joint account that earns 8.0% annually. Her last deposit will occur in the year that Bobby starts school. If Bobby’s schooling costs $25,000 each year for four years, and Mallory’s schooling costs $30,000 each year for four years, will Susan’s plan provide enough money for both her children’s college education? By how much will Susan meet/miss the goal when she quits depositing money in year 10? (Assume schooling costs are paid after the year is completed, i.e. Bobby’s first tuition payment will occur at end of year 11)

Considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD offering 1.5% per year plus the rate of inflation.

a. Which is the safer investment?

a. Conventional 1-year bank CD

b. 1-year “Inflation-Plus” CD

b. Can you tell which offers the higher expected return?

a. Expected rate of inflation

b. Bank rate

c. Cannot be determined

c. If you expect the rate of inflation to be 3% over the next year, which is the better investment?

a. Conventional CD

b. “Inflation-Plus” CD

d. If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the market’s expected rate of inflation is 3.5% per year?

a. Yes

b. No

You are saving for the college education of your two children. They are two years apart in age; one will begin college in 7 years, and another in 10 years. You estimate your first child’s college expenses to be $30,000 per year, paid at the beginning of each college year (first payment is at year 7 and so on). You estimate your second child’s college expenses to be $50,000 per year, paid at the beginning of each college year (first payment at year 10 and so on). The annual interest rate is 8 percent. How much money must you deposit in an account each year to fund your children’s education? You will begin payments one year from today. You will make your last deposit when your oldest child enters college. Also assume that each child will take 4 years to graduate from college.

$45,714.29

$35,863.17

$25,869.35

$27,938.94

None of the above