You are buying a $1,250,000 property, financing it with an 75% loan-to-value ratio, adjustable rate mortgage with a teaser rate of 2.95%. At the end of the first year, the mortgage loan rate adjusts to 3.875%. The loan has a 5 percent payment cap. You expect the property to appreciate 5% each year. 30 year loan/360 months.

What is the teaser payment?

What is the outstanding balance on the 1-year reset date?

How much principal and interest was paid in the first year?

Given the reset interest rate, what is the uncapped payment?

How much higher (in percent) is the fully amortizing payment?

If the payment is capped, what is the new payment?

If the payment is capped, what is the negative amortization after the next year?

Neglecting selling expenses, what is the return on equity after the second year?

A survey asked university students who wanted to go to an exchange program, which city they will choose – London, Paris or Madrid. The exchange programs are only offered in the first and second year. The results are given below in the table.

a) Fill the table. What is the probability that a student chosen at random is a junior and did not select Madrid?

b) What is the probability that a student chosen at random selected London, given that the student is a senior (2nd year)?

c) It seems that Madrid becomes much more popular with second year students than in the first year. Can you figure out if being a second year student and choosing Madrid are independent events? Explain.

Jennifer is a project manager for Cyclone Fitness Inc. She is evaluating the feasibility of a project to build a new plant for manufacturing a new health drink. She has the following information. · Sales of 800,000 bottles/year with a price of $5/bottle. · Variable cost per bottle is $1.5 per bottle. · Fixed costs are $500,000 per year. · Project life is 5 years. · Initial Investment (cash outlay) is $5,000,000. · Depreciation is $1,000,000/year. · Additional net working capital of $1,500,000 required. Same for all periods. · The firm’s required return is 22%. · The tax rate is 30%.

a. What is the OCF in year 1 to year 5?

b. What is the (Free) Cash Flow in year 1 to year 5?

c. What is the NPV of the project? Should Cyclone Fitness Inc. accept or reject the project?

Skeets Mfg Inc forecasts the following financial information for the next 3 years (in millions):

                                       Year 1                 Year 2                 Year 3

Revenues                       $25,200              $27,540              $32,300

Operating Expenses      $13,650              $13,848              $14,200

Depreciation                  $6,573                $5,580                $6,750

EBIT                                $4,977                $8,112                $11,350

Interest Expenses          $1,170                $1,572                $1,325

Taxes                              $1,332                $2,289                $3,509

Net Income                    $2,475                $4,251                $6,516

Increase in NWC            $165                   $420                   $735

The firm estimates capital expenditures of $1,200 million in year1, $750 million in year 2 and $1,550 million in year 3. Determine the value of the firm today if we assume that the free cash flows will grow at 3% per year indefinitely after year 3 and the firm has a weighted average cost of capital of 14%?

Question 4 (25 marks / Bond Market and Term Structure of Interest Rates)

1. a) You are considering investing in bonds and have collected the following information about the prices of a 1-year zero-coupon bond and a 2-year coupon bond.

   • - The 1-year discount bond pays $1,000 in one year and sells for a current price of $950.

   • - The 2-year coupon bond has a face value of $1,000 and an annual coupon of $60. The bond currently sells for a price of $1,050.

   1. i) What are the implied yields to maturity on one- and two-year discount bonds?

   2. ii) What is the implied forward rate between years 1 and 2?

   3. iii) Consider a 2-year annuity with annual coupon payments of $800. What is the most that you would be willing to pay for this annuity?

A machine costing $209,800 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 482,000 units of product during its life. It actually produces the following units: 123,200 in 1st year, 123,700 in 2nd year, 119,800 in 3rd year, 125,300 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)

Required:

Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.)

[The following information applies to the questions displayed below.]

Harris Corp. is a technology start-up currently in its second year of operations. The company didn’t purchase any assets this year but purchased the following assets in the prior year:

Harris did not know depreciation was tax deductible until it hired an accountant this year and didn’t claim any depreciation deduction in its first year of operation. (Use MACRS Table 1 and Table 2.)

a. What is the maximum amount of depreciation deduction Harris Corp. can deduct in its second year of operation?

b. What is the basis of the office equipment at the end of the second year?

Oregon Forest Products will acquire new equipment that falls under the five-year MACRS category. The cost is $330,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Earnings before Depreciation Year 1 $ 111,000 Year 2 130,000 Year 3 95,000 Year 4 57,000 Year 5 48,000 Year 6 31,000 The firm is in a 30 percent tax bracket and has a 12 percent cost of capital. a. Calculate the net present value. b. Under the net present value method, should Oregon Forest Products purchase the equipment asset? Yes No

A machine costing $210,200 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 483,000 units of product during its life. It actually produces the following units: 122,000 in 1st year, 122,800 in 2nd year, 120,700 in 3rd year, 127,500 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.) Required: Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.)

PROBLEM 2 West Hills Village (WHV) in Rapid City, South Dakota is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHV decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHV buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNV's tax rate is 40 percent. Should the home lease or buy?