# Use the following information

Whitney Point Industries: Market Value Balance Sheet (\$ Millions) and Cost of Capital

 Assets Liabilities Cost of Capital Cash 0 Debt 200 Debt 6% Other Assets 500 Equity 300 Equity 12% Tax rate 35%

Whitney Point Industries New Project Free Cash Flows

 Year 0 1 2 3 Free Cash Flows -\$100 \$40 \$50 \$60

Assume that the risk of this new project is similar to Whitney Point’s existing assets and the firm wants to hold constant its debt to equity ratio.

a.) Compute Whitney Point’s weighted average cost of capital. Show work.

b.) Compute the NPV for Whitney Point’s new project. Show work.

c.) Compute the “Debt Capacity” for Whitney Point’s new project in year 0. Hint: if Whitney Point will keep its debt-to-equity ratio the same after taking this new project, how much more debt will the firm add? Show work.

d.) Whitney Point’s existing \$200 million in debt is perpetual and has an annual coupon of 6%. Therefore, Whitney Point pays only interest on this debt.Compute the present value of interest tax shields. Show work.

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# Use the following information

Use the following information for the next 5 questions: Laurel, Inc., and Hardy Corp, both have 10 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has six years to maturity, whereas the Hardy Corp. bond has 19 years to maturity. Some guided examples for you to study if you need:

Question 10 If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Laurel’s bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., type 32.16 for 32.16%. Do NOT include the “%s”) D Question 11 0.5 pts If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Hardy’s bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, eg, type 32.16 for 32.16%. Do NOT include the “%”) D

Question 12 If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Laurel’s bonds be then? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., type 32.16 for 32.16%. Do NOT include the “%s”) D
Question 13 If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Hardy’s bonds be then? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., type 32.16 for 32.16%. Do NOT include the “%s”)

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# Use the following information

Use the following information for the next five questions:

On March 28, 2008, Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor, offered some securities for sale to the public. Under the terms of the deal, TMCC promised to repay the owner of one of these securities \$100,000 on March 28, 2038, but investors would receive nothing until then. Investors paid TMCC \$24,099 for each of these securities; so they gave up \$24,099 on March 28, 2008, for the promise of a \$100,000 payment 30 years later.
1. Time Value of Money: Why would TMCC be willing to accept such a small amount today (\$24,099) in exchange for a promise to repay about four times that amount (\$100.000) in the future?
2. Call Provisions: TMCC has the right to buy back the securities on the anniversary date at a price established when the securities were issued (this feature is a term of this particular deal). What impact does this feature have on the desirability of this security as an investment?
3. Time Value of Money: Would you be willing to pay \$24,099 today in exchange for \$100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?
4. Investment Comparison: Suppose that when TMCC offered the security for \$24,099, the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price? Why?
5. Length of Investment: The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the \$24,099 original price? Why? If you looked in the year 2019, do you think the price would be higher or lower than today’s price? Why?

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# Use the following information

Use the following information for next 5 questions.

Assume the following information:

1-year deposit rate offered on U.S. dollars = 8%

1-year deposit rate offered on Singapore dollars = 12%

1-year forward rate of Singapore dollars (S\$) = \$0.702

Spot rate of Singapore dollar = \$0.722

Question 8 (3.03 points)

U.S. investors have \$1,000,000 to invest. If U.S. investors use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars U.S. investors will have after one year?

Question 8 options:

 \$1,153,601.28. \$1,151,908.83. \$1,088,975.07. \$1,125,417.29.

Question 9 (3.03 points)

Singapore investors have S\$1,000,000 to invest. If Singapore investors use covered interest arbitrage for a 1-year investment, what will be the amount of Singapore dollars Singapore investors will have after one year?

Question 9 options:

 S\$1,187,378.64. S\$1,093,708.21. S\$1,110,769.23. S\$1,050,083.10.

Question 10 (3.03 points)

Using U.S. investors’ investment results calculated above, does the covered interest arbitrage work for U.S. investors?

Question 10 options:

 No, the covered interest arbitrage does not work for U.S. investors because the yield is lower than 8%. Yes, the covered interest arbitrage works for U.S. investors because the yield is higher than 8%. Yes, the covered interest arbitrage works for U.S. investors because the yield is higher than 12%. No, the covered interest arbitrage does not work for U.S. investors because the yield is lower than 12%.

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# Use the following information

Use the following information to answer the next three questions.

Q13: Davis Corp. common stock currently trades for \$70, but you believe the company’s stock will appreciate due to strong sales in the next six months. 6 month European put options on the stock have an exercise price of \$65 and a premium of 75. The annual risk free rate is 3%. You want to create a portfolio that provides the same return as a 6 month european call on Davis Corp. that has a strike price of \$65. Which of the following steps must be done to achieve the payoff you desire?

A. Sell a put option and receive \$75 for the option premium.

B. Sell the stock and receive \$7000.

C.Borrow \$6404.64 at the risk free rate today.

D. Cannot be determined.

Q14: What should be the price of a 3 month European call option on Davis stock that carries a \$65 strike price? Round intermediate steps to four decimals and your final answer to two decimals. Do not use the dollar sign when entering your response.

Q15: Suppose that 6 month European call options with an exercise price of \$65 are selling for \$6.85. Which of the following statements is true?

A. An arbitrage profit of approximately \$15 per call can be made by selling calls in the market and creating a long position in synthetic call options.

B. An arbitrage profit of approximately \$15 per call can be made by purchasing calls in the market and creating a short position in synthetic call options.

C.The market is in equilibrium.

D.None of the above

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# Use the following information

Use the following information about an interest rate SWAP contract to answer the following question Assume for the date court traction) Capital Cibes wants to pay LIBOR 27 WCB wants to make a book of \$84,000, what the rate should CIBC pay? 10 Counter Parties Notional Principal Foxed Rate paver Food Rite Floating Rate Payer Floating Rate Floating Ratement Efective date Maturity Date CIBC & Capital Cities \$2.000.000 CIBC XXX per annum Capital LOR27p 6 months December 21 2020 December 21 2022 Teem Mears) Payrole Discount Receverte Piscount 200 Factor actor 05 537 0.9742 5455 09738 10 5.87 09846 5975 09437 15 5949 09171 GM 09145 20 6211 09865 632 OB 25 630 08584 6424 08550 3.0 6.42% 08237 6541 08269 CIBC should pay percent. (Do not found intermediate calculations. Round your final answer to the nearest basis point)

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# Use the following information

Use the following information to answer both Problem 1 and Problem 2. Consider ABC corporation. ABC’s yearly (operating) free cash flows are expected to equal £200, each year forever, i.e., cash flows are perpetual. The discount rate for these cash flows is 20%; the risk-free interest rate is 4%.

1. Now assume that markets are perfect except that firms must pay corporate taxes. The tax rate t = 0.25.
a. Suppose that ABC is all equity financed. What is the value of ABC Corp.? What is the required return on ABC’s equity?

b. Now, suppose that ABC decides to issue perpetual debt worth £400. The proceeds from the debt issue will be paid to ABC’s shareholders. This debt issue is risk free. ABC’s debt will consist of perpetual bonds which make an interest payment each year forever. ABC’s free cash flows will not be affected by the debt issue. After the debt issue, what is the value of ABC Corp.? What is the required return on ABC’s equity?

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# Use the following information

Use the following information for the next several questions. A 30-year, \$1000 par value bond with a 8% annual coupon bond sells for \$1.250. Preferred stock pays \$7 per year and has a selling price of \$80? Stock’s beta is 1.2, the 30 day T-bill rate is 4%, the market risk premium is 6%, equity-bond RP is 5%, the common stock dividend payment at the end of year 1 is \$5, the stock price is \$55 and the dividend growth is 4%. Tax Rate is 20%. Targets: 40%, 10%, 50%. What is the cost of debt for ACME company ?

O 8.09% O 8.75% O 6.15% O 5.9396 0 11.15%

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# Use the following information

1. Use the following information for a project under consideration by Bulldog industries to answer the questions that follow

Initial Cost Time 1 Time 2 Time 3 Time 4 Time 5

-\$3,280,000 \$600,000 \$728,000 \$845,000 \$670,000 \$480,000

PV

-3280000 545454.55 601652.89 634861.01 457619.02 298042.23

The project has a salvage value at time 5 of \$1,250,000 and a project cost of capital of 10% and an internal rate of return of 10.345%

1. Calculate the NPV of the project (5 points)
2. Calculate the payback period for the project (5 points)
3. Calculate the discounted payback period for the project (5 points)
4. Calculate the profitability index for the project (5 points)
5. Conduct sensitivity analysis for the project assuming that the future cash flows (not including the salvage value), the salvage value, and the project cost of capital may all be 10% above or 10% below their initial valu Report your findings in a table similar to the one in the notes (see example setup below) and explain your results (what variable presents the most risk etc.) (10 points)
 NPV when there is a change in: Change in Variable Future Cash Flows Salvage Value Cost of capital -10% base +10%
1. Conduct a scenario analysis assuming the best case is when all three variables in e) move by 10% in a direction that benefits the firm and a worst case when all three variables in e) move in a direction that is not beneficial to the firm. Assume the base, best and worst case are equally likely. Make sure to calculate the coefficient of variation and explain your results. (10 points)
1. Is the following statement true or false? Explain in detail using the equations or an explanation of each – Show why it is true or false – you will not get full credit if you just reword the statement… (5 points)

“Using net present value to evaluate a project will not always provide the same reject / accept decision as using the internal rate of return”

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# Use the following information:

Use the following information:

 Purchase price \$1,850,000 Cash flow from operations: Year 1 2 3 4 5 NOI \$175,000 \$200,000 \$225,000 \$250,000 \$275,000 Debt Service \$140,000 \$140,000 \$140,000 \$140,000 \$140,000 Cash Flow at sale: Sale Price: \$2,137,500 Cost of sale: \$64,125 Mortgage balance: \$1,603,125 Going in Cap Rate 8% Required return, UNLEVERED CF’s (APR) 10% Required return, LEVERED CF’s (APR) 15%

Compute a value for the property using direct capitalization and the first year’s NOI: 2187500

Calculate the initial equity investment in this property, assuming UNLEVERED CF’s (i.e. LTV = 0). Enter a positive number.,Find the UNLEVERED net sale proceeds from the sale of the property:,Calculate the UNLEVERED BTCF to equity in year 2. Don’t overthink this…,Calculate the UNLEVERED BTCF to equity in year 4. Don’t overthink this…,Calculate the TOTAL UNLEVERED CF in Year 5.,Compute the NPV of the property based on UNLEVERED cash flows. Round to the nearest dollar.,Calculate the IRR of the property, based on UNLEVERED CF’s. Express your answer in percent. Round to TWO decimal places.

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# Use the following information

Use the following information to answer questions 20 through 25:

Acme Services’ CFO is considering whether to take on a new project that has average risk. She has collected the following information:
• The company has outstanding bonds that mature in 15 years. The bonds have a face value of \$1,000, an annual coupon of 7.5%, and sell in the market today for \$1,150. There are 15,000 bonds outstanding.
• The risk-free rate is 3%.
• The market risk premium is 5%.
• The stock’s beta is 0.9. The company’s tax rate is 35%.
The company has 100,000 shares of preferred stock with a par value of \$100. These shares are currently trading at \$73, and pay an annual dividend of \$3.50.
• The company also has 2.250,000 common shares trading at \$15. These shares last paid an annual dividend of \$0.33
What is the value of Acme’s debt? trix
\$21.25M
\$20.25M
\$17.25M
\$18.25M
\$19.25M
What is the cost of Acme’s preferred shares?
4.79%
04.01%
5.15%
3.29%
6.94%
What is the weight of Acme’s preferred shares?
13.55%
12.52%
15.75%
14.96%
16.33%

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# Use the following information

Use the following information about a hypothetical government security dealer named J.P. Groman. (Market yields are
in parentheses; amounts are in millions.) (LG 22-1)

Assets Liabilities and Equity
Cash \$ 10 Overnight repos \$170
1-month T-bills (7.05%) 75 Subordinated debt
3-month T-bills (7.25%) 75 7-year fixed (8.55%) 150
2-year T-notes (7.50%) 50
8-year T-notes (8.96%) 100
5-year munis
(floating rate)
(8.20% reset
every six months) 25

What is the repricing or funding gap if the planning
period is 30 days? 91 days? 2 years? (Recall that cash is
a noninterest-earning asset.)

What is the impact over the next 30 days on net interest
income if all interest rates rise by 50 basis points?

The following one-year runoffs are expected: \$10 million
for two-year T-notes, \$20 million for the eight-year
T-notes. What is the one-year repricing gap?

If runoffs are considered, what is the effect on net interest income at year-end if interest rates rise by 50 basis
points?

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# Use the following information

Use the following information to answer the next 2 questions

Today is 4/20/2020. A has an issue of bonds outstanding that is currently selling for \$1,200. The bonds have a face value of \$1,000, a coupon rate of 10% paid annually and a maturity date of 4/20/2040. The bonds may be called starting 4/20/2025 for 104% of the par value (4% call premium)

1) The expected rate of return if you buy the bond and hold it until maturity (Yield to maturity), is

7.97%
7.50%
6.38%
4.99%
8.02%
Today is 4/20/2020. A has an issue of bonds outstanding that is currently selling for \$1,200.. The bonds have a face value of \$1,000, a coupon rate of 10% paid annually and a maturity date of 4/20/2040. The bonds may be called starting 4/20/2025 for 104% of the par value (4% call premium
2) The expected rate of return if the bond is called on 4/20/2025? (Yield to call) is:
0 6.41%
7.00%
7.50%
5.50%
5.97%

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# Use the following information

Use the following information to answer questions

You have determined the following costs of capital:

Before-tax cost of debt: 10%

Cost of preferred stock 10%

Cost of retained earnings 14%

Cost of new stock 15%

Assume that the corporate tax rate is 40%, and the most recent balance sheet shown here reflects the optimal capital structure.

 Great Expectations Balance Sheet Dec. 31, 2015 Assets Liabilities and Equity Cash \$ 150,000 Long-Term Debt \$ 600,000 Accounts Receivable 190,000 Preferred Stock 350,000 Inventories 300,000 Common Stock 500,000 Plant and Equipment, net 810,000 Total Assets \$ 1,450,000 Total Liabilities and Equity \$ 1,450,000

1. Calculate the weighted average cost of capital using retained earnings for the equity component.

2. Calculate the weighted average cost of capital using newly issued common stock

for the equity component.

3. The firm expects to have \$700,000 in additions to retained earnings in the coming year. Calculate the equity break point.

4. The expected return on the market is 15%, the risk-free rate is 5%, and the beta for

Alpha Corporation is 1.3. What is your estimate of the cost of retained earnings using the CAPM approach?

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# Use the following information

Use the following information on a convertible bond issue from for problems.

You are examining a mortgage backed security with the following features:

• \$500 million in underlying mortgages (e.g., principal value = \$500 million)

• Three time tranches, A, B, and where the par value of A is \$200 million, the par value of B is \$100 million, and the par value of C is \$200 million. A is senior to B and B is senior to C.

• The weighted average coupon (WAC) is 6%; the pass through rate is 5%

• The security has a weighted average maturity (WAM) of 3 years and payments are made annually (e.g., so it will only make 3 payments).

• assume that there is no default and no prepayment.

– What is the value of X in the tables shown in the PDF file?

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# Use the following information

1. Use the following information to answer the next three questions.

Franklin Inc. is considering a project that has an initial outlay of \$100 million and produces the following cash flows (in order) over the next five years:\$10 million, -\$5 million, \$40 million, \$45 million, \$20 million. The company will finance the project by issuing \$25 million of debt, \$60 million of common stock, and \$15 million of preferred stock. The company plans to issue new debt, new preferred stock and new common stock to finance the project. Franklin’s 5 year, 10% coupon debt is priced to yield 10%. New 5 year debt will also carry an 10% coupon, but the company will incur a 7.5% floatation cost of par. Franklin’s common stock paid a \$2 dividend last year, which is expected to grow at a 5% rate forever. The common stock is currently worth \$50, but the company will pay a 2% floatation cost on new shares. Franklin’s preferred stock pays a \$1 dividend and is worth \$15. New preferred shares will incur a floatation cost equal to 1% of their market value. The company’s marginal tax rate is 45%.

Find the company’s after tax cost of debt. Round intermediate steps and your final answer to four decimals and enter your answer in decimal format (.XXXX).

6.25 points

QUESTION 7

1. Find the company’s cost of external equity. Round intermediate steps and your final answer to four decimals and enter your answer in decimal format (.XXXX).

6.25 points

QUESTION 8

1. Should the project be accepted?

 Yes No The company would be indifferent between accepting and rejecting the project. Cannot be determined.

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# Use the following information

Use the following information to answer questions 44 and 45

– A 3-year 12% corporate bond paying interest annually

– 3-year bonds are currently offering yields of:

oProvince of Ontario: 7.5%

oCity of Vancouver: 8.75%

oABC Inc.: 10.25%

44) What was the discount rate of this type of bond, when this bond was issued?

a) 6%

b) 7.5%

c) 10.25%

d) 12%

45) What has happened to interest rates since this bond was issued?

a) They have increased

b) They have decreased

c) They have stayed the same

d) Cannot determine from above information

Use the following information to answer question 46

– A 4-year semi-annual 10% bond is trading in the marketplace

46) What is the present value of the principal (assuming a discount rate of 11.5%)

a) 10%

b) \$80.50

c) 11.5%

d) \$63.94

47) A \$100,000, 9.85% corporate bond, maturing January 28, 2014, is bought on Tuesday,

January 26, for 108.25. Assuming no holidays during that week, what is the total price the

a) \$100,000.00

b) \$108,250.00

c) \$108,276.99

d) \$110,860.00

48) Please calculate the PV (present value) of the first coupon of a 5% four-year bond

with a par value of \$100, with a 6% discount rate or rate of return

a) \$1.67

b) \$2.00

c) \$2.43

d) \$4.00

49) A provincial bond with an initial term of 25 years will mature in 2.5 years. The initial

coupon rate was 6.5%. Today, another province is issuing a bond with the same maturity

date as our 25-year bond and it is paying a coupon rate of 7.20%.

What is the market value of the 2nd coupon of this bond?

a) \$3.03

b) \$6.06

c) \$6.50

d) \$87.02

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# Use the following information

Use the following information (from Higgins Ch 3, #18) to answer the following questions Wind Resources (WRI) is contemplating developing an attractive wind farm site it owns in Southern California. A consultant estimates that at the current natural gas price of 6 cent/kWh, immediate development will yield a profit of \$10 million. However, natural gas prices are volatile. Suppose the price in one year will be either 8 cents/kWh or 4 cents/kWh with equal probability. According to the consultant WRI’s profit will either jump to \$30 million or fall to \$10 million. Because the company won’t receive these profits for one year, discount them to the present at 25%. WRI is now considering whether to wait to develop the wind farm.

Draw a decision tree
What should WRI do? What is the NPV of the project?
What is the value of the option to wait?
Suppose the price in one year will be either 12 cents/kWh or 2 cents/kwh with equal probability. According to the consultant WRI’s profit will either jump to \$60 million or fall to -\$30 million What is the new value of the option to wait?

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# Use the following information

Use the following information for Problems # 4 and 5:

Income Statement

For the Year

Net sales

\$827,500

COGS

611,800

Depreciation

23,100

EBIT

\$192,600

Interest

9,700

Taxable income

\$182,900

Taxes

6,200

Net income

176,700

Balance Sheet

Beginning of Year

End of Year

Cash

\$ 38,200

\$43,700

Accounts receivable

91,400

86,150

Inventory

203,900

214,600

Net fixed assets

516,100

537,950

Total assets

849,600

\$882,400

Accounts payable

\$136,100

104,300

Long-term debt

329,500

298,200

Common stock

75,000

82,000

Retained earnings

309,000

397,900

Total Liab. & Equity

\$849,600

882,400

There are 100,000 shares trading at \$12.50 per share at the beginning of the year and at \$15 per share at the end of the year.

Problem #4

Show the computation of Cash-Flow from Assets by computing Operating Cash-Flow, and Capex, and Working Capital Investment. Show how this Cash-Flow is distributed to Debtholders (or Creditors) and Stockholders. Explain if any new issue of debt or equity has been made or any debt redemption and stock buybacks.

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# Use the following information

Use the following information to answer the? problem(s) below.

Consider two banks. Bank A has 1000 loans outstanding each for? \$100,000, that it expects to be fully repaid today. Each of Bank? A’s loans have a? 6% probability of? default, in which case the bank will receive? \$0 for each of the defaulting loans. Bank B has 100 loans of? \$1 million? outstanding, which it also expects to be fully repaid today. Each of Bank? B’s loans have a? 5% probability of? default, in which case the bank will receive? \$0 for each of the defaulting loans. The chance of default is independent across all the loans.

The expected overall payoff to Bank B? is:

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# Use the following information

1. Use the following information to answer the next two questions.

You have \$40 million to invest today in machines that increase production at your facility. After doing your research, you have narrowed it down to three possibilities. The cash flows associated with each machine are listed below. Your company’s WACC is 10%.

 Year Cash Flows: Machine H (in millions) Cash Flows: Machine I (in millions) Cash Flows: Machine J (in millions) 0 -30 -10 -15 1 5 7 8 2 5 7 8 3 -10 8 4 20 5 20 6 20

Find the NPV of Machine H (in millions). Round your final answer to four decimals. Do not use the dollar sign when entering your response.

1. Which machine or machines should you purchase if you evaluate each project using EAA analysis?

 H I J H&I H&J I&J None of the above

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# Use the following information

1. Use the following information to answer the next four questions.

The cash flows for two mutually exclusive projects are shown in the following table. Investors require a 7% rate of return for each project.

 Year Cash Flows: Project C (in millions) Cash Flows: Project D (in millions) 0 -160 -160 1 -35 50 2 50 40 3 50 40 4 -20 -30 5 90 60 6 95 60

Find the profitability index for project D. Round intermediate steps and your final answer to four decimals.

1. Which project or projects would you take based on the profitability index?

 C D C&D You’d be indifferent between accepting and rejecting C or D None of the above
1. Find the crossover rate. Round your final answer to four decimals and enter it in decimal format (.XXXX)

1. Find project C’s MIRR.

 8.1254% 7.1504% 6.1257% 9.3264% None of the above

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# Use the following information

1. Use the following information to answer the next six questions.

You are evaluating independent projects with cash flows shown below. The WACC is 12%.

 Year Cash Flows: Project A (in millions) Cash Flows: Project B (in millions) 0 -125 -140 1 40 85 2 30 50 3 85 -20 4 -10 -15 5 70 90

You are concerned about short-term financing, so you decide to evaluate each project in terms of its payback period. Your required payback period is 4 years. Which project or projects would you take?

 A B A&B You’d be indifferent between accepting and rejecting either project. None of the above
1. Find the discounted payback period (in years) for project B. Round intermediate steps and your final answer to four decimals. Do not use words when entering your response.

1. Suppose you decide to the discounted payback method to evaluate the projects, with a required payback of 4 years. Which project or projects would you accept?

 A B A&B You’d be indifferent between accepting and rejecting either project None of the above
1. Which project or projects would you take based on NPV?

 A B A&B You’d be indifferent between accepting and rejecting either project None of the above
1. What is the modified internal rate of return for project A? Round intermediate steps to four decimals.

 .2059 .1241 .238 .1978 None of the above
1. Which project or projects would you take based on MIRR?

 A B A&B You’d be indifferent between accepting and rejecting either project None of the above

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# Use the following information

Use the following information to answer the next three questions. You
are interested in selling a \$1000 treasury bill that matures in 150 days
to a dealer. The dealer quotes a bid yield of .0135 and an ask yield of
.0127. How much will the dealer pay you for your treasury bill? Round
decimals. Do not use the dollar sign or words when entering your
response.
Assume that the dealer purchases your treasury
bill. What is the bond equivalent yield earned by the dealer? Round
intermediate steps to four decimals.
0.0311
.0330
.0129
.0138
Assume that the dealer purchases your treasury bill. What is the
effective annual return eamed by the dealer? Round intermediate steps to
four decimals.
.0136
.0139
.0129
.0333

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# Use the following information

Use the following information to answer the next three questions. Echo
bank currently has \$300 million in transaction deposits on its balance
sheet. The current reserve requirement is 12 percent of transaction
deposits. The Federal Reserve plans to increase the reserve requirement
to 15 percent. Echo withdraws all excess reserves and gives them out as
loans. The cash to deposit ratio is 10% What is Echo’s loan account
balance (in millions) prior to the change in the reserve requirement? Do
not use the dollar sign or words when entering your response. Enter
your response in terms of millions of dollars (EX: enter 20 for 20
million dollars). QUESTION 6 What is Echo’s reserve entry (in millions)
on its balance sheet prior to the change in the reserve requirement?
24
39.6
45
36
None of the above
What is Echo’s loan account
balance (in millions) after the change in the reserve requirement? 285.6
221
224.40
306
255

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# Use the following information

Use the following information of the next 3 questions:

Global Technology considers investing a total of \$50,000 in cloud computing.

• This \$50,000will be 100% depreciated over the three-year life of the project.
• The project will require an initial \$10,000 investment in NWC and the tax rate is 20%.
• At the end of the project’s life, the fixed assets will be worth \$20,000, and Global Technology will recover \$9,000 that was tied up in working capital.
• The OCF for the next 3 years is \$32,000.

1. Calculate the CFFA in Yr 0

2. Calculate the CFFA in Yr 3

3. Calculate the NPV of this project with a discount rate of 20%.

[Hint: the CFFA of Year 1 and Year 2 is \$32,000]

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# Use the following information

Use the following information to answer this question and the next question.
The Bozo Company has an 8% coupon bond outstanding. The bond makes semiannual coupon payments and has 12 years remaining to maturity. Its market price is \$846.64. It is issuing a new 20-year bond to finance a factory to make new Bozos. The new bond will make annual coupon payments.

What coupon rate should be set for the new bonds of the Bozo Company for these bonds to sell at par?

 9.52% 10.00% 10.25% 10.51%

Use the following information to answer this question and question 7.
Bonds of RAR Foods are selling in the market for \$854.66. These bonds carry a 9 percent coupon paid semiannually, and have 15 years remaining to maturity.

1. What will be the bond’s price if yield to maturity drops to 10%, assuming that all other factors remain the same?

 \$888.88 \$691.76 \$858.79 \$923.14

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# Use the following information

Use the following information about a hypothetical government security dealer named J.P. Groman. (Market yields are in parentheses; amounts are in millions.) Assets Liabilities and Equity Cash \$ 27 Overnight repos \$ 228 1-month T-bills (7.22%) 109 Subordinated debt 3-month T-bills (7.42%) 109 7-year fixed (8.72%) 167 2-year T-notes (7.67%) 67 8-year T-notes (9.13%) 117 5-year munis (floating rate) (8.37% reset every six months) 42 Equity 76 Total \$ 471 Total \$ 471

a. What is the repricing or funding gap if the planning period is 30 days? 91 days? 2 years? (Recall that cash is a non-interest-earning asset.)

b. What is the impact over the next 30 days on net interest income if all interest rates rise by 40 basis points?

c. The following one-year runoffs are expected: \$16 million for two-year T-notes, \$26 million for the eight-year T-notes. What is the one-year repricing gap?

d. If runoffs are considered, what is the effect on net interest income at year-end if interest rates rise by 40 basis points?

 30 days ______? million 91 days ______? million 2 years ______? million

Net income will (increase/decrease) by ______?

One year repricing gap _____ million?

Net interest income will (increase/decrease) by ______?

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# Use the following information

Use the following information for the next two questions: Lucifer, Inc. is holding a two-week carpet sale at Lux, a local warehouse store. Lucifer, Inc. plans to sell carpets for P500 each. The company will purchase the carpets from a local distributor for P350 each, with the privilege of returning any unsold units for a full refund. Lux has offered Lucifer, Inc. two payment alternatives for the use of space. Option 1 – A fixed payment of P5,000 for the sale period. Option 2 – 10% of total revenues earned during the sale period.

1. Assume Lucifer, Inc. will incur no other costs. At what level of revenues will Lucifer, Inc. be indifferent between the two payment options?
a. P10,000
b. P17,000
C. P50,000
d. 0
2. At a sales level of 100 units, the degree of operating leverage under Option 2 is
a. 1.50
b. 5.00
c 5.50
d. 1.00

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