1.Based on the following project assumptions, develop a capital budgeting analysis and determine the NPV and the IRR for the project. State your recommendation.

Equipment invoice$300,000

Transportation and installation$85,000

Training$20,000

Projected incremental increase in sales in YR 1$245,000

Sales escalate at a rate of 9% per year after YR 1.

Expenses in YR 1 are projected to be 32% of the capital investment.

Expenses escalate at a rate of 4% per year after YR 1.

Depreciation is straight line, 5 years.

Salvage value at the end of YR 3$88,000

WACC10%

Project life3 years

Tax rate40%

Tax credits may be used against other income.

2.European bonds pay coupons annually, while U.S. bonds pay coupons semiannually. If the coupon rate on a European bond is 12% (annual coupons), what is the comparable coupon rate for a U.S. bond (semiannual coupons) assuming all other factors are equal?

3.Calculate the WACC given the following assumptions:

a.Company tax rate is 40%.

b.Company has an outstanding bond issue with a 6-7/8 coupon, market price of 102-5/8 (percent of 100% par, in 32nds), semiannual coupon payments, and 12 years to maturity.

c.Company has an outstanding preferred stock issue paying an 8% dividend, $100 par, and a market price of $98.35. Flotation (issuance) costs on a new issue are 8%.

d.Common equity financing is through retained earnings. The company has a beta of 1.22. The market risk premium is 6% and the risk-free rate is 4%.

The company's capital structure is 40% debt, 10% preferred, and 50% common equity.

4.You are looking at two investment options, Option A and Option B. Following are their populations of returns for the last five years:

Option AOption B

Year 115%8%

Year 222%12%

Year 38%10%

Year 42%7%

Year 513%9%

Which option is preferable on a relative measure?

5.Given the following capital project data:

Cost of automation system (invoice):$730,000

Transportation and installation:$140,000

Training:$100,000

Firm's WACC:9%

Firm's tax rate:35%

Depreciation 5 years, straight line

Life of project:3 years

Salvage value:$385,000

Annual cost savings (net):$105,000

Increased annual sales (net):$200,000

Calculate (1) the payback, (2) the discounted payback, (3) the NPV, (4) the IRR, (5) the MIRR, and (6) your recommendation on the project.

6.Last year BBB Inc. had $275 million of sales, and it had $190 million of fixed assets that were used at 75% of capacity.In millions, by how much could BBB sales increase before the need to increase its fixed assets?

7.XYZ Corporation's budgeted monthly sales are $10,000, and they are constant. Its customers pay as follows: 30% pay in the first month and take the 2% discount, while the remaining 70% pay in the month following the sale and do not receive a discount.Purchases for next month's sales are constant at 60% of projected sales for the next month.Payments for labor costs, rent, and taxes are 25% of sales for the month.Construct a cash budget for a typical month. Calculate the average cash gain or loss during the month.

8.You were hired as a consultant to Quigley Company, whose target capital structure is 30% debt, 20% preferred, and 50% common equity.The interest rate on new debt is 7.50%, the yield on the preferred is 6.20%, the cost of retained earnings is 13.25%, and the tax rate is 40%.The firm will not be issuing any new stock.What is Quigley's WACC?

9.Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50sometime during the next 6 months.For $250.30 you can buy a 6-month call option giving you the right to buy 100 shares at a price of $25 per share.If you buy this option for $250.30 and Johnson's stock price actually rises to $48, what would your net profit be?

10.The December CBOT Treasury bond futures contract is quoted at 92-19.If annual interest rates go up by 1.50 percentage points, what is the gain or loss on the futures contract?(Assume a $1,000 par value, and round to the nearest whole dollar.)