1.McGilla Golf has decided to sell a new line of golf club. The clubs will sell for $730 per set and have a variable cost of $360 per set. The company has spent $150,000 for a marketing study that determined the company will sell 75,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,500 sets per year of its high-priced clubs. The high-priced clubs sell at $1,200 and have variable costs of $540. The company will also increase sales of its cheap clubs by 11,000 sets per year. The cheap sets sell for $340 and have a variable of $125 per set. The fixed costs each year will be $11,200,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $24,500,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,500,000 that will be returned at the end of the project. The tax rate is 40 percent. Information for computing the cost of capital is given in the table below.

a. Calculate the payback period, the NPV and the IRR.

b. Test the sensitivity of NPV and IRR to a $50 decrease in the selling price of the $730 clubs.

c. Test the sensitivity of NPV and IRR to a $20 increase in the variable cost of the ($730) clubs.

Book Value of Debt - $2,500,000,000

Market Value of Debt -$2,750,000,000

Book Value of Equity -$3,500,000,000

Market Value of Equity -$4,500,000,000

Expected Dividend for next year -$2.35

Growth rate of dividends -4%

Current stock price -$23.50

Bond information Coupon rate = -5%, maturity = 15 years, maturity value =$1,000 and the current price is 1,117.63. Assume interest is paid semiannually.

2.A piece of newly purchased industrial equipment costs $4,200,000, has a

salvage value of $150,000 and is classified as a five-year property under MACRS. Calculate the

annual depreciation allowances and the end-of-year book values for this equipment. If the equipment

is sold for 30% of the initial cost in year 3, what is the after-tax cash flow from the sale if the

tax rate is 35%?

3. Consider credit terms of 3/30, net 60. What effective rate does a buyer pay by not

taking the discount? What would be the APR if one were quoted?

4.Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on

the stock over the next nine years, because the rm needs to plow back its earnings to fuel growth.

The company will then pay a dividend of $15 per share 10 years from today and will increase the

dividend by 5 percent per year thereafter. If the required return on this stock is 14 percent, what

is the current share price?

5.Cross-Rates and Arbitrage. Suppose the Japanese yen exchange rate is 82 = $1, and

the British pound exchange rate is 1 = $1.47.

a. What is the cross-rate in terms of yen per pound?

b. Suppose the cross-rate is l24 = 1. Is there an arbitrage opportunity here? If there is,

explain how to take advantage of the mispricing.