Fill in the blanks.

1. An annuity whose payments occur at the beginning of each period is called (annuity due/ordinary annuity).

2. If a bond sells at a premium, the price of a bond would be (lower/higher) than par value and the coupon rate would be _________ (lower/higher) than the bond's yield to maturity.

3. The cost of the debt to the company issued bonds would be(higher/lower) than the required return to bondholders.

4. If NPV of the project is greater than zero, PI should be ________ (lower/higher) than 1, and IRR should be _________ (lower/higher) than cost of capital.

5. Generally speaking, stock repurchases have a (positive/negative) signaling effect.

Solve the following questions

1. (5%) Gumil Co. plans to purchase a new machine for $600,000 with 12%, 5-year loan. Assume the installment payment would be made immediately. What is the annual payment?(PVIF10%,5=0.6209, PVIFA10%,5= 3.7908)

2. (10%) An investment portfolio includes stock A and B. The relevant figures are:

Stock	% of portfolio	Beta	Expected return	standard deviation
A	70%	1.5	25%	6%
B	30%	0.6	8%	3%

(1) Which stock is riskier in terms of stand-alone risk? Which stock is riskier in terms of systematic risk?

(2) What is the expected return of the portfolio?

(3) What is the of the portfolio?

3. (10%) You are considering buying common stock in Fabul Inc. The firm yesterday paid a dividend of $2. You have projected that dividends will grow at a rate of 6% per year indefinitely. The firm's beta is 1.5, the risk-free rate is 3%, and the market return is 13%.

(1) What is the required return of the common stock?

(2) What is the intrinsic value of the common stock?

(3) If the market price of this stock is $35 per share, would you buy or sell the stocks? Why?

4. (10%) The Leau Company manufactures products with the price of $200 per unit; the fixed costs are $1,000,000 for up to 30,000 units; variable costs are $150 per unit. (1) What is the firm's EBIT at sales of 30,000 units?

(2) What is the quantity at break-even point?

(3) What is the sales at break-even point?

Comprehensive problems.

1. (18%) Pural Co. is considering the purchase of a new machine for $900,000 and the installation cost would be $100,000. For the coming 5 years, sales will be $840,000 per year and annual operating costs (exclusive of depreciation) will be $500,000. The purchase of this machine would necessitate an increase in inventory of $100,000. This machine has an expected life of 5 years, after which it will have no salvage value. Assume that straight-line depreciation is used.

The firm's cost of capital is 10% and the firm's tax rate is 25%.

(1) What is the initial outlay associated with this project?

(2) What are the annual after-tax cash flows associated with this project for years 1 to 5? (3) Should this machine be purchased?

(PVIF10%,5=0.6209, PVIFA10%,5= 3.7908)

2. (17%) Geler co. now has an investment plan which needs 8 million dollars. The company has two financing proposals.

Plan A is to borrow $2million at 10% and $6 million will need to sell stocks at $40 per common share. Plan B would involve a higher financial leverage. $4 million would be raised by selling bonds with an interest rate of 10% and the remaining $4 million would be raised by selling common stock at the $40 price per share. The corporate tax rate is 25%.

(1) Find the EBIT indifference level associated with the two financing plans. (2) If a detailed financial analysis project that long-term EBIT will be in the range of $1 million to 1.5 million annually, which plan will generate higher EPS?

(3) If the fixed cost is $500,000, please calculate DOL, DFL and DCL at the point of EBIT being $1 million under plan B.