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1. A 10-year annuity paying ax at the beginning of every year (i.e. the first of ten payments is made today) is worth the same (today) as an annuity of $300 payable every 6 months for 10 years (20 payments), the first payment of which is due 66 months from now. If the annual interest rate (compounded annually) is 3%, find x. a. $232.73 d. $508.11 b. $502.48 e. $521.42 C. $506.23 2. A machine costing $3,000 must be replaced at the end of 8 years. The resale value of the machine at the time of replacement is $600. At what annual discount rate (compounded annually) would it be equally economical to use a similar machine costing $4,000 with a life of & years and a resale value of $1,900? (Assume that there is no taxes.) a. 2.4% d. 3.39% b. 2.7% e. 3.6% C. 3.0% 3. What is the present value of 15 payments of $100 each received every 18 months ( the first one occuring in 18 months from now), if the annual discount rate (compounded annually) is 9%? a. $620.43 d. $951.28 b. $875.56 e. $1,209.10 C. $930.61 4. Corporate managers can maximize shareholder wealth by choosing positive NPV projects because: a. all investors have the same preferences. b. the unhappy shareholders can sell off their shares. C. given the existence of financial markets, investors will be satisfied with the same real investment decisions regardless of personal preferences. d. managers are wiser than shareholders regarding investments. 8. none of the above.1. (20 points modal) Stiphla Inc.'s real assets are expected to generate earnings before interest and taxes (EBIT) of $102,030 at the end of every year in perpetuity. The firm is currently financed by 50,000 shares each worth $6.11 and by $130 000 worth of perpetual debt issued at a rule of 125%. The corporate tax rule is 35%%. Ignore personal taxes and bankruptcy costs. a. (2 polan) What is the current total firm value of Stiphla Inc.? b. (3 paints) What is the current expected return on Stiphla's equity! c. (2 point) What is Stiphis's weighted average cost of capital (WACC) d. (2 paints) Show that the value of the firm can be obtained by discounting its after-tax earnings at the weighted average cost of capital. Janine Finch, the CFO of the company, has just found out that Sciphla could issue an additional $130 000 worth of perpetual debt to buy back some equity. However, because the new debt will be junior to the original debt, Sciphla will have to pay a rate of 14% on that new debt. 6. (2 points) What is the value of the firm after it goes whead with the new debt issue? f. (4 points) What is the new expected return on the firm's equity? g. (2 points) Explain why the shareholders are better off (in terms of their total wealth). h. (3 paints) What is Sciphla's new weighted menage cost of capital (WACC)?2. (10 pours modal) Firms A and Bare both unlevered. The shares of both companies are currently trading at 5100, and both offer an annual pre-tax return of 106. In the case of firm A, the return is entirely in the form of a dividend yield (ie. the company pays a regular annual dividend of $10 a share _ In the case of firm H, the return comes entirely in capital gain the shares appreciate by 10% a year). Suppose that an investor buys a share of each firm today, and plans to sell them in 10 years. Suppose that dividends and capital gains are both tased at 3016. a. (5 points) What is the annual after-tax yield (rate of return) on firm As share over the 10-year period? b. (5 points) What is the annual after-tax yield (rate of return] on firm B's share over the 10-year 3. (25 points whal) The Jack & Diane (ID) Corporation is considering a new 5-year project. Since this project is very different from ID's current operations, the adjusted present value will be used to value the project. The project requires an initial lowestment of $750,000 in new assets, which will be depreciated straight-line to O over the project's 5-year life. These assets will be worthless in five years, Le., they will not be resold ( Assume that the depreciation tax shields can be discounted at the project discount rate). Each year for five years, the project is expected to generate pre-tax revenues of $600,000 and to require pre-tax costs of $240,030. The entire project will be financed through a 5-year bank loan with an annual rate of 1046. The principal on the loan will be repaid in equal installments of $150,000 each (Le., each year, the company pays $150,000 in principal, and pays the interest on the outstanding loan]. It is estimated that the pre-was costs [payable at time zero) of negotiating the loan will be 49% of the amount borrowed. The project's risk is very similar to the risk of Tommy & Gina (TG] Inc's assets. This firm is currently financed by 100,000 shares worth $1250 each, and $750,000 worth of debt. The bets of TG's stock is 15, and the company barrows at a rate of I1 16. The riskfree rate in the economy is 8%%, and the expected return on the market is IRk. The current corporate tax rate is 459% (assume that it applies to both JD and TG). Ignore personal bars. a. (8 points) What would be the appropriate discount rate for the project, if it were all-equity financed