Please answer questions. e- textbook Corporate Finance, 3rd Jonathan 'Berk and Peter DeMarzo

1. Which do you prefer: a bank account that pays 6% per year (EAR) for three years or: a. An account that pays 3% every six months for three years? b. An account that pays 9% every 18 months for three years? c. An account that pays 0.6% per month for three years? a. An account that pays 3% every six months for three years? If you deposit $1 into a bank account that pays 6% per year for three years, you will have $._________ (Round to five decimal places.) If you deposit $1 into a bank account that pays 3% every six months for three years, the amount you will receive after three years is $______ round to five decimal places 3. You are considering moving your money to new bank offering a one-year CD that pays an 2% APR with monthly compounding. Your current bank's manager offers to match the rate you have been offered. The account at your current bank would pay interest every six months. How much interest will you need to earn every six months to match the CD? First convert APR into a monthly discount rate: The monthly discount rate is _____% round to four decimal places 4. You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay the minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay? The original loan payment is $________ round to nearest cent 6. Assume that a bond will make payments every six months as shown on the following timeline: Period 0 1 $20.00 2 27 $20.00 $20.00 28 $1,020.00 a. What is the maturity of the bond (in years)? b. What is the coupon rate (in percent)? c. What is the face value? a. What is the maturity of the bond (in years)? The maturity of the bond in years is _______years (round to nearest integer) 8. You are considering an investment in a clothes distributer. The company needs $103,000 today and expects to repay you $122,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17%. What does the IRR rule say about whether you should invest? What is the IRR of this investment opportunity? The IRR of this investment opportunity is ______%. (Round to one decimal place.) 9. You have been offered a very long-term investment opportunity to increase your money one hundredfold. You can invest $1,600 today and expect to receive $160,000 in 40 years. Your cost of capital for this (very risky) opportunity is 21%. What does the IRR rule say about whether the investment should be undertaken? What about the NPV rule? Do they agree? What is the IRR? The IRR of this investment opportunity is _____%. (Round to one decimal place.) 14. Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $24 million upfront investment and will generate $20 million in savings for Facebook each year for the next 3 years. The second bid from Cisco requires a $89 million upfront investment and will generate $60 million in savings each year for the next 3 years. a. What is the IRR for Facebook associated with each bid? b. If the cost of capital for each investment is 15%, what is the net present value (NPV) for Facebook of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $22 million upfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as with Cisco's original bid. c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now? d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain. a. What is the IRR for AOL associated with each bid? The IRR associated with the first bid from Huawei is ______%.(Round to one decimal place.) The IRR associated with the Cisco opportunity is _______%.(Round to one decimal place.) b. If the cost of capital for this investment is 15%, what is the NPV of each bid? The NPV for Huawei's bid is $ _________million. (Round to two decimal places) The NPV for the Cisco opportunity is $ _______million (Round to two decimal places) Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, AOL will pay $22 million upfront, and $35 million per year for the next 3 years. AOL's savings will be the same as with Cisco's original bid. c. What are Facebook's net cash flow under the lease contract?(Round to the nearest dollar.) Year 0 Cash Flow ($) ______ 1 _____ 2 _____ 3 _____ 15. You own a car dealership and are trying to decide how to configure the showroom floor. The floor has 2000 square feet of usable space. You have hired an analyst and asked her to estimate the NPV of putting a particular model on the floor and how much space each model requires: Model NPV Space Requirement (sq. ft.) PI MB345 $3,000 200 $ MC237 $5,000 250 MY456 $4,000 240 MG231 $1,000 150 MT347 $6,000 450 MF302 $4,000 200 MG201 $1,500 150 In addition, the showroom also requires office space. The analyst has estimated that office space generates a NPV of $14 per square foot. What models should be displayed on the floor and how many square feet should be devoted to office space? Complete the PI table below:(Round to two decimal places.) Model NPV Space Requirement (sq. ft.) PI MB345 MC237 MY456 MG231 MT347 MF302 MG201 $3,000 $5,000 $4,000 $1,000 $6,000 $4,000 $1,500 200 250 240 150 450 200 150 $ $ $ $ $ $ $ The models that should be displayed are: (Select the best choice below.) A.MC 237 comma MY 456 comma MB 345 comma and MF 302MC237, MY456, MB345, and MF302 Your answer is correct. B.MG 231 comma and MG 201MG231, and MG201 C.All the models should be displayed. D.MT347 and MY456 The number of square feet that should be devoted to the office space is _____sq. ft. (Round to the nearest integer.) 18. Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): Year 1 Revenues 111.2 COGS and Operating expenses (other than depreciation) 42.2 Depreciation 29.8 Increase in working capital 3.1 Capital expenditures 29.3 Marginal corporate tax rate 32% a. What are the incremental earnings for this project for years 1 and 2? b. What are the free cash flows for this project for the first two years? Year 2 164.1 59.3 31.4 8.2 43.1 32% What are the incremental earnings for this project for years 1 and 2? The incremental earnings for year 1 is $ ____________ million. (Round to one decimal place.) 19. You are evaluating the HomeNet project under the following assumptions: Sales of 50,000 units in year 1 increasing by 50,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 10% annually and a year 1 cost of $120/unit decreasing by 20% annually. In addition, new tax laws allow you to depreciate the equipment, costing $7.5 million, over three years using straight-line depreciation. Research and development expenditures total $15 million in year 0 and selling, general, and administrative expenses are $2.8 million per year (assuming there is no cannibalization). Also assume HomeNet will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). However, receivables related to HomeNet are expected to account for 15% of annual sales, and payables are expected to be 15% of the annual cost of goods sold. Under these assumptions the unlevered net income, net working capital requirements and free cash flow are shown in the Table . Using the FCF projections given: a. Calculate the NPV of the HomeNet project assuming a cost of capital of 10%, 12% and 14%. b. What is the IRR of the project in this case? a. Calculate the NPV of the HomeNet project assuming a cost of capital of 10%, 12% and 14%. _______________Year_______0______1_______2________3_______4_______5 HomeNet Unit Sales (000s) 50 50 100 150 200 Sales Price ($/unit) 10% 260 234.00 210.60 189.54 _ COGS ($/unit) 20% 120 96.00 76.80 61.44 Operating Exp ($000) Hardware & Software Dev ($15,000) Marketing & Tech Support 2,800 2,800 2,800 2,800 Capital Expenditures Lab Equip (7,500) Marginal Corp Tax 40% 40% 40% 40% 40% Depreciation 33% 33% 33% _____________________Year________0______1______2_______3________4______5 Incremental Earnings Forecast ($000) 1. Sales 13,000 23,400 31,590 37,908 2. COGS (6,000) (9,600) (11,520) (12,288) 3. Gross Profits 7,000 13,800 20,070 25,620 4. Selling, Gen & Admin (2,800) (2,800) (2,800) (2,800) 5. R&D ($15,000) 6. Depreciation (2,500) (2,500) (2,500) 7. EBIT ($15,000) 1,700 8,500 14,770 22,820 8. Income Tax at 40% 6,000 (680) (3,400) (5,908) (9,128) 9. Unlevered Net Income (9,000) 1,020 5,100 8,862 13,692 Free Cash Flow ($000) 10. Plus: Depreciation (2,500) (2,500) (2,500) 11. Less: Capital Expend (7,500) 12. Less: Increases in NWC (1,050) (1,020) (941) (832) 13. Free Cash Flow (16,500) 2,470 6,580 19,421 12,860 20. Billingham Packaging is considering expanding its production capacity by purchasing a new machine, theXC-750. The cost of the XC-750 is $2.82 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $47,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: bullet Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.20 million per year in additional sales, which will continue for the ten-year life of the machine. bullet Operations: The disruption caused by the installation will decrease sales by $4.98 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 71% of their sale price. The increased production will also require increased inventory on hand of $1.05 million during the life of the project, including year 0 and depleted in year 10. bullet Human Resources: The expansion will require additional sales and administrative personnel at a cost of $1.92 million per year. bullet Accounting: The XC-750 will be depreciated via the straight-line method over the ten-year life of the machine. The firm expects receivables from the new sales to be 16% of revenues and payables to be 10% of the cost of goods sold. Billingham's marginal corporate tax rate is 35%. a. Determine the incremental earnings from the purchase of the XC-750. b. Determine the free cash flow from the purchase of the XC-750. c. If the appropriate cost of capital for the expansion is 9.7%, compute the NPV of the purchase. d. While the expected new sales will be $10.20 million per year from the expansion, estimates range from $8.30 million to $12.10 million. What is the NPV in the worst case? In the best case? e. What is the break-even level of new sales from the expansion? If the firm believes that sales will not increase, but costs would be reduced by purchasing the new machine, what is the break-even level for the cost of goods sold? f. Billingham could instead purchase the XC-900, which offers even greater capacity. The cost of the XC900 is $4.01 million. The extra capacity would not be useful in the first two years of operation, but would allow for additional sales in years 3-10. What level of additional sales (above the $10.20 million expected for theXC-750) per year in those years would justify purchasing the larger machine? a. Determine the incremental earnings from the purchase of the XC-750. Calculate the incremental earnings from the purchase of the XC-750 below: (Round to the nearest dollar.) Incremental Earnings Year Sales Revenues Cost of Goods Sold S, G, and A Expenses Depreciation EBIT Taxes at 35% Unlevered Net Income 0 $ $ $ $ $ $