QUESTIONS FOR MODULE 2 1. The Majestic Mulch and Compost Company (MMCC) is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations with buyers for large garden shops, MMCC projects unit sales as follows: The new power mulcher will sell for $120 per unit to start. When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110. The power mulcher project will require $20,000 in net working capital at the start. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It will cost about $800,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment, which qualifies as seven-year MACRS property. The equipment will actually be worth about 20 percent of its cost in eight years. The relevant tax rate is 34 percent, and the required return is 15 percent. Based on this information, should MMCC proceed? Using spreadsheet software such as MS Excel or Google sheet, please prepare the followings SIMILAR TO THE FORMAT LAID OUT IN THE TEXTBOOK OR THE LECTURE NOTES: QUESTIONS FOR MODULE 3 1. You are the owner of a small and successful firm with an estimated market value of $50 million. You are considering going public. A. What are the considerations you would have in choosing an investment banker? B. You want to raise $20 million in new financing, which you plan to reinvest back in the firm. (The estimated market value of $50 million is based on the assumption that this $20 million is reinvested.) What proportion of the firm would you have to sell in the IPO to raise $20 million? C. How would your answer to B change if the investment banker plans to under-price your offering by 10% ? D. If you wanted your stock to trade in the $2025 range, how many shares would you have to create? How many shares would you have to issue? AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come out that will change AMC's enterprise value to either $600 million or $200 million. A. What is AMC's share price prior to the share repurchase? B. What is AMC's share price after the repurchase if its enterprise value goes up? What is AMC's share price after the repurchase if its enterprise value declines? C. Suppose AMC waits until after the news comes out to do the share repurchase, what is AMC's share price after the repurchase if its enterprise value goes up? What is AMC's share price after the repurchase if its enterprise value declines? D. Suppose AMC management expects good news to come out. Based on your answers to parts B and C, if management desires to maximize AMC's ultimate share price, will they undertake the repurchase before or after the news comes out? When would management undertake the repurchase if they expect bad news to come out? E. Given your answer to part D, what effect would you expect an announcement of a share repurchase to have on the stock price? Why? QUESTIONS FOR MODULE 5 (RISK MANAGEMENT) 1. Why might a large, multinational company choose to insure against common events, such as vehicle accidents, but not against rare events which could cause large losses? Explain briefly. 2. "The farmer does not avoid risk by selling wheat futures. If wheat prices stay about $2.80 a bushel, then he will actually have lost by selling wheat futures at $2.50." Is this a fair comment? 3. List some of the commodity futures contracts that are traded on exchanges. Who do you think could usefully reduce risk by buying each of these contracts? Who do you think might wish to sell each contract? 4. Genentech's main facility is in South San Francisco. Suppose that Genentech would experience a direct loss of $450 million in the event of a major earthquake that disrupted its operations. The chance of such an earthquake is 2% per year, with a beta of 0.5. A. If the risk-free interest rate is 5% and the expected return of the market is 10%, what is the actuarially fair insurance premium required to cover QUESTIONS FOR MODULE 6 (INTERNATIONAL FINANCE) 1. Spot and Forward Rates: Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market. A. Is the dollar selling at a premium or a discount relative to the franc? B. Does the financial market expect the franc to strengthen relative to the dollar? Explain. C. What do you suspect is true about relative economic conditions in the United States and Switzerland? 2. Purchasing Power Parity: Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you relying on in answering