SHOW YOUR WORK.

1. Based on the following project assumptions, develop a capital budgeting analysis and determine the NPV and the IRR for the project. State your recommendation. Equipment invoice $300,000 Transportation and installation $ 85,000 Training $ 20,000 Projected incremental increase in sales in YR 1 $245,000 Sales escalate at a rate of 9% per year after YR 1. Expenses in YR 1 are projected to be 32% of the capital investment. Expenses escalate at a rate of 4% per year after YR 1. Depreciation is straight line, 5 years. Salvage value at the end of YR 3 $ 88,000 WACC 10% Project life 3 years Tax rate 40% Tax credits may be used against other income.
2. European bonds pay coupons annually, while U.S. bonds pay coupons semiannually. If the coupon rate on a European bond is 12% (annual coupons), what is the comparable coupon rate for a U.S. bond (semiannual coupons) assuming all other factors are equal?
3. Calculate the WACC given the following assumptions:
   1. Company tax rate is 40%.
   2. Company has an outstanding bond issue with a 6-7/8 coupon, market price of 102-5/8 (percent of 100% par, in 32nds), semiannual coupon payments, and 12 years to maturity.
   3. Company has an outstanding preferred stock issue paying an 8% dividend, $100 par, and a market price of $98.35. Flotation (issuance) costs on a new issue are 8%.
   4. Common equity financing is through retained earnings. The company has a beta of 1.22. The market risk premium is 6% and the risk-free rate is 4%. The company?s capital structure is 40% debt, 10% preferred, and 50% common equity.
4. You are looking at two investment options, Option A and Option B. Following are their populations of returns for the last five years: Option A Option B Year 1 15% 8% Year 2 22% 12% Year 3 8% 10% Year 4 2% 7% Year 5 13% 9% Which option is preferable on a relative measure?
5. Given the following capital project data:
6. Cost of automation system (invoice): $730,000
7. Transportation and installation: $140,000
8. Training: $100,000
9. Firm?s WACC: 9%
10. Firm?s tax rate: 35%
11. Depreciation 5 years, straight line
12. Life of project: 3 years
13. Salvage value: $385,000
14. Annual cost savings (net): $105,000
15. Increased annual sales (net): $200,000 Calculate (1) the payback, (2) the discounted payback, (3) the NPV, (4) the IRR, (5) the MIRR, and (6) your recommendation on the project.
16. Last year BBB Inc. had $275 million of sales, and it had $190 million of fixed assets that were used at 75% of capacity. In millions, by how much could BBB sales increase before the need to increase its fixed assets?
17. XYZ Corporation?s budgeted monthly sales are $10,000, and they are constant. Its customers pay as follows: 30% pay in the first month and take the 2% discount, while the remaining 70% pay in the month following the sale and do not receive a discount. Purchases for next month?s sales are constant at 60% of projected sales for the next month. Payments for labor costs, rent, and taxes are 25% of sales for the month. Construct a cash budget for a typical month. Calculate the average cash gain or loss during the month.
18. You were hired as a consultant to Quigley Company, whose target capital structure is 30% debt, 20% preferred, and 50% common equity. The interest rate on new debt is 7.50%, the yield on the preferred is 6.20%, the cost of retained earnings is 13.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?
19. Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 6 months. For $250.30 you can buy a 6-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $250.30 and Johnson's stock price actually rises to $48, what would your net profit be? 10. The December CBOT Treasury bond futures contract is quoted at 92-19. If annual interest rates go up by 1.50 percentage points, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)

SHOW YOUR WORK. 1. Based on the following project assumptions, develop a capital budgeting analysis and determine the NPV and the IRR for the project. State your recommendation. Equipment invoice $300,000 Transportation and installation $ 85,000 Training $ 20,000 Projected incremental increase in sales in YR 1 $245,000 Sales escalate at a rate of 9% per year after YR 1. Expenses in YR 1 are projected to be 32% of the capital investment. Expenses escalate at a rate of 4% per year after YR 1. Depreciation is straight line, 5 years. Salvage value at the end of YR 3 $ 88,000 WACC 10% Project life 3 years Tax rate 40% Tax credits may be used against other income. 2. European bonds pay coupons annually, while U.S. bonds pay coupons semiannually. If the coupon rate on a European bond is 12% (annual coupons), what is the comparable coupon rate for a U.S. bond (semiannual coupons) assuming all other factors are equal? 3. Calculate the WACC given the following assumptions: a. Company tax rate is 40%. b. Company has an outstanding bond issue with a 6-7/8 coupon, market price of 102-5/8 (percent of 100% par, in 32nds), semiannual coupon payments, and 12 years to maturity. c. Company has an outstanding preferred stock issue paying an 8% dividend, $100 par, and a market price of $98.35. Flotation (issuance) costs on a new issue are 8%. d. Common equity financing is through retained earnings. The company has a beta of 1.22. The market risk premium is 6% and the risk-free rate is 4%. The company's capital structure is 40% debt, 10% preferred, and 50% common equity. 4. You are looking at two investment options, Option A and Option B. Following are their populations of returns for the last five years: Option A Option B Year 1 15% 8% Year 2 22% 12% Year 3 8% 10% Year 4 2% 7% Year 5 13% 9% Which option is preferable on a relative measure? 5. Given the following capital project data: Cost of automation system (invoice): Transportation and installation: Training: Firm's WACC: Firm's tax rate: Depreciation 5 years, straight line Life of project: Salvage value: Annual cost savings (net): Increased annual sales (net): $730,000 $140,000 $100,000 9% 35% 3 years $385,000 $105,000 $200,000 Calculate (1) the payback, (2) the discounted payback, (3) the NPV, (4) the IRR, (5) the MIRR, and (6) your recommendation on the project. 6. Last year BBB Inc. had $275 million of sales, and it had $190 million of fixed assets that were used at 75% of capacity. In millions, by how much could BBB sales increase before the need to increase its fixed assets? 7. XYZ Corporation's budgeted monthly sales are $10,000, and they are constant. Its customers pay as follows: 30% pay in the first month and take the 2% discount, while the remaining 70% pay in the month following the sale and do not receive a discount. Purchases for next month's sales are constant at 60% of projected sales for the next month. Payments for labor costs, rent, and taxes are 25% of sales for the month. Construct a cash budget for a typical month. Calculate the average cash gain or loss during the month. 8. You were hired as a consultant to Quigley Company, whose target capital structure is 30% debt, 20% preferred, and 50% common equity. The interest rate on new debt is 7.50%, the yield on the preferred is 6.20%, the cost of retained earnings is 13.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? 9. Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 6 months. For $250.30 you can buy a 6-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $250.30 and Johnson's stock price actually rises to $48, what would your net profit be? The December CBOT Treasury bond futures contract is quoted at 92-19. If annual interest rates go up by 1.50 percentage points, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.) 10