1. The U.S. economy has been in an economic recovery since Q2 2020, immediately following a sharp economic decline in Q1 2020 due to the Covid pandemic lockdown. The Fed has practiced an accommodating/easing policy and has decreased interest rates significantly in 2020. The economic outlook for the rest of 2021 looks uncertain due to the ongoing pandemic. In light of the prospects for interest rates in 2021, what economic developments do you believe will occur? As the CFO of Market Enterprises, Inc., you watch the markets closely, especially the bond market. Discuss your opinion about the economy (i.e., GDP prospects) and the economic variables supporting your opinion. What do you think the FOMC will do? What do you think the U.S. Treasury curve will do? How will the economy affect the Treasury yield curve and the valuation of Market Enterprises, Inc.s future capital expenditures?
2. Arleen Food Products projects its sales next year to be $6 million. The firm is currently in the process of projecting its financing needs and has made the following assumptions and projections:

• Operating profit margin is 30% of sales
• Operating expenses are 25% of sales
• Interest expense is $100 thousand
• Tax rate is 35%
• Current assets are 25% of sales
• Fixed assets are 5% of sales
• Accounts payables are 10% of sales
• There is no long-term debt
• Equity is equal to $1 million
• Future borrowing rate is Prime Rate + 200 basis points.

What are Arleen Food Products financing needs for next year?

Briefly discuss the options available to the firm to generate the additional funds

necessary. How might each of these options affect firm value?

3. Project A has an initial cash outflow of $250,000 and is expected to generate $100 thousand a year for the next three years. Project B has an initial cash outflow of $300 thousand and is expected to generate $125 thousand a year for the next three years. Assume the discount rate is 8%.

• Calculate the NPV and IRR for each project.
• Based on your analysis should Project A and B be implemented?

4. . A firms finance department estimates the firms weighted average cost of capital to be 12%. A financial analyst recommends to the CFO that a project with an internal rate of return of 13% be accepted over another project with an internal rate of return of 14%. Under what circumstances could this occur?
5. The Philadelphia Tool Company is considering a replacement machine that has a cost of

$25,000. The new machine will permit output expansion, so annual revenues are estimated

at $5,000 during its operating period. The new machines greater efficiency is expected to

reduce operating expenses by $3,000 per year. This machine has an estimated useful life of 5

years and will be depreciated using a straight-line basis. The machine will cause a change in

working capital of $3,000 per year. The Philadelphia Tool Companys marginal tax rate is

40% and its cost of capital is 5%. Use the following equation in your effort to answer the

following questions.

CFt = EBITt(1-TAXt) + DEPt - WCRt - CAPEXt

a. Create a cash flow schedule and determine if the Philadelphia Tool Company

should replace the old machine?

b. Briefly discuss in words only how your analysis process might change in the

following situations:

i. The increase in sales is highly dependent on the strength of the economy.

ii. The replacement machine is much more reliable than the existing one so

that the risk of temporary shutdowns in production is lower.

iii. The replacement machine has an estimated useful life of seven years.