• Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. Show your work.

• If the cost of capital of this investment opportunity is 10%, what is the NPV? (Round to the nearest cent)
• Since the NPV is (negative? or positive?), I should (take? Not take?) the deal!
• Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is what percent? (Round two decimal places)
• The max deviation allowable in the cost of capital is what percent? (Round to two decimal places)
• You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $9,000 and will be posted for one year. You expect that it will generate additional revenue of $1,710 a month. Show your work
  • What is the payback period? (Round to two decimal places)
• You are considering a safe investment opportunity that requires a $1,000 investment today, and will pay $500 two years from now and another $750 five years from now. Show your work
  • What percentage is the IRR of this investment? (Round to two decimal places)
  • If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain.
• Homebuilder Supply currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town. The company already owns the land for this store. The company must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store?
  • Should the cost of the land where the store be located be included?
  • Should cost of demolishing the abandoned warehouse and clearing the lot be included?
  • Should the loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead be included?
  • Should the 14,000 in market research spent to evaluate customer demand be included in the incremental earnings for the proposed new retail store?
  • Should the construction costs for the NEW store be included in the incremental earnings for the proposed new retail store?
  • Should the value of the land, if sold, be included in the incremental earnings or the new store?
  • Should the interest expense on the debt borrowed to pay the construction costs be included in the incremental earnings for the proposed new retail store?
• Arnold Inc., is considering a proposal to manufacture high-end protein bars for bodybuilders. The project requires use of an existing warehouse, which the firm acquired three years ago for $2 million and which currently rents out for $135,000. Rental rates are not expected to change going forward. In addition, the project requires an upfront investment into machines and other equipment of $1.4million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc expects to terminate the project at the end of eight years to sell the machines and equipment for $435,000. Finally, the project requires and initial investment into net working capital equal to 10 percent of the predicted first-year sales. Lastly, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.7 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30%. show your work.
  • What are the free cash flows (FCF) of the project?
  • The FCF for year 0 is $million. (Round to three decimal places)
  • The FCF for years 1-7 is $million. (Round to 3 decimal places)
  • The FCF for 8 years is $million. (round to 3 decimal places)
  • If the cost of capital is 15%, what is the NPV of the project? $million *(round 3 decimal places)
• HomeNet project under the following assumptions: You depreciate the equipment, costing $7.5 million, over three years using straight-line depreciation. Research and development expenditures total $15million in year 0 and selling, general and administrative expenses are $2.8 million per year (assuming 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 and assuming a cost of capital of 12%, calculate:
  • The break-even annual sales price decline if: sales of 50,000 units in year1 increase by 55,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 25% annually. Reference Chart 6.1
  • The break-even annual unit sales increase is ______units. (Round to the nearest integer). See chart 6.1

Chart 6.1

7. The Krell Industries has a share price of $20.99 today. If krell is expected to pay a dividend of $1.06 this year, and its stock price is expected to grow to $23.94 at the end of the year, what is Krell?s dividend yield and equity cost of capital? Show your work.

Krell?s dividend yield is what percent? % (round to one decimal place)What is the capital gain rate? % (Round to one decimal place)What is the expected total return?% (Round to one decimal Place)

8. Benchmark Metrics Inc (BMI) reported EPS of $5.00 in 2013. Despite the economic downturn, BMI is confident regarding its current investment opportunities. Due to the financial crisis, BMI doesn?t wish to fund these investments externally. The board has decided to suspend its stock repurchase plan and cut its dividend to $1.00 per share (vs. $2 per share in 2012), and retain these funds instead. The firm has just paid the 2013 dividend, and plans to keep its dividend at $1.00 per share in 2014. In subsequent years, it expects it growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. (all dividends and repurchases occur at the end of the year). Suppose BMIs existing operation will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 14% and that reinvestments will account for all future earnings growth. Assume BMI?s equity cost of capital is 10%.

a. BMI?s EPS in 2014 is $? (round to the nearest cent)

b. BMI?s EPS in 2015 is $? (round to the nearest cent)

c. The value of a share of BMI at the start of 2014 is $? (round to the nearest cent.)

9. You read in the paper that summit systems will pay a dividend of 1 dollar this year. At that point you expected Summit?s dividend to grow by 7% per year. Today you read in the paper that Summit has revised it?s growth prospects and expects dividends to grow at a rate of 4.0% per year forever. The firm?s equity cost of capital is 12.0%

a. If the expected dividend growth is 7% per year, what is the value of a share? $

b. If you tried to sell your stock after reading this news, what price would you get? 20.00? 12.50?

10. Kenneth Cole had sales of $518 million in 2005. Based on the past profits and investment needs, we expect EBIT to be 9% of sales, increases in net working capital requirements to be 10% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be *% of any increase in sales. Kenneth Cole has $1000 million in cash, 3 million in debt, 21 million shares outstanding, tax rate of 37% and a weighted average cost of capital of 11%.

a. We believe Kenneth cole?s initial revenue growth rate will be between 4% - 11%. With growth slowing in equal steps to 4% by 2011. What range of share prices for KCP is consistent with this forcast? 20.51 to 25.36, 25.70 to 24.83, 28.34 to 22.24, or 19.59 to 27.48?

b. We believe KCP?s EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP?s initial revenue growth at 9% with growth slowing in equal steps to 4% by year 2011?

a. 28.34 to 22.24? 20.51 to 25.36? 19.59 to 27.48? 25.70 to 24.83?

1) Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. Show your work. a. If the cost of capital of this investment opportunity is 10%, what is the NPV? (Round to the nearest cent) b. Since the NPV is (negative? or positive?), I should (take? Not take?) the deal! c. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is what percent? (Round two decimal places) d. The max deviation allowable in the cost of capital is what percent? (Round to two decimal places) 2) You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $9,000 and will be posted for one year. You expect that it will generate additional revenue of $1,710 a month. Show your work a. What is the payback period? (Round to two decimal places) 3) You are considering a safe investment opportunity that requires a $1,000 investment today, and will pay $500 two years from now and another $750 five years from now. Show your work a. What percentage is the IRR of this investment? (Round to two decimal places) b. If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain. 4) Homebuilder Supply currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town. The company already owns the land for this store. The company must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store? a. Should the cost of the land where the store be located be included? b. Should cost of demolishing the abandoned warehouse and clearing the lot be included? c. Should the loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead be included? d. Should the 14,000 in market research spent to evaluate customer demand be included in the incremental earnings for the proposed new retail store? e. Should the construction costs for the NEW store be included in the incremental earnings for the proposed new retail store? f. Should the value of the land, if sold, be included in the incremental earnings or the new store? g. Should the interest expense on the debt borrowed to pay the construction costs be included in the incremental earnings for the proposed new retail store? 5) Arnold Inc., is considering a proposal to manufacture high-end protein bars for bodybuilders. The project requires use of an existing warehouse, which the firm acquired three years ago for $2 million and which currently rents out for $135,000. Rental rates are not expected to change going forward. In addition, the project requires an upfront investment into machines and other equipment of $1.4million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc expects to terminate the project at the end of eight years to sell the machines and equipment for $435,000. Finally, the project requires and initial investment into net working capital equal to 10 percent of the predicted first-year sales. Lastly, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.7 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30%. show your work. a. What are the free cash flows (FCF) of the project? i. The FCF for year 0 is $million. (Round to three decimal places) ii. The FCF for years 1-7 is $million. (Round to 3 decimal places) iii. The FCF for 8 years is $million. (round to 3 decimal places) b. If the cost of capital is 15%, what is the NPV of the project? $million *(round 3 decimal places) 6) HomeNet project under the following assumptions: You depreciate the equipment, costing $7.5 million, over three years using straight-line depreciation. Research and development expenditures total $15million in year 0 and selling, general and administrative expenses are $2.8 million per year (assuming 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 and assuming a cost of capital of 12%, calculate: a. The break-even annual sales price decline if: sales of 50,000 units in year1 increase by 55,000 units per year over the life of the project, the year 1 sales price is $260/unit, and the year 1 cost of $120/unit decreases by 25% annually. Reference Chart 6.1 b. The break-even annual unit sales increase is ______units. (Round to the nearest integer). See chart 6.1 Chart 6.1 7. The Krell Industries has a share price of $20.99 today. If krell is expected to pay a dividend of $1.06 this year, and its stock price is expected to grow to $23.94 at the end of the year, what is Krell's dividend yield and equity cost of capital? Show your work. a. Krell's dividend yield is what percent? % (round to one decimal place) b. What is the capital gain rate? % (Round to one decimal place) c. What is the expected total return?% (Round to one decimal Place) 8. Benchmark Metrics Inc (BMI) reported EPS of $5.00 in 2013. Despite the economic downturn, BMI is confident regarding its current investment opportunities. Due to the financial crisis, BMI doesn't wish to fund these investments externally. The board has decided to suspend its stock repurchase plan and cut its dividend to $1.00 per share (vs. $2 per share in 2012), and retain these funds instead. The firm has just paid the 2013 dividend, and plans to keep its dividend at $1.00 per share in 2014. In subsequent years, it expects it growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. (all dividends and repurchases occur at the end of the year). Suppose BMIs existing operation will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 14% and that reinvestments will account for all future earnings growth. Assume BMI's equity cost of capital is 10%. a. BMI's EPS in 2014 is $? (round to the nearest cent) b. BMI's EPS in 2015 is $? (round to the nearest cent) c. The value of a share of BMI at the start of 2014 is $? (round to the nearest cent.) 9. You read in the paper that summit systems will pay a dividend of 1 dollar this year. At that point you expected Summit's dividend to grow by 7% per year. Today you read in the paper that Summit has revised it's growth prospects and expects dividends to grow at a rate of 4.0% per year forever. The firm's equity cost of capital is 12.0% a. If the expected dividend growth is 7% per year, what is the value of a share? $ b. If you tried to sell your stock after reading this news, what price would you get? 20.00? 12.50? 10. Kenneth Cole had sales of $518 million in 2005. Based on the past profits and investment needs, we expect EBIT to be 9% of sales, increases in net working capital requirements to be 10% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be *% of any increase in sales. Kenneth Cole has $1000 million in cash, 3 million in debt, 21 million shares outstanding, tax rate of 37% and a weighted average cost of capital of 11%. a. We believe Kenneth cole's initial revenue growth rate will be between 4% - 11%. With growth slowing in equal steps to 4% by 2011. What range of share prices for KCP is consistent with this forcast? 20.51 to 25.36, 25.70 to 24.83, 28.34 to 22.24, or 19.59 to 27.48? b. We believe KCP's EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth at 9% with growth slowing in equal steps to 4% by year 2011? a. 28.34 to 22.24? 20.51 to 25.36? 19.59 to 27.48? 25.70 to 24.83