7/17/2017 Assignment Print View

1. Award: 10.00 points

CompanyZ'searningsanddividendspershareareexpectedtogrowindefinitelyby2%ayear.Ifnextyear'sdividend
is$6andthemarketcapitalizationrateis10%,whatisthecurrentstockprice?(Round your answerto2decimal
places.)

Stockprice$ 75.00

References

Worksheet Difficulty:Basic

2. Award: 10.00 points

MexicanMotorsmarketcapis200billionpesos.Nextyearsfreecashflowis10.3billionpesos.Securityanalystsare
forecastingthatfreecashflowwillgrowby9.3%peryearforthenextfiveyears.

a.Assumethatthe9.3%growthrateisexpectedtocontinueforever.Whatrateofreturnareinvestorsexpecting?(Do
notroundintermediatecalculations.Enteryouranswerasapercentroundedto2decimalplaces.)

Rateofreturn 14.45 %

b1.MexicanMotorshasgenerallyearnedabout11%onbookequity(ROE=11%)andreinvested50%ofearnings.
Theremaining50%ofearningshasgonetofreecashflow.SupposethecompanymaintainsthesameROEand
investmentrateforthelongrun.Whatwillbethegrowthrateofearnings?(Donotroundintermediatecalculations.
Enteryouranswerasapercentroundedto2decimalplaces.)

Growthrate %

b2.Whatwouldbetherateofreturn?(Donotroundintermediatecalculations.Enteryouranswerasapercent
roundedto2decimalplaces.)

Rateofreturn %

References

Worksheet Difficulty:Intermediate

3. Award: 10.00 points

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7/17/2017 Assignment Print View

Portfoliomanagersarefrequentlypaidaproportionofthefundsundermanagement.Supposeyoumanagea$102
millionequityportfolioofferingadividendyield(DIV1/P0)of5.2%.Dividendsandportfoliovalueareexpectedtogrow
ataconstantrate.Yourannualfeeformanagingthisportfoliois.52%ofportfoliovalueandiscalculatedattheendof
eachyear.

a.Assumingthatyouwillcontinuetomanagetheportfoliofromnowtoeternity,whatisthepresentvalueofthe
managementcontract?(Donotroundintermediatecalculations.Enteryouranswerinmillionsroundedto2
decimalplaces.)

Presentvalue$ milllion

b.Whatwouldthecontractvaluebeifyouinvestedinstockswitha4.2%yield?(Donotroundintermediate
calculations.Enteryouranswerinmillionsroundedto2decimalplaces.)

Contractvalue$ milllion

References

Worksheet Difficulty:Challenge

4. Award: 10.00 points

Considerthefollowinginformation:

CashFlows($)
Project C0 C1 C2 C3 C4
A 5,300 1,300 1,300 3,300 0
B 700 0 600 2,300 3,300
C 5,200 3,400 1,700 800 300


a.Whatisthepaybackperiodoneachoftheaboveprojects?(Roundyouranswersto2decimalplaces.)

Project PaybackPeriod
A year(s)
B year(s)
C year(s)


b.Giventhatyouwishtousethepaybackrulewithacutoffperiodoftwoyears,whichprojectswouldyouaccept?

ProjectA,ProjectB,andProjectC
ProjectAandProjectB
ProjectC
ProjectBandProjectC
ProjectB
ProjectAandProjectC
ProjectA
None

c.Ifyouuseacutoffperiodofthreeyears,whichprojectswouldyouaccept?

ProjectA,ProjectB,andProjectC
ProjectBandProjectC

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7/17/2017 Assignment Print View
ProjectC
ProjectAandProjectC
ProjectB
ProjectA
ProjectAandProjectB

d.Iftheopportunitycostofcapitalis9%,whichprojectshavepositiveNPVs?

ProjectA
ProjectBandProjectC
ProjectB
ProjectA,ProjectB,andProjectC
ProjectC
ProjectAandProjectB
ProjectAandProjectC

e.Ifafirmusesasinglecutoffperiodforallprojects,itislikelytoaccepttoomanyshortlivedprojects.Trueorfalse?

True
False

f1.Ifthefirmusesthediscountedpaybackrule,willitacceptanynegativeNPVprojects?

Yes
No

f2.WillitturndownpositiveNPVprojects?

Yes
No

References

Worksheet Difficulty:Basic

5. Award: 10.00 points

TheTitanicShipbuildingCompanyhasanoncancelablecontracttobuildasmallcargovessel.Constructioninvolvesa
cashoutlayof$268,000attheendofeachofthenexttwoyears.Attheendofthethirdyearthecompanywillreceive
paymentof$620,000.AssumetheIRRofthisoptionexceedsthecostofcapital.

Thecompanycanspeedupconstructionbyworkinganextrashift.Inthiscase,therewillbeacashoutlayof$580,000
attheendofthefirstyear,followedbyacashpaymentof$620,000attheendofthesecondyear.UsetheIRRruleto
showthe(approximate)rangeofopportunitycostsofcapitalatwhichthecompanyshouldworktheextrashift.(Enter
youranswersasapercentroundedto2decimalplaces.Enterthesmallestpercentfirst.)

Thecompanyshouldworktheextrashiftifthecostofcapitalisbetween %and %

References

Worksheet Difficulty:Intermediate

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7/17/2017 Assignment Print View

6. Award: 10.00 points

Considerthefollowingprojects:

CashFlows($)
Project C0 C1
D 10,200 20,400
E 20,200 35,350


Assumethattheprojectsaremutuallyexclusiveandthattheopportunitycostofcapitalis12%.

a.Calculatetheprofitabilityindexforeachproject.(Donotroundintermediatecalculations.Roundyouranswers
to2decimalplaces.)

Project ProfitabilityIndex
D
E

b1.Calculatetheprofitabilityindexusingtheincrementalcashflows.(Donotroundintermediatecalculations.
Roundyouranswerto2decimalplaces.)

Profitabilityindex

b2.Whichprojectshouldyouchoose?

ProjectD
ProjectE

References

Worksheet Difficulty:Intermediate

7. Award: 10.00 points

Considerthefollowingcashflows:

CashFlows($)
C0 C1 C2
7,450 5,200 19,400

a.Calculatethenetpresentvalueoftheaboveprojectfordiscountratesof0,50,and100%.(Donotround
intermediatecalculations.Roundyouranswerstothenearestwholedollaramount.)


NPV@0% $
NPV@50% $
NPV@100% $

b.WhatistheIRRoftheproject?(Donotroundintermediatecalculations.Enteryouranswerasapercent
roundedtothenearestwholenumber.)

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7/17/2017 Assignment Print View
IRR %

References

Worksheet Difficulty:Basic

8. Award: 10.00 points

Thefollowingtabletracksthemaincomponentsofworkingcapitaloverthelifeofafouryearproject.

2016 2017 2018 2019 2020
Accountsreceivable 0 182,000 257,000 222,000 0
Inventory 91,000 146,000 146,000 111,000 0
Accountspayable 33,000 58,000 66,000 43,000 0

Calculatenetworkingcapitalandthecashinflowsandoutflowsduetoinvestmentinworkingcapital.(Negative
answersshouldbeindicatedbyaminussign.Leavenocellsblankbecertaintoenter"0"whereverrequired.)

2016 2017 2018 2019 2020
Networkingcapital
Cashflows

References

Worksheet Difficulty:Basic

9. Award: 10.00 points

MachinesAandBaremutuallyexclusiveandareexpectedtoproducethefollowingrealcashflows:

CashFlows($thousands)
Machine C0 C1 C2 C3
A 103 +113 +124
B 123 +113 +124 +136

Therealopportunitycostofcapitalis9%.

a.CalculatetheNPVofeachmachine.(Donotroundintermediatecalculations.Enteryouranswersindollars
notinthousands,e.g.123,456.Roundyouranswerstothenearestwholedollaramount.)

Machine NPV
A $
B $

b.Calculatetheequivalentannualcashflowfromeachmachine.(Donotroundintermediatecalculations.Enter
youranswersindollarsnotinthousands,e.g.123,456.Roundyouranswerstothenearestwholedollar
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7/17/2017 Assignment Print View
amount.)

Machine CashFlow
A $
B $

c.Whichmachineshouldyoubuy?

MachineA
MachineB

References

Worksheet Difficulty:Basic

10. Award: 10.00 points

Aprojectrequiresaninitialinvestmentof$100,000andisexpectedtoproduceacashinflowbeforetaxof$27,500per
yearforfiveyears.CompanyAhassubstantialaccumulatedtaxlossesandisunlikelytopaytaxesintheforeseeable
future.CompanyBpayscorporatetaxesatarateof34%andcandepreciatetheinvestmentfortaxpurposesusingthe
fiveyearMACRStaxdepreciationschedule.Supposetheopportunitycostofcapitalis10%.Ignoreinflation.

a.CalculateprojectNPVforeachcompany.(Negativeanswersshouldbeindicatedbyaminussign.Donot
roundintermediatecalculations.Roundyouranswerstothenearestwholedollaramount.)

NPV
CompanyA $
CompanyB $

b1.WhatistheIRRoftheaftertaxcashflowsforeachcompany?(Donotroundintermediatecalculations.Enter
youranswersasapercentroundedto2decimalplaces.)

IRR
CompanyA $ %
CompanyB $ %

b2.WhatdoescomparisonoftheIRRssuggestistheeffectivecorporatetaxrate?(Donotroundintermediate
calculations.Enteryouranswerasapercentroundedto1decimalplace.)

Effectivetaxrate %

References

Worksheet Difficulty:Intermediate

11. Award: 10.00 points

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7/17/2017 Assignment Print View
MarshaJoneshasboughtausedMercedeshorsetransporterforherConnecticutestate.Itcost$52,000.Theobjectis
tosaveonhorsetransporterrentals.

Marshahadbeenrentingatransportereveryotherweekfor$217perweekplus$1.85permile.Mostofthetripsare
90milesintotal.Marshausuallygivesthedrivera$50tip.Withthenewtransportershewillonlyhavetopayfordiesel
fuelandmaintenance,atabout$.62permile.InsurancecostsforMarshastransporterare$2,050peryear.

Thetransporterwillprobablybeworth$32,000(inrealterms)aftereightyears,whenMarshashorseNikewillbeready
toretire.Assumeanominaldiscountrateof10%andaforecastedinflationrateof2%.Marshastransporterisa
personaloutlay,notabusinessorfinancialinvestment,sotaxescanbeignored.Hint:Allnumbersgiveninthe
questionsareinrealterms.AssumeCFatendofyear,forsimplicity.

CalculatetheNPVoftheinvestment.(Donotroundintermediatecalculations.Roundyouranswertothenearest
wholedollaramount.)

NPV$

References

Worksheet Difficulty:Intermediate

12. Award: 10.00 points

Asaresultofimprovementsinproductengineering,UnitedAutomationisabletoselloneofitstwomillingmachines.
Bothmachinesperformthesamefunctionbutdifferinage.Thenewermachinecouldbesoldtodayfor$62,000.Its
operatingcostsare$21,600ayear,butinfiveyearsthemachinewillrequirea$19,200overhaul.Thereafteroperating
costswillbe$30,800untilthemachineisfinallysoldinyear10for$6,200.

Theoldermachinecouldbesoldtodayfor$25,800.Ifitiskept,itwillneedanimmediate$24,000overhaul.Thereafter
operatingcostswillbe$32,700ayearuntilthemachineisfinallysoldinyear5for$6,200.

Bothmachinesarefullydepreciatedfortaxpurposes.Thecompanypaystaxat35%.Cashflowshavebeenforecasted
inrealterms.Therealcostofcapitalis12%.

a.Calculatetheequivalentannualcostsforsellingthenewmachineandforsellingtheoldmachine.(Donotround
intermediatecalculations.Enteryouranswersasapositivevalueroundedto2decimalplaces.)

EquivalentAnnualCost
Sellnewmachine $
Selloldmachine $

b.WhichmachineshouldUnitedAutomationsell?

Selloldmachine
Sellnewmachine

References

Worksheet Difficulty:Intermediate

13. Award: 10.00 points

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7/17/2017 Assignment Print View

In the early 1990s, the California Air Resources Board (CARB) started planning its Phase 2 requirements for
reformulatedgasoline(RFG).RFGisgasolineblendedtotightspecificationsdesignedtoreducepollutionfrommotor
vehicles.CARBconsultedwithrefiners,environmentalists,andotherinterestedpartiestodesignthesespecifications.
AstheoutlineforthePhase2requirementsemerged,refinersrealizedthatsubstantialcapitalinvestmentswouldbe
requiredtoupgradeCaliforniarefineries.

Assumearefineriscontemplatinganinvestmentof$460milliontoupgradeitsCalifornianplant.Theinvestmentlasts
for31yearsanddoesnotchangerawmaterialandoperatingcosts.Thereal(inflationadjusted)costofcapitalis5%.
Ignoretaxes.

Howmuchextrarevenuewouldbeneededeachyeartorecoverthatcost?(Donotroundintermediatecalculations.
Enteryouranswerindollars,notmillions,roundedtothenearestwholenumber.)

Annuitypayment$

References

Worksheet Difficulty:Intermediate

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