## DataPoint Engineering is considering the purchase of a new piece of equipment for \$230,000

Data Point Engineering is considering the purchase of a new piece of equipment for \$230,000. It has an eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of \$130,000 in non depreciable working capital. Thirty-two thousand dollars of this investment will be recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Amount
1 \$ 182,000
2 158,000
3 128,000
4 113,000
5 94,000
6 84,000

The tax rate is 30 percent. The cost of capital must be computed based on the following:

Cost
(aftertax) Weights
Debt Kd 8.50 % 30 %
Preferred stock Kp 12.20 20
Common equity
(retained earnings) Ke 17.00 50

a.

Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your depreciation base and annual depreciation answers to the nearest whole dollar. Round your percentage depreciation answers to 3 decimal places.)

Year Depreciation
Base Percentage
Depreciation Annual
Depreciation
1 \$ \$
2
3
4
5
6

\$

b.

Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year 6. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Year Cash Flow
1 \$
2
3
4
5
6

c.

Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Weighted average cost of capital %

d-1.

Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations. Round your answer to 2 decimal places.)

Net present value \$

d-2. Should DataPoint purchase the new equipment?

## There are two calls on the same stock. Both expire in 6 months and are identical in every way except the exercise price

Question 1

There are two calls on the same stock. Both expire in 6 months and are identical in every way except the exercise price. If Call A has an exercise price of \$40 and Call B has an exercise price of \$50, which call will have a higher price?
A.

Call A
B.

Call B
C.

Cannot be determined

Question 2

If the present value of the exercise price is \$20, the call option is selling for \$5, and the market price of the stock is \$22. If the put is selling for \$5, should you buy it? Why or why not?
A.

Yes, you will make \$2
B.

No, you will lose \$3
C.

No, you will lose \$2
D.

Yes, you will make \$3

Question 3

Suppose you have written both a put and a call on the same stock with the same exercise price and the same expiration date (so you are short both options). You are best off if the stock price on the expiration date is
A.

Below the exercise price
B.

Equal to the exercise price
C.

Above the exercise price
Question 4

A decrease in ____ will decrease the price of both a call and a put on the same stock
A.

Stock price
B.

Exercise price
C.

Volatility
D.

Dividends
Question 5

Which of the following is an example of a real option?
A.

Foothold in an expanding market
B.

End a project early
C.

Wait for better market conditions
D.

All of these are real options
Question 6

You buy 27 call contracts with an exercise price of \$80. The current price of the stock is \$81. The ask price is \$1.33 per contract. What is the cost of the option?
Question 7

The minimum option value
A.

speculative value
B.

intrinsic value
C.

option price

Question 8 Risk-neutral valuation is one way to estimate the value of the option before maturity

True

False

Question 9

If you are long the option, then you can choose whether to exercise or not.

True

False

Question 10

A put has an exercise price of \$12 and 9 months to maturity. The stock price is \$10. Find the intrinsic value. If the option price is \$2.75, what is the speculative value?
A.

Intrinsic = 2; speculative = .75
B.

Intrinsic = 2; speculative = 2.75
C.

Intrinsic = 0; speculative = 2.75
D.

Intrinsic = 0; speculative = .75

## The two companies that need to be compared is PayPal and Square Inc. For this assignment, apply the next three steps of the nine-step assessment process detailed in Assessing a Company’s Future Financial Health (i.e., Step 5: External Financing Need, Step 6: Target Sources of Finance, and Step 7: Viability of 3-5 Year Plan) to compose further assessment of the company/competitor pairing analysis as below: Current financial plan. Interpret current equity valuations in order to recommend strategic solutions regarding future financial goals. Consider how stock splits and stock dividend allocations can impact the plan. Future external financing needs. To support growth, companies need capital, and external financial needs are vital any firm’s future success. Describe external financing needs sufficient to support your ongoing analytical assumptions and pro forma financial statements for your chosen company and competitor. Access to target sources of external financing. You will need to consider the amount of financing, timing, length of time required, and deferability of financing options. Viability of a 3-5 Year Plan. Assess the consistency of the plan with the firm’s goals, and the achievability of both the operating plan and the financing plan you are proposing

The two companies that need to be compared is PayPal and Square Inc.

For this assignment, apply the next three steps of the nine-step assessment process detailed in Assessing a Company’s Future Financial Health (i.e., Step 5: External Financing Need, Step 6: Target Sources of Finance, and Step 7: Viability of 3-5 Year Plan) to compose further assessment of the company/competitor pairing analysis as below:

Current financial plan. Interpret current equity valuations in order to recommend strategic solutions regarding future financial goals. Consider how stock splits and stock dividend allocations can impact the plan.
Future external financing needs. To support growth, companies need capital, and external financial needs are vital any firm’s future success. Describe external financing needs sufficient to support your ongoing analytical assumptions and pro forma financial statements for your chosen company and competitor.
Access to target sources of external financing. You will need to consider the amount of financing, timing, length of time required, and deferability of financing options.
Viability of a 3-5 Year Plan. Assess the consistency of the plan with the firm’s goals, and the achievability of both the operating plan and the financing plan you are proposing

## Suppose you borrowed \$10,000 at a rate of 5% and must repay it in 3 equal installments at the end of each of the next 3 years

1. Suppose you borrowed \$10,000 at a rate of 5% and must repay it in 3 equal installments at the end of each of the next 3 years. How much would you still owe at the end of the second year, after you have made the second payment?

2. Person A and Person B each have \$250,000 in an investment account. No other contributions will be made to their investment accounts. Both have the same goal: They each want their account to reach \$1.1 million, at which time each will retire. Person, A has his money invested in risk-free securities with an expected annual return of 4%. Person B, has their money invested in a stock fund with an expected annual return of 8%. How many years after Person B retires will Person A retire?

3. What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of \$1,250?

4. At a rate of 6.5%, what is the future value of the following cash flow stream?

Years: 0 1 2 3 4
| | | | |

5. What’s the present value of a 4-year ordinary annuity of \$2,250 per year plus an additional \$3,000 at the end of Year 4 if the interest rate is 5%?

## Jack Tar, CFO of Sheetbend & Halyard, Inc., opened the company confidential envelope. It contained a draft of a competitive bid for a contract to supply duffel canvas to the U.S. Navy.

Jack Tar, CFO of Sheetbend & Halyard, Inc., opened the company confidential envelope. It contained a draft of a competitive bid for a contract to supply duffel canvas to the U.S. Navy. The cover memo for Sheetbend’s CEO asked Mr. Tar to review the bid before it was submitted.
The bid and its supporting documents had been prepared by Sheetbend’s sales staff. It called for Sheetbend to supply 100,000 yards of duffel canvas per year for 5 years. The proposed selling price was fixed at \$30 per yard.
Mr. Tar wa not usually involved in sales, but this bid was unusual in at least two respects. First, if accepted by the navy, it would commit Sheetbend to a fixed-price, lont-term contract. Second, producing the duffel canvas would require an investment of \$1.5 million to purchase machinery and to refurbish Sheetbend’s plant in Pleasantboro, Maine.
Mr. Tar set to work and by the end of the week had collected the following facts and assumptions:
– The plant in Pleasantboro had been built in the early 1900s and is now idle. The plant was fully depreciated on Sheetbend’s books, except for the purchase cost of the land (in 1947) of \$10,000.
-Now that the land was valuable shorefront property, Mr.Tar thought the land and the idle plant could be sold, immediately or in the near future, for \$600,000.
-Refurbishing the plant would cost \$500,000. This investment would be depreciated for tax purposes on the 10-year MACRS schedule.
-The new machinery would cost \$1million. This investment could be depreciated on the 5-year MACRS schedule.
-The refurbished plant and new machinery would last for many years. However, the remaining market for duffel canvas was small, and it was not clear that additional orders could be obtained once the navy contract was finished. The machinery was custom-built and could be used only for duffel canvas. Its seconhand value at the end of 5 years was probably zero.
-Table 9-4 shows the sales staff’s forecasts of income from the navy contract. Mr. Tar reviewed this forecast and decided that its assumptions were reasoable, except that the forecast used book, not tax, depreciation.
-But the forecast income statment contained no mention of working capital. Mr. Tar thought that working capital would average about 10% of sales.

Armed with this information, Mr. Tar constructed a spreadsheet to calculate the NPV of the duffel canvas project, assuming that Sheetbend’s bid would be accepted by the navy.
He had just finished debugging the spreadsheet when another confidential envelope arrive from Sheetbend’s CEO. It contained a firm offer from a Maine real estate developer to purchase Sheetbend’s Pleasantboro land and plant for \$1.5 million in cash.
Should Mr. Tar recommend submitting the bid to the navy at the proposed price of \$30 per yard? The discount rate for this project is 12%

## A firm’s current assets and current liabilities are referred to as the firm’s:

1. A firm’s current assets and current liabilities are referred to as the firm’s:
A) capital structure.
B) cash equivalents.
C) working capital.
D) net assets.
E) capital interest.

2. The financial statement that summarizes a firm’s operations over a period of time is called a(n):
A) income statement.
B) cash flow statement.
C) production report.
D) balance sheet.
E) periodic operating statement.
3. Which one of the following ratios indicates how long a firm can pay its bills given its current cash balance? A) current ratio
B) debt ratio
C) cash coverage ratio
D) quick ratio
E) cash ratio

4. By definition, a bank that pays simple interest on a savings account will pay interest:
A) only at the beginning of the investment period.
B) only at the end of the investment period.
C) only on the initial investment.
D) on both the initial investment and all prior interest payments that are reinvested.
E) only if all previous interest payments are reinvested.
5. A series of unending cash flows of equal amount that occur at equal intervals of time is called a(n):
A) ordinary annuity.
B) annuity due.
C) absolute annuity.
D) perpetuity.
E) perpetuity due.
6. A note is:
A) unsecured debt that is generally payable within the next ten years.
B) a formal loan secured by real estate.
C) long-term debt secured by part, or all, of the assets of the borrower.
D) any liability classified as short-term debt on a financial statement.
E) the formal agreement between a firm and its bondholders.
7. Anthony’s Appliances pays a constant quarterly dividend of \$.35 per share. How much are you willing to pay for one share if you require a 9 percent rate of return?
A) \$3.89
B) \$7.78
C) \$11.67
D) \$15.56
E) \$19.44

8. One year ago, you purchased 200 shares of stock for \$29 a share. The stock pays \$.60 a share in dividends each year. Today, you sold your shares for \$31.60 a share. What is your total dollar return on this investment? A) \$480
B) \$520
C) \$610
D) \$640
E) \$670

9. The stock of Jensen Shipping has a risk premium of 8.4 percent while the inflation rate is 2.6 percent and the risk-free rate is 4.2 percent. What is the expected return on this stock?
A) 6.8 percent
B) 8.4 percent
C) 11.0 percent
D) 12.6 percent
E) 15.2 percent
10. Last week, Lester’s Electronics paid an annual dividend of \$2.10 on its common stock. The company has a longstanding policy of increasing its dividend by 3 percent annually. This policy is expected to continue. What is the firm’s cost of equity if the stock is currently selling for \$44.60 a share?
A) 7.66 percent
B) 7.71 percent
C) 7.79 percent
D) 7.85 percent
E) 7.90 percent

11. Atlantic Seafood has determined that \$17,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering. The one structure consists of all equity with 12,000 shares of stock. The second structure consists of 9,000 shares of stock and \$50,000 of debt. What is the interest rate on the debt?
A) 8.10 percent
B) 8.25 percent
C) 8.50 percent
D) 8.67 percent
E) 8.75 percent
12. Uptown Merchants just announced that it will be paying an annual dividend of \$1.60 a share plus an extra dividend of \$.40 a share this coming year. The company also announced that its regular dividend, which is all it anticipates paying after this year, will increase by 2 percent annually. What is the anticipated dividend per share 4 years from now?
A) \$1.60
B) \$1.63
C) \$1.70
D) \$1.73
E) \$2.16
13. The Pasta Maker needs to raise \$16 million to update its machinery. Management estimates that it will cost the firm \$240,000 for accounting, legal, and other costs related to the issuance of securities for this purpose. The underwriting spread is 8 percent and the issue price is \$24 a share. How many shares of stock must The Pasta Maker sell to finance its new machinery?
A) 626,543 shares
B) 676,667 shares
C) 735,507 shares
D) 748,211 shares
E) 794,348 shares
14. A firm has a weighted average cost of capital of 9.6 percent and a cost of equity of 14.5 percent. The debt-equity ratio is .70. There are no taxes. What is the firm’s cost of debt?
A) 2.60 percent
B) 3.18 percent
C) 3.27 percent
D) 3.33 percent
E) 3.59 percent
15. Breakable Gifts is an all-equity firm with a current cost of equity of 17.5 percent. The estimated earnings before interest and taxes are \$224,000 annually forever. Currently, the firm has no debt but is in the process of borrowing \$300,000 at 7.5 percent interest. The tax rate is 32 percent. What is the value of the unlevered firm?
A) \$870,400
B) \$872,200
C) \$938,700
D) \$962,500
E) \$966,400

16. Carter’s Home Supply has a \$35 million bond issue outstanding with a coupon rate of 8.5 percent. The tax rate is 38 percent. What is the present value of the tax shield?
A) \$9.7 million
B) \$10.2 million
C) \$10.4 million
D) \$12.8 million
E) \$13.3 million
17. Office Supplies and More is a retail outlet. The company went public a year ago at an offering price of \$14 a share. Today, the stock is priced at \$2.80 a share. The firm has decided to do a reverse stock split to return the stock to its original offering price. Which one of the following split ratios will best accomplish this goal?
A) 2-for-7
B) 1-for-5
C) 1-for-7
D) 5-for-1
E) 7-for-1
18. Ziegler’s has the following equity account balances: common stock of \$42,000 with a \$1 par value, capital surplus of \$228,000, and retained earnings of \$509,000. The stock has a market value of \$38 a share. Assume the company issues a 20 percent stock dividend. How many shares of stock will the firm distribute as a result of this dividend?
A) 8,400 shares
B) 9,200 shares
C) 43,750 shares
D) 45,600 shares
E) 101,800 shares

19. The Pickle Jar issued 300,000 shares of stock last week. The underwriters charged a 7.5 percent spread in exchange for agreeing to a firm commitment. The legal and accounting fees were \$420,000. The company incurred \$110,000 in indirect costs related to management time and other internal expenses. The offer price was \$14 a share. Within the hour of trading, the stock was selling for \$17.50 a share. What was the flotation cost as a percentage of the funds raised?
A) 27.33 percent
B) 38.07 percent
C) 41.41 percent
D) 56.48 percent
E) 63.40 percent

20. AB Cutter has a cash balance of \$10 and a beginning short-term loan balance of \$100 at the beginning of quarter one. The net cash inflow for the first quarter is \$79 and for the second quarter there is a net cash outflow of \$27. All cash shortfalls are funded with short-term debt. The firm pays 3 percent of its prior quarter’s ending loan balance as interest each quarter. The minimum cash balance is \$10. What is the short-term loan balance at the end of the first quarter?
A) \$18
B) \$24
C) \$76
D) \$100
E) \$110

21. The Green Elephant has a line of credit with a local bank that permits it to borrow up to \$3.5 million at any time. The interest rate is 0.46 percent per month. The bank charges compound interest and also requires that 4 percent of the amount borrowed be deposited into a noninterest-bearing account. What is the effective annual interest rate on this loan?
A) 5.90 percent
B) 5.98 percent
C) 6.03 percent
D) 6.08 percent
E) 6.14 percent
22. California Wines offers credit terms of 2/5, net 25. What is the effective annual rate on a \$8,000 purchase of wines if you forgo the discount?
A) 38.76 percent
B) 44.59 percent
C) 47.23 percent
D) 54.08 percent
E) 61.20 percent
23. The Purple Fiddle generally receives 3 checks a month in the amounts of \$18,200, \$22,000, and \$57,900. On average, it takes 2 days for the funds from these checks to be added to the firm’s available balance at the bank once they have been deposited. What is the amount of the average daily float?
A) \$3,270
B) \$4,670
C) \$4,920
D) \$6,540
E) \$6,610
24. Your German friend has decided to come and visit you in the U.S. You estimate the cost of her trip at \$4,800. What is the cost to her in euros if the U.S. dollar equivalent of the euro 1.35?
A) €3,555.56
B) €3,592.40
C) €6,220.00
D) €6,480.00
E) €6,521.28
25. Your favorite running shoes cost \$74 in the U.S. while the identical shoes cost C\$79 in Canada. According to purchasing power parity, the C\$/\$ exchange rate is:
A) C\$.937/\$1
B) C\$.942/\$1
C) C\$.949/\$1
D) C\$1.01/\$1
E) C\$1.07/\$1

## We are evaluating a project that costs \$748,000, has an 15-year life, and has no salvage value.

We are evaluating a project that costs \$748,000, has an 15-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 142,000 units per year. Price per unit is \$39, variable cost per unit is \$21, and fixed costs are \$760,716 per year. The tax rate is 34 percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-12 percent. The best-case NPV is \$ and worst-case NPV is \$. (Do not include the dollar signs (\$). Negative amount should be indicated by a minus sign. Round your answers to the nearest whole dollar amount. (e.g., 32).) 4. value: 4.76 points A 12-year project has an initial fixed asset investment of \$159,600, an initial NWC investment of \$15,200, and an annual OCF of -\$24,320. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 19 percent, the project’s equivalent annual cost, or EAC, is \$. (Do not include the dollar sign (\$). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) 10. value: 4.76 points McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for \$800 per set and have a variable cost of \$500 per set. The company has spent \$185,000 for a marketing study that determined the company will sell 77,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 16,000 sets of its high-priced clubs. The high-priced clubs sell at \$1,200 and have variable costs of \$1,000. The company will also increase sales of its cheap clubs by 17,000 sets. The cheap clubs sell for \$500 and have variable costs of \$300 per set. The fixed costs each year will be \$9,240,000. The company has also spent \$1,294,000 on research and development for the new clubs. The plant and equipment required will cost \$22,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of \$1,242,000 that will be returned at the end of the project. The tax rate is 38 percent, and the cost of capital is 10 percent. McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The sensitivity of the NPV to changes in the price is \$ and the sensitivity of the NPV to the quantity sold is \$. (Do not include the dollar signs (\$). Round your answers to 2 decimal places. (e.g., 32.16))
13. value: 4.76 points Summer Tyme, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of \$3.0 million. The fixed asset falls into the three-year MACRS class ( MACRS Table ) and will have a market value of \$280,000 after three years. The project requires an initial investment in net working capital of \$500,000. The project is estimated to generate \$2,850,000 in annual sales, with costs of \$1,160,000. The tax rate is 40 percent and the required return on the project is 12 percent. The net cash flow in Year 0 is \$; the net cash flow in Year 1 is \$; the net cash flow in Year 2 is \$; and the net cash flow in Year 3 is \$. The NPV for this project is \$. (Do not include the dollar signs (\$). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) 18. value: 4.76 points Consider an asset that costs \$413,600 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for \$51,700. If the relevant tax rate is 33 percent, the aftertax cash flow from the sale of this asset is \$. (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) 20. value: 4.76 points Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for \$979,200 is estimated to result in \$326,400 in annual pretax cost savings. The press falls in the MACRS five-year class ( MACRS Table ), and it will have a salvage value at the end of the project of \$142,800. The press also requires an initial investment in spare parts inventory of \$40,800, along with an additional \$6,120 in inventory for each succeeding year of the project. If the shop’s tax rate is 32 percent and its discount rate is 17 percent, the NPV for the project is \$ and Geary buy and install the machine press. (Do not include the dollar sign (\$). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)

## Tom’s company has projected net income per share for this year at \$3.80 per share. It has traditionally paid out a dividend of 45% of its net income

1. Tom’s company has projected net income per share for this year at \$3.80 per share. It has traditionally paid out a dividend of 45% of its net income. Income and dividends have been growing at a rate of 8% per year. The equity discount rate for comparable companies is 13%. a. What is the projected dividend for next year ? b. What is the current value of the stock using the Dividend Discount Model? 2. Tom’s company decides to reduce its dividend rate to 40%, and expects that the growth rate will increase as a result of the higher retained earnings to 9% per year. a. What is the new projected dividend for next year? b. What is the new stock value? 3. Bill’s company has a ROE of 18%. a. What will be its estimated growth rate if it has a dividend payout ratio of 60% ? b. If the company decreases the dividend payout ratio to 50%, what will be the new estimated growth rate ? 4. Jake’s company will have earnings per share of \$5.00 this year. It pays a dividend equal to 35% of net income. It is expecting that income and dividends will grow by 25% next year and 20% the year after. Then it is expecting to return to its historical growth rate of 8% per year. The relevant discount rate is 15% a. What are the projected level of dividends for in years 1,2 and 3 i. D 1 = ii. D 2 = iii. D 3 = b. What is the value of the stock in year 2 ? c. What is the value of the stock today ? 5. David’s company has EBITDA of \$370 million. It has outstanding debt of \$670 million. It is industry has typically displayed a Value /EBITDA ratio of between 5x and 6x EBITDA. If David’s company has 20 million shares outstanding, what is the estimate of the per share value of the company?