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Get college assignment help at uniessay writers 15. (10 points) Consider the following utility function: Y1-7 U(Y)= 1-7 where y> 0. a) Calculate the absolute risk aversion RA(Y) and the relative risk aversion RR(Y) b) Given an investment with the following payoff: Z equals either $100,000 with probability 0.5, or -$100,000 with prob- ability 0.5 (that is, E[Z] = 0), we define the risk premium through the following E U (Y 2)-U(Y-(, 2)) Explain the equation above. Derive the formula characterizing the risk pre- (1,2) the variance of Z mium II in terms of RA(Y) and

1. Your company currently generates $200 million in revenue selling through 50 indepen dent sales agencies. The agencies are paid a flat 5 percent commission on sales they generated. You are wondering whether it would be less expensive to develop your own dedicated sales force. Your industry’s trade association conducts an annual compensation survey, which indicated that the average salary for salespeople is $60,000 including ben- efits. In addition, an incentive compensation of 0.5 percent (i.e, one-half of 1 percent) of sales was also typical. You estimate that you would necd to hire 100 salespeople to replace the sales agents. Given the information provided, which would cost you less at $200 million in revenue-your own dedicated sales force or independent sales agents? What is the breakeven sales volume for your company; that is, when do the two sales force alternatives cost the same? 2. Upon further reflection on the previous problem, you realize that you have neglected to consider several relevant costs in your calculations. You have one national sales manager and a marketing manager who presently interface with the independent sales agents, but additional management levels will be needed to train and manage the number of salespeople you are anticipating hiring. First, you have decided to divide the nation into two regions with a regional sales manager in charge of each. According to industry sources, a regional sales manager’s average salary is $120,000. Second, a number of district managers will be needed to manage the salespeople directly. A span of control of 10:1 (10 salespeople to 1 manager) is believed to be necessary. Salaries for district managers average $90,000. Incentive pay for managers, both regional and district, is expected to be 0.35 percent of sales. Third, it should cost $12,000 to recruit and train cach salesperson. Finally, management wants sales to grow by 10 percent next year to $220 million, so more than 100 salespeople will need to be hired. Average sales per salesperson are expected to be $2 million. Given this new information, which type of sales force will be less expensive? What is the breakeven sales volume now? Cost of Sales Agents: Total Sales Commission Volume Rate Cost (S) (%) (S) $0 Cost of Dedicated Sales Force: Salary per Salesperson ($ Sales Commission Total Number of Volume Rate Cost Salespeople (S) (%) (S) $0 Instructions: Fill in the boxed cells with the appropriate numbers to calculate the total cost of the two alternative sales force organizations

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Coupon Rate (annual payments) Bond Maturity (years) A 0% 17 0% 12 2% C 17 12 D 8%

The Lawn Robot: Is It Really Worth It? le Tolks at Creative ProductsCorporation (CPC) knew we hw to come up with useful and unique products in the midst If there well, rsity. With of a useful, and hopefully hipl venues shrinking due Ished har hly profitable, “unique product. Last month, the design team unveiled a fully tested, prototype of their latest innovation, a remote-controlled lawn mower, the “Lawn Robot.” Surveys of retailers and customers conducted by the marketing department indicated that demand would be excellent, provided the price was lower than a riding lawn mower. The testing and development phases took almost three years and the final product passed all safety hazard tests with flying colors. After the unveiling, the product was exhibited at various home shows nationwide and received rave reviews. Full production had not yet started, however, because there had been a change in CEOs, and the new CEO was highly conservative. Before being given the “go ahcad” to go into full-scale production of the Lawn Robot, the design team had to present a detailed feasībility study to the Capital Investment Committee (CIC), which was chaired by the Vice President of Finance, Bill Burton. As was typical in documentation to substantiate the numbers. major undertaking of this type, the proposal had to include detailed cost and revenue estimates with sufficient 45 Having been involved with more than a few of these kinds be prepared for a tough and demanding question and answer session at the next committee meeting. Luckily for Matt, his assistant, Chris Robinson, who had recently carned his chartered financial analyst (CFA) designation, was an experienced and dependable employee. Prior to being hired by CPC three years ago, Chris had worked for another large engineering company for over 10 years. “Chris, we have to dot all the ‘i’s’ and cross all the t’s’ on this one!” said Matt. “Or else the big guys are going to tear us apart, because we’re talking major dollars here. Their main question is going proposals before, the head of the design team, Matt Robichek, knew that he had better take every possible factor into consideration and be, is it rea So Matt and Chris began collecting the necessary information. They knew that to have a comprchensive feasibility study they would have to include the following: 1. Pro forma statements showing expected annual revenues, variable costs, fixed costs, and net cash flows over the economic life of the project with appropriate supporting documentation. 2. Break-even analysis 3. Sensitivity of the cash flows to alternative scenarios of sales growth and profit margins. Based on the data provided by the marketing department, they prepared Table 1, showing the expected unit sales of the Lawn Robot over its 10-year economic life and the expected selling price per unit. Note that the price of $1,000 per unit was estimated to gradually drop to $900 per unit over the 10-year period reflecting competitive pressures. Depreciation for this project was based on the seven-year MACRS rates be sold for $4 million The manufacturing would be done in an unused plant of the firm. Similar plant locations could be leased for $10,000 per month. Fixed costs were estimated to be $1,500,000 per year while variable production costs per unit were expected to be $400. To get the project underway, additional inventory of $500,000 would be required. The company would increase its accounts payable by $600,000 and its accounts receivable by S1,000,000. Matt and Chris estimated that cach year thereafter, the net working capital of thee firm would amount to 5% of sales. The weighted average cost of capital was calculated to be 14%. Interest expenses on debt raised to fund the project were estimated to be $400,000 per year. The company’s tax rate was expected to remain constant at 34%. Table 2. The cost of equipment, including shipping, handling, and installation, was estimated at $20 million. It was estimated that after 10 years, the equipment and tools could shown 46 Table 1 Projected Unit Sales and Price for Lawn Robot Unit Price Unit Sales Year $1000 30,000 1000 34,000 2 1000 38,800 3 950 38,000 4 950 36,000 950 36,000 950 35,500 7 900 35,000 8 900 34,500 900 34,000 10 Table 2 Modified ACRS Depreciation Allowances 7-Year 5-Year 3-Year Year 14.29% 20.00% 33.33% 24.49 32.00 44,44 17.49 19.20 14.82 12.49 11.52 7,41 4 8.93 11.52 8.93 5.76 6 8.93 7 4,45 47 Questions 1. Prepare a pro forma statement showing the annual cash flows resulting from the Lawn Robot project 2. Use a scenario analysis to show how the cash flows would change if the sales forecasts were 15% worse (pessimistic) and 15% better (optimistic) than the stated forecast (base). 3. Realizing that the CIC will demand some kind of sensitivity analyses, how should Matt and Chris prepare their report? Which variables or inputs obviously need to be analyzed using multiple values? Explain by performing suitable calculations 4. How should the annual interest expenses of $400,000 be treated? Explain. 5. Using the base case estimates calculate the cash, accounting, and financial break-even of the Lawn Robot project. Interpret each one. 6. Say the company spent $500,000 in developing the prototype of the Lawn Robot. How should Matt and Chris treat this item in their report? Explain 7. Calculate the IRR of the project. Based on your calculations what would you recommend? Why? 8. How sensitive is the net present value of the project to the cost of capital? 9. Calculate the operating leverage entailed by this project. What does it indicate? 10. What other types of contingency planning should Matt and Chris include to make the report comprehensive? Please explain the relevance of cach suggestion

Special Problems in Capital Budgeting P4. Semper Mortgage wishes to select the best of three possible computers, each expected to meet the firm’s growing need for computational and storage capacity. The three computers – A, B, and C – are equally risky. The firm plans to use a 12 % cost of capital to evaluate each of them. The initial outlay and annual cash outflows over the life of each computer are shown in the following table. Year Computer A Computer B Computer C -$50,000 -$35,000 -$60,000 0 -$18,000 -$7,000 -$5,500 1 -$7,000 -$12,000 -$18,000 2 -$7,000 -$16,000 -$18,000 -$7,000 -$23,000 -$18,000 -$7,000 -$18,000 5 -$7,000 -$18,000 6 a. Calculate the NPV for each computer over its life. Rank the computers in descending order based on NPV. b. Calculate the PI for each computer and rank the computers in descending order based on Pl. Compare your answer with part a c. Use the equivalent annual cost (EAC) approach to evaluate and rank the computers in descending order based on the EAC d. Compare and contrast your findings in parts (a) – (c). Which computer would you recommend that the firm acquire? Why? LO.

Choosing the Right Discount Rate P1. Company A’s capital structure contains 10% debt and 90% equity. Company B’s capital structure contains 50% debt and 50% equity. Both companies pay 8% annual interest on their debt. The shares of Company A have a beta of 1.1, and the shares of Company B have a beta of 1.45. The risk-free rate of interest equals 5%, and the expected return on the market portfolio equals 12% a. Calculate the WACC for each company, assuming there are no taxes. b. Recalculate the WACC for each company, assuming that they face a tax rate of 34% Explain how taking taxes into account in part (b) changes your answer from part (a) C.

16. (10 points) Suppose the uncertainty involves two possible states (0 = 1, 2) with equal probability 0.5. The investment A produces a state-contingent rate of return 3 % at the state 1 and 5% at the state 2. The invest- ment B produces a state-contingent rate of return 2% at the state 1 and 8% at the state 2. a) Based on the state-by-state dominance, which investment project would you prefer? b) Based on the mean-variance criterion, which investment project would you like better? c) Which investment project would you rather have? Tell me your criterion.

. (10 points) [Valuing a Put Option] Suppose stock is currently trading for $60, and in period will either go up by 20% or fall by 10%. If the one-period risk-free rate is 3%, what is the price of a European put option that expires in one period and has an exercise price of $60? one

Estimated Annual Retirement Living Expenses Estimated annual living expenses if retiring today Number of years until retirement Expected annual rate of return before retirement Future value (use Exhibit 1-A) X Projected annual retirement living expenses, adjusted for inflation (A) (Round your final answer to nearest whole number.) Estimated Annual Income at Retirement Social Security income Company pension, personal retirement account income Investment and other income Total retirement income (B) (Round your final answer to nearest whole number.) Needed investment fund after retirement (A – B) (C) (Round your final answer to nearest whole number.) Number of years until retirement Expected annual rate of return before retirement Future value for a series of deposits (use Exhibit 1-B) (D) Annual deposit to achieve needed investment fund (C/D) (Roundrrrotr final answer to two decimal places.) Exhibit 1-B Future Value (Compounded Sum) of $1 Paid In t the End of Each Period for a Given Number of Time Periods (an Annuity) Period 1% 2% 3% 5% 6% 7% 9% 11% 4% 8% 10% 1 1 1 201 202 203 205 206 205 209 207 21 211 3.31 3.08 3.091 3.153 3,184 3.278 3 03 3 122 3.210 3.246 3.342 4.122 4.184 4.31 4.375 4.506 4.573 4.64 4 4.0E 4.246 4.44 4 71 5867 6 228 5.101 5 204 6300 5416 5526 5 637 575 5 985 106 6.152 6.633 7.913 F 6.308 6 468 6.802 6.975 7.155 7.336 7.523 7.716 7 806 9.48 7 214 7.434 7.662 8.142 8.394 8.654 8.923 9.2 9.783 11.020 11.050 8 206 503 8.092 9.214 9.549 9.097 10.26 10.637 11.436 0 158 11 027 11 9/8 12488 13 021 13 5/9 14 164 9 369 10 583 49 10 95 12.578 13.181 14 487 15.193 10 10.462 1 464 12.006 13 816 15 937 16 722 11.567 12.800 13.486 14.207 16.645 17 56 18.531 1: 12.169 4.97 15.784 19.561 20 141 12 683 18 977 1: 13.412 14 192 15 026 15917 16 87 17 898 21 394 22713 14.6 13 13.809 15.618 16.627 17 713 18.882 20.141 21.495 22.953 24.523 26.212 14 14.947 15.974 17.086 18.292 19.599 21.015 22.56 24.215 26.019 27.975 30.095 15 16.097 17.293 18 500 20.024 21.579 23.276 25.129 27.152 29.361 31.772 34.405 23.65 18 639 21.825 25.672 30.324 39.19 11 17 218 D 157 27 888 33 003 35 9C 20.012 1.762 28.213 36.974 11 18 43 23 608 25.84 30.84 33 75 40 545 44,501 1.301 16 19.615 21.412 23.414 25.645 28.132 0.90 33.990 37 45 45.599 50.306 46 018 19 20 811 22 841 25 117 27.671 30 530 33 76 37 379 41446 51 159 66 939 20 22.019 24.297 26.87 29.778 33.066 5.786 40.990 45.762 51.16 57.275 64.203 25 28.243 32.03 6.459 41.646 47.727 54.865 63.249 73.106 84.701 98.347 114.413 34.785 40 560 47.575 56.005 G6430 79.050 94.461 113.203 6.300 164.494 199.021 219 057 AL 48 886 60 402 5 40 so 026 120 8 154 76: 199.635 337 882 412 583 581.826 84.579 112.797 152.667 573.77 815.084 50 64.463 209.348 290.336 406.529 1163.909 1663.771 Perlod 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 1 1 1 1 1 1 1 2.17 22 2 12 2.13 2.14 2 15 2,16 2.18 2.19 2 25 2.3 S 99 3.505 3 530 364 3.374 3.407 3.44 3.473 3.572 3.606 813 4.85 4.993 5.06 5368 6.187 1779 4.921 514 5215 5.291 5766 7 442 6.353 648 6 61 6742 6 877 7014 7 154 7 297 8 207 a043 9.207 9.93 11.259 12.756 3.115 8.323 8.536 8.754 8.977 9 442 9.683 10.089 10.405 10.73 11.067 11.414 11 77 12.142 12.523 12.916 15.073 17.583 12.3 12.757 13.233 13.727 14.24 14.773 15.327 15.902 16.499 19.842 23.850 14 776 15 416 16 085 16 786 17.519 18.285 19 086 19 923 20 799 25 802 32015 24.709 10 17.549 18.42 19.337 20.304 21.321 2 39 23.521 25.969 33 253 42.619 1: 20.655 21.814 23.045 25.733 30 404 32.15 42 566 56 405 24 349 27.2 28 755 13 24 133 25.65 27 27 29 002 30 85 2 824 34 931 37.18 39 581 54 200 74 327 34.352 48.497 13 28.029 29.985 32.089 35.785 40 12 218 45.244 58 7E 97.625 32.393 37.581 40.605 43.672 59.196 127.913 14 34.883 4Y.103 50.818 54.841 86.949 167.206 15 37.20 40417 43.842 47.58 51.66 56.11 60.065 G261 72.035 109 607 55.717 16 42.753 46672 50.98 60 925 66649 72939 79.85 87 442 138.109 218.472 11 48.884 53.739 9.118 65.075 71.673 78.979 87.058 95.022 105.931 173.636 285.014 55 75 61.725 93.406 115.266 28 117 371.518 16 8.304 75.836 84.141 103.74 218.045 70 740 78 969 483 973 19 a 44 88212 98 603 110 28 123 414 139 166 154 74 273 556 72.052 80 947 102.444 165.418 630.165 20 91.025 115.38 130,033 146.628 86.688 342.945 181.87 133.334 155.62 212.793 249.214 292.105 342.603 402.042 471.981 1054.791 2348.803 241.333 293 199 356 707 434 745 530 312 647 439 790.948 966.712 1181.082 3227.174 0729.985 AL 767 081 1013 /04 1342.025 1779 09 2360 75/ 3134 522 4163 213 5629 829 7343 858 30088 650 120392 883 2400,018 3459.507 4994.521 7217 716 10435.649 15089.502 21813.094 31515.336 45497.191 280255 693 1659760 743

Get college assignment help at uniessay writers Assume that the following market model adequately describes the return- generating behavior of risky assets: Rit ai BiRMt Ejt Here: Rit= The return on the th asset at Time t RMt The return on a portfolio containing all risky assets in some proportion at Time t RMt and Eit are statistically independent. Short selling (i.e., negative positions) is allowed in the market. You are given the following information: E(R) Var(Ei) Bi Asset A 76 9.01% .0100 1.15 12.66 .0156 B C 1.62 14.35 .0237 The variance of the market is .0133, and there are no transaction costs. a. Calculate the standard deviation of returns for each asset. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the variance of return of three portfolios containing an infinite number of asset types A, B, or C, respectively. (Do not round intermediate calculations and round your answers to 6 decimal places, e.g., .161616.) c. Assume the risk-free rate is 4.1 percent and the expected return on the market is 10.1 percent. What is the expected returns of each asset? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) A standard deviation B standard deviation C standard deviation A variance B variance a. b. C variance c-1. A expected return B expected return C expected return

s.25 Internal rate of return: Holliday Ltd., a resort company, is refurbishing one of its hotels at a cost of $6,465,406 million. The company expects that this improvement will lead to additional cash flows of $2,092,819 million for the next 6 years. What is the IRR of this project? If the appropriate cost of capital is 12 percent should it go ahead with this project?

8. If investors become more risk averse, everything else equal, the market risk premium is predicted to a) decrease b) increase c) remain equal, as investor risk aversion should not affect market risk premium d) first increase sharply because of increased investor demand for T-bills, then flatten out once the excess demand is absorbed e) none of the above

7. Which of the following is true? a) interest rate risk is inversely related to bond’s coupon rate b) interest rate risk is positively related to bond’s coupon rate c) interest rate risk is not related to bond’s coupon rate d) interest rate risk is equal to bond issuer’s CAPM beta e) none of the above

Discounted payback: Fluid Communication Ltd. is investing $9,365,000 in new technologies. The company expects significant benefits in the first 3 years after installation (as can be seen by the cash flows), and a constant amount for four more years. What is the discounted payback period for the project assuming a discount rate of 10 percent? B 8.33 4-7 $1,250,000 3 $3,378,911 2 $4,558,721 Years Cash flows 1 $2,265,433

Exercise II Supplier A applies a 8,0% trade discount for payment made within 10 days from the date of purchase, when the full period of trade credit granted is 40 days. Supplier B uses a 7,0% discount for cash payment and can grant a trade credit for a period of 50 days. Company ABC wants to take advantage of the trade discount provided by the supplier. Determine the value of additional sources of short-term financing should the company benefit from the offer of supplier A or suppliers is estimated at USD 4000000 per year. Calculate also the cost of credit both for the unique (incidental) and permanent (renewable, cyclical) scenario. supplier B, and the value of purchased goods from these

Exercise III Calculate Weighted average Cost of Capital. The company is financing its investments by bank loans (data given below). Additionally the external capital is being added by long term financing through bond issue with fixed coupon payments. Corporate tax rate is equal 19% . Based on these data please calculate WARD. Loan 1 4000000 $ Interest rate for loan 1 8.0% oan 2 2700000 $ Interest rate for loan 2 Total value of the bond 7.0% 10 000 000 $ Face value of one bond 10 000 $ Issue price (market price of the bond at the issue) Nominal interest rate (coupon rate) 10017 $ 7,5% Number of coupons during a year Maturity of the bond 2 4 19% orporate tax rate The dividend payout is the result of multiplying the dividend payout per share from last year and current number of common shares being listed and retains the base for calculating the dividend payout ratio. Profitability ratios are being calculated based on the data from the last year. None financial revenues are taken into account. Equity 8 000 000 $. The debt levels did not change from the last year. Dividend payout from the last period 11 S Current market price of common share Number of common shares listed 1170000 Financial results from the last period of time Sales revenues 9 000 000 S Variable expenses (as % of the sales revenues) Fixed expenses 55% 800 000 S Corporate tax rate Additionally please calculate how the cost of equity would change when the new issue of common share would be initiated The company would issue 300 thousand new common shares at the current market price with 15% of public offering fees. 19%

Practice 3: Bond market 1. What were the bid price, asked price, and yield to maturity of the 5.000% May 15th. 2037 Treasury bond displayed in Figure below? What was its asked price the previous day? If 30 days have passed since the last coupon payment, what is the sale, or invoice, price of the bond? U.S. Government Bonds and Notes ASK YLD MATURITY COUPON BID ASKED CHG Jun 30 11 Jul 31 11 Jul 31 11 Aug 15 11 Aug 31 11 Aug 31 11 Sep 30 11 Sep 30 11 Oct 31 11 Nov 15 11 Nov 30 11 May 15 37 Feb 15 38 May 15 38 Feb 15 39 May 15 39 Aug 15 39 5.125 1.000 4.875 5.000 1.000 4.625 1.000 4.500 4.625 .750 4.500 5.000 4.375 4.500 3.500 4.250 4.500 107:11 107:11 100:09 100:10-2 0.8303 107:05 107:06 -3 0.8186 107:18 107:19 100:06 100:06 – 0.9008 106:29 106:30 -3 0.8796 100:03 100:03 -2 0.9555 106:28 106:29 -2 0.9365 107:11 107:12 2 0.9739 101:16 101:17 -2 1.0122 107:08 107:09 -3 1.0235 111:00 1105 -21 4.3049 100:24 100:28 -21 4.3208 102:29 103:00 -20 4.3161 86:11 86:14 -18 4.3197 98:26 103:02 103:03 -22 4.3143 -2 0.7792 -3 0.8118 98:29 -20 4.3156 2. A 30-year maturity, 10% coupon bond paying coupons semiannually is callable in 15 years at a call price of $1,100. The bond currently sells at a yield to maturity of 8% (4% per half-year) a. What is the yield to call? b. What is the yield to call if the call price is only $1,050? c. What is the yield to call if the call price is $1,100, but the bond can be called in 10 years instead of 15 years? 3. Suppose that the yield to maturity of the 5% coupon, 25-year maturity bond falls to 7% by the end of the first year and that the investor sells the bond after the first year. If the investor’s federal plus state tax rate on interest income is 30% and the combined tax rate on capital gains is 20%, what is the investor’s after- tax rate of retum?

8.41 Dravid Ltd. is currently evaluating three projects that are independent. The cost of funds can be either 13.6 percent or 14.8 percent depending on their financing plan. All three projects cost the same at $500,000. Expected cash flow streams are shown in the following table. Which projects would be accepted at a discount rate of 14.8 percent? What if the discount rate was 13.6 percent? Project 2 Project 3 $245,125 Project 1 Year 1 0 0 $125,000 $150,000 $375,000 $212,336 $112,500 $74,000 0 2 $500,000 $500,000 3 4

Audit of the sales and collection cycle based on chapter 13 3. Understand internal control, and design and perform tests of controls and substantive test of transactions for sales 4. Understand internal control, and design and perform tests of controls and substantive test of transactions for cash receipts

10.48 Blasko Ltd is considering inflows of $11.5 million per year for 7 years and an additional after-tax salvage value of $50 million in Year 7. The required rate of retum is 10 percent. What is the investment’s PI2 an investment of $375 million_with expected after-tax cash

The post Question: 15. (10 Points) Consider The Following Utility Function: Y1-7 U(Y)= 1-7 Where Y> 0. A) Calculate The Absolute Risk Aversion RA(Y) And The Relative Risk Aversion RR(Y) B) Given An Investment With The Following Payoff: Z Equals Either $100,000 With Probability 0.5, Or -$100,000 With Prob- Ability 0.5 (that Is, E[Z] = 0), We Define The Risk Premium Through … appeared first on uniessay writers.

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