The purpose of this milestone is for students to begin their firm analysis from a micro-economic perspective

ECO 201 Milestone Two Guidelines and Rubric The purpose of this milestone is for students to begin their firm analysis from a micro-economic perspective, applying concepts learned in Modules One, Two, and Three. Specifically, students will examine the supply and demand conditions for the goods or services the firm produces, paying special attention to how sales and product development have evolved over time. Students will then apply the elasticity concept to determine how the price elasticity of demand for the firm’s goods or services would be categorized, and they will examine what that suggests for the firm’s ability to increase or decrease prices. Prompt: Submit a draft of the supply and demand conditions (Section II) and price elasticity of demand (Section III) of your research paper, including all critical elements listed below. You will analyze data on firm sales and in the market overall to identify trends and inform your recommendation for the firm’s future actions. You will also use available data to determine the price elasticity for the goods or services your firm produces and explain the factors that influence consumers’ reactions and the firm’s pricing decisions. Specifically the following critical elements must be addressed: II. Explore the supply and demand conditions for your firm’s product. a) Evaluate trends in demand over time and explain their impact on the industry and the firm. You should consider including annual sales figures for the product your firm sells. b) Analyze information and data related to the demand and supply for your firm’s product(s) to support your recommendation for the firm’s actions . Remember to include a graphical representation of the data and information used in your analysis. III. Examine the price elasticity of demand for the product(s) your firm sells. a) Analyze the available data and information, such as pricing and the availability of substitutes, and justify how you determine the price elasticity of demand for your firm’s product. b) Explain the factors that affect consumer responsiveness to price changes for this product, using the concept of price elasticity of demand as your guide. c) Assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growth

Use sufficient solution steps, and specific Excel functions =PV(…), =FV(…), =PMT(…), =NPER(…), =RATE(…), =PRICE(…) or =YIELD(…) whenever applicable

Use sufficient solution steps, and specific Excel functions =PV(…), =FV(…), =PMT(…), =NPER(…), =RATE(…), =PRICE(…) or =YIELD(…) whenever applicable. Don’t use any “Amortization tables” . Must be done in excel, put each case on a separate tab. I will tip very well if all criteria is met with quality. Case 1: You apply for a 20-year, fixed-rate (APR 6.48%) monthly-payment-required mortgage loan for a house selling for $150,000 today. Your bank requires 22% initial down payment of house value, and $3,000 closing cost (to be carried into loan balance and amortized later) when the loan is approved. (a) What is your monthly loan payment if you stick to the mortgage deal till the end (assuming each payment is made at the end of each month)? (b) 9 years after buying the house, what will be the remaining loan principal balance? (Please note again it is a monthly mortgage.) (c) 9 years after buying the house, the loan market rate drops from 6.48% APR to 6.00% APR. You plan to refinance, but the bank would charge an extra fee of $4,500 for refinancing (which is carried into the current remaining loan balance for amortization). Would you be able, and by how much, to lower your monthly loan payment if you choose to refinance on the remaining loan principal balance over the remaining loan life period ? Based on your calculation results, should you choose to refinance or not? (d) Redo the calculations in Question (c), assuming that the loan market rate drops from 6.48% APR to 5.76% APR (instead of 6.00%). Shall you choose to refinance then?

Case 2: By the end of each year , you contribute a $3,300 to your retirement fund portfolio, which on average earns an annual nominal return of 11.25% over time. The annual contribution continues for 36 years until you retire. (Note: All tax concerns are ignored here.) (a) By the time of your retirement, how much money would you have in your portfolio? (without considering any inflation) (b) For your post-retirement life (which would last approximately another 28 years), by the end of every year you withdraw and spend an equal amount of annuity payment from your retirement fund account. What should be the annual payment amount you withdraw if you do not want to leave any money to your heirs? (without considering any inflation) (c) Considering the long-term inflation averages 3.50% annually. How much money (at real purchasing power) will you actually have when you retire? How much equal amount should you withdraw and spend (at real purchasing power) by the end of each year for your post-retirement life, provided that you leave no money to your heirs in the end? (d) Again consider the long-term annual inflation 3.50%, and use the information you obtain from the above (c). How much equal amount should you and your heirs withdraw and spend (at real purchasing power) by the end of each year, provided that you and your heirs can benefit from this fund generations after generations infinitely ?

Chapter 7 – Valuing Bonds Extra Credit 7-1 Interest Payments

Chapter 7 – Valuing Bonds Extra Credit 7-1 Interest Payments Determine the interest payment for the following three bonds: 31⁄2 percent coupon corporate bond (paid semiannually), 4.±5 percent coupon Treasury note, and a corporate zero coupon bond maturing in ten years. (Assume a $²,000 par value.) (LG7-²) 7-2 Interest Payments Determine the interest payment for the following three bonds: ³1⁄2 percent coupon corporate bond (paid semiannually), 5.²5 percent coupon Treasury note, and a corporate zero coupon bond maturing in ²5 years. (Assume a $²,000 par value.) (LG7-²) 7-3 Time to Maturity A bond issued by Ford on May ²5, ²997 is scheduled to mature on May ²5, ±097. If today is November ²6, ±0²4, what is this bond’s ´me to maturity? (LG7-²) 7-4 Time to Maturity A bond issued by IBM on December ², ²996, is scheduled to mature on December ², ±096. If today is December ±, ±0²5, what is this bond’s ´me to maturity? (LG7-²) 7-5 Call Premium A 6 percent corporate coupon bond is callable in µve years for a call premium of one year of coupon payments. Assuming a par value of $²,000, what is the price paid to the bondholder if the issuer calls the bond? (LG7-²) 7-6 Call Premium A 5.5 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $²,000, what is the price paid to the bondholder if the issuer calls the bond? (LG7-²) 7-9 Bond Quotes Consider the following three bond quotes: a Treasury note quoted at 97:±7, a corporate bond quoted at ²0¶.±5, and a municipal bond quoted at ²0².90. If the Treasury and corporate bonds have a par value of $²,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars? (LG7-¶) 7-10 Bond Quotes Consider the following three bond quotes: a Treasury bond quoted at ²06:²4, a corporate bond quoted at 96.55, and a municipal bond quoted at ²00.95. If the Treasury and corporate bonds have a par value of $²,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars? (LG7-¶) 7-11 Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in ±0 years if the market interest rate is ¶.8 percent. (LG7-4) 7-12 Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in ²5 years if the market interest rate is 5.75 percent. (LG7-4) 7-13 Current Yield What’s the current yield of a ¶.8 percent coupon corporate bond quoted at a price of ²0±.08? (LG7-6) 7-14 Current Yield What’s the current yield of a 5.± percent coupon corporate bond quoted at a price of 96.78? (LG7-6)

7-15 Taxable Equivalent Yield What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket? (LG7-6) 7-16 Taxable Equivalent Yield What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket? (LG7-6) 7-23 Compute Bond Price Calculate the price of a 5.2 percent coupon bond with 18 years leF to maturity and a market interest rate of 4.6 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond? (LG7-4) 7-24 Compute Bond Price Calculate the price of a 5.7 percent coupon bond with 22 years leF to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond? (LG7-4) 7-25 Bond Prices and Interest Rate Changes A 5.75 percent coupon bond with ten years leF to maturity is priced to o±er a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.8 percent. What is the change in price the bond will experience in dollars? (LG7-5) 7-26 Bond Prices and Interest Rate Changes A 6.5 percent coupon bond with 14 years leF to maturity is priced to o±er a 7.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.8 percent. What is the change in price the bond will experience in dollars? (LG7-5) 7-27 Yield to Maturity A 5.65 percent coupon bond with 18 years leF to maturity is o±ered for sale at $1,035.25. What yield to maturity is the bond o±ering? (Assume interest payments are semiannual.) (LG7-6) 7-28 Yield to Maturity A 4.30 percent coupon bond with 14 years leF to maturity is o±ered for sale at $943.22. What yield to maturity is the bond o±ering? (Assume interest payments are semiannual.) (LG7- 6) 7-29 Yield to Call A 6.75 percent coupon bond with 26 years leF to maturity can be called in six years. The call premium is one year of coupon payments. It is o±ered for sale at $1,135.25. What is the yield to call of the bond? (Assume interest payments are semiannual.) (LG7-6) 7-30 Yield to Call A 5.25 percent coupon bond with 14 years leF to maturity can be called in four years . The call premium is one year of coupon payments. It is o±ered for sale at $1,075.50. What is the yield to call of the bond? (Assume interest payments are semiannual.) (LG7-6) 7-36 Bond Prices and Interest Rate Changes A 7.5 percent coupon bond with 13 years leF to maturity is priced to o±er a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. If this occurs, what would be the total return of the bond in dollars and percentage terms? (LG7-5) 7-37 Yields of a Bond A 2.50 percent coupon municipal bond has 12 years leF to maturity and has a price quote of 98.45. The bond can be called in four years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, taxable equivalent yield

Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows

Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows:

Units Sold Price Total Variable Costs Fixed Costs
120,000 $48 $3,000,000 $1,000,000
159,500 $45 $3,510,000 $1,000,000
160,000 $40 $4,000,000 $1,000,000
180,000 $35 $4,500,000 $1,000,000
200,000 $30 $5,000,000 $1,000,000
How much profit will Troy have if a price of $45 is charged?

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The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.25 above full cost. Management estimates that the variable cost of the globe will be $64 per unit and fixed costs per year will be $240,000.

Assuming sales of 1,200 units, what is the full selling price of a globe with a 0.25 markup?

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A company believes it can sell 5,400,000 of its proposed new optical mouse at a price of $10.50 each. There will be $8,000,000 in fixed costs associated with the mouse. If the company desires to make a profit $2,000,000 on the mouse, what is the target variable cost per mouse?

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Wizard Corporation has analyzed their customer and order handling data for the past year and has determined the following costs:

Order processing cost per order

$7
Additional costs if order must be expedited (rushed)

$9.50

Customer technical support calls (per call)

$12
Relationship management costs (per customer per year)

$1200

In addition to these costs, product costs amount to 75% of Sales.

In the prior year, Wizard had the following experience with one of its customers, Chester Company:

Sales

$15,000
Number of orders

160
Percent of orders marked rush

70%
Calls to technical support

80

Required:

Calculate the profitability of the Chester Company account.

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When a firm adds a predetermined percentage to the cost of its product for pricing purposes, it is called:

Question 5 options:

incremental pricing

demand pricing

cost-plus pricing

cost plus demand pricing

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PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:

Direct material $625,000
Direct labor 375,000
Variable overhead 125,000
Fixed overhead 1,500,000
Total cost $2,625,000
At the start of the current year, the company received an order for 3,200 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because they currently have excess capacity. Also, this is the company’s first international order. On the other hand, the company in China is willing to pay only $140 per unit.

What will be the effect on profit of accepting the order?
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Another name for menu-based pricing is:

Question 7 options:

Cost-plus pricing

Customer profitability pricing

Profit maximizing pricing

Activity-based pricing

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A company has $40 per unit in variable costs and $1,200,000 per year in fixed costs. Demand is estimated to be 106,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?

Motorcade Company has three service departments (S1, S2, and S3) and two production departments (P1 and P2)

Motorcade Company has three service departments (S1, S2, and S3) and two production departments (P1 and P2). The following data relate to Motorcade’s allocation of service department costs:

Budgeted Costs

Number of Employees

S1

$3,120,000

75

S2

2,340,000

50

S3

1,000,000

25

P1

150

P2

225

Service department costs are allocated by the direct method. The number of employees is used as the allocation base for all service department costs.

Calculate the total service department cost allocated to each production department P1

Calculate the total service department cost allocated to production department P1

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El Dorado Company has two production plants. Recently, the company conducted an ABM study to determine the cost of activities involved in processing orders for parts at each of the plants. How might an operations manager use this information to manage the cost of processing orders?

Question 2 options:

Set up an ABC costing system

Identify benchmarks

Compare the cost to process an order at each plant and the nature of the orders to determine if costs are out of control. If out of control, investigate

Close down the plant with the highest cost to increase profits

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Infinity Designs, an interior design company, has experienced a drop in business due to an increase in interest rates and a corresponding slowdown in remodeling projects. To stimulate business, the company is considering exhibiting at the Home and Garden Expo. The exhibit will cost the company $12,000 for space. At the show, Infinity Designs will present a slide show on a PC, pass out brochures that are printed previously, (the company printed more than needed), and show its portfolio of previous

jobs.

The company estimates that revenue will increase by $36,000 over the next year as a result of the exhibit. For the previous year, profit was as follows:

Revenue $201,000
Less:
Design supplies (variable cost) $17,000
Salary of Samantha Spade (owner) 80,000
Salary of Kim Bridesdale (full time employee) 55,000
Rent 18,000
Utilities 6,000
Depreciation of office equipment 3,600
Printing of advertising materials 700
Advertising in Middleton Journal 2,500
Travel expenses other than depreciation of autos (variable cost) $2,000
Depreciation of company cars 9,000

Required:
Calculate the impact of the exhibit on company profit.
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Each year, Sunshine Motos surveys 7,500 former and prospective customers regarding satisfaction and brand awareness. For the current year, the company is considering outsourcing the survey to Global Associates, who have offered to conduct the survey and summarize results for $30,900.Craig Sunshine, the president of Sunshine Motors, believes that Global will do a higher-quality job than his company has been doing, but is unwilling to spend more than $10,000 above the current costs. The head of bookkeeping for Sunshine has prepared the following summary of costs related to the survey in the prior year.

Mailing $16,800

Printing (done by Lester Print Shop) $4,500

Salary of Pat Fisher, part-time employee who stuffed envelopes and summarized data when surveys were returned
(100 hours X $15) $1,500

Share of depreciation of computer and software used to track survey responses and summarized results. $1,100

Share of electricity/phone/etc. based on square feet of space occupied by Pat Fisher vs. entire company. $500

REQUIRED: What is the incremental cost of going outside versus conducting the survey as in the past?

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Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

Cost per Unit

Variable costs

Direct material

$920

Direct labor

600

Variable overhead

300

Fixed costs

Depreciation of equipment

500

Depreciation of building

275

Supervisory salaries

300

The company has an offer from Duvall Valves to produce the part for $2,000 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year.

What is the incremental savings of buying the valves? (The answer should be stated in a per-unit format and is a positive number)

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Landmark Coal operates a mine. During July, the company obtained 500 tons of ore, which yielded 250 pounds of gold and 63,700 pounds of copper. The joint cost related to the operation was $500,000. Gold sells for $325 per ounce and copper sells for $0.87 per pound. Allocate the joint costs using relative weight. With these costs, what is the profit or loss associated with Copper?

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Landmark Coal operates a mine. During July, the company obtained 500 tons of ore, which yielded 250 pounds of gold and 63,100 pounds of copper. The joint cost related to the operation was $500,000. Gold sells for $325 per ounce and copper sells for $0.93 per pound. Allocate the joint costs using the relative sales values. With these costs, what is the profit or loss associated with Copper?

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Common costs

Question 8 options:

A) are fixed costs that are not directly traceable to an individual product line

B) normally not avoidable

both A and B are true statements

Neither A nor B is a true statement

Working Capital Management 04-373-30 (Summer 2014, Fenn)

Working Capital Management 04-373-30 (Summer 2014, Fenn) Final Exam Format Part I – True and false and short answer format Twenty (20) true and false questions (in total) related to cash, accounts receivable, inventory, deferred taxes, debt financing, lending criteria, ratio analysis, working capital structuring and valuation. A calculator will be required for some questions. Also, one short answer question will be asked related to working capital lessons learned in the course. Part II – Potential exam questions The Talich Fabricating Inc. (Talich) case will be used on the final exam and given to you at the July 28 th class. The owner needs funds to finance an expansion. You should analyze the case from a lender’s perspective. 1. Does the industry, company history and ratio analysis support a viable on-going business that a banker would want to finance? Yes or no and reasons. 2. Does the 7C’s approach support financing the business? Yes or no and reasons. 3. What is the forecasted income statement, statement of financial position and statement of cash flows for 1996? Do the forecasted financials support financing the business? Yes or no and reasons. 4. What terms would you place on a loan to the company based on the value of the company including its net assets? Explain key terms such as percent of value, length of loan, and interest rate. 5. Does the expansion opportunity affect the profitability and working capital needs of the company? Yes or no and reasons. Your answer for each question will not be more than 3 pages (hand-written during the exam). You can use bullets and charts within these three pages. I am expecting a well laid- out answer that could be presented to the board of directors of Talich. The answers should be very concise with relevant support from your analysis to support a decision. Two (2) questions will be given to you at the exam to answer. For the final exam, no computers will be allowed in the classroom but you can bring in your analysis and notes regarding the Talich case. Otherwise, the final exam is closed book

The companies will be Apple and Google, and you are deciding as an investor which company you would RATHER invest in

The companies will be Apple and Google, and you are deciding as an investor which company you would RATHER invest in.  You must say which one YOU are investing in!  No beating around the bush here, part of what you need to learn to do as a business leader and manager is to make a decision.  That decision may be right or wrong, but as a leader/manager you need to state your recommendation in order to give people who work for you direction and goals.  You should be utilizing concepts you are discussing in class to use for analyzing companies.  No exceptions here.

If you would like to do a different pair of companies, that is also fine!  But the same holds for detailed requirements and deliverable.  You must utilize what you are learning.

Write a 6-8 page research paper on selected companies.

FINC6601 Module 04 Assignment CAPITAL BUDGETING

FINC6601 Module 04 Assignment CAPITAL BUDGETING Due : E-submission: 6:00 p.m. on Tuesday, October 27, 2015. Type of Assignment : This is an individual assignment but you can seek assistance of others provided that you do the computations yourself and write up your own work. Deliverables : 1. An MSWord document or MSExcel worksheet containing the answers to the questions below. (Probably an MSExcel worksheet – which is probably the most efficient way to do this project.) Your document should include your name in the text as well as a neat and professional set of answers. 2. Use the naming convention “Last name_first initial_MOD04.xlsx.” For example, if I were turning in this assignment it would have the name “Highfield_R_MOD04.xlsx”. Post your document on Blackboard by the due date. Purpose : To provide specific practice in applying the fundamentals of capital budgeting to a corporate investment decision in a realistic setting. To complete the problem successfully you need to accurately estimate the cash flows for the project from estimates of sales and costs and compute several standard capital budgeting criteria including NPV, payback period, discounted payback period, IRR and Profitability Index. Please write up the case in a professional manner. If you do the computations in a spreadsheet (recommended), please include this spreadsheet in your submission, named according to the convention given above. If you do the computations by hand, please include an appendix to your word document showing the steps you took to get to your answers. GWYNT INDUSTRIES, INC. GWYNT Industries is a specialized manufacturing firm. It has been looking for new opportunities to expand its profitability as a manufacturer and has recently been approached to be the sole source contract supplier to a major computer manufacturer of an important computer component (cooling fan). The contract with the computer maker would be guaranteed for four years with no expectation of contract extension. A significant reason for this offer is a new, innovative and particularly reliable manufacturing approach for this component that GWYNT developed after extensive research and development. GWYNT has also researched the market for independent sales of the same component to parts distributors for specialty makers and hobbyists. GWYNT Industries must now decide whether to make the investment necessary to go into the computer cooling fan business. The contract with the major maker would begin this year, and the specialty/hobby market could also begin this year. They could enter either market alone or both markets simultaneously. If the contract offer is accepted, GWYNT must immediately abandon an existing product line that would have generated incremental after-tax cash flows of $500,000 in each of the next two years (i.e., this existing product line has two more years remaining before the product would be obsolete anyway.) If it leaves this existing market, the opportunity is effectively gone forever. Further, the R&D costs noted above to develop the process have totaled about $ 150,000 , and the m a rk e ting research on the specialty/hobby market co s t $50,000. The CFO of GWYNT Industries , h as a s k e d you, as a financial analyst, to e va lua t e this new opportunity p ro j e c t a nd to pr ov id e a recommendation on whether to go ahe a d w i t h th e inv es tment that would allow them to enter one or both markets . To simplify the analysis, assume that the initial investment that will occur immediately (i.e., production facilities will immediately be switched to the new product) and all other c as h f l o ws wi ll occur a t y e a r e nd . GWYNT Industries must initi a ll y i n v est $1.6 million to purchase new production e quipm e nt for the new product. Some of this cost, $390,000 can be recouped at the end of the project, 4 years from now, by selling the production equipment. As noted above, GWYNT Industries can potentially s ell th e cooling fans in two di s tinct m ar ket s (the markets are independent, i.e., GWYNT will be able to see in both markets): 1. Under contract : The contract with the major computer maker calls for 45,000 cooling fan units in the first year at $40 per unit. Thereafter, the number of units delivered will increase by 2% per year and the price received by GWYNT will increase by 2% percent above the inflation rate each year until the end of the four-year contract. 2. Th e specialty/hobbyist m ar k e t : Thi s retail m ar ket has hi g h e r ma r gi ns ; GWYNT e x p e ct s t o receive a unit price of $60 in this market in the first year. The market research predicts that the size of this entire market will be 90,000 units in the first year and that GWYNT can obtain a 15% market share of the market. It is expected that unit sales in this entire market will grow by 4% per year, and that GWYNT will be able to maintain its 15% market share and increase its price by 2% above the inflation rate each year. The variable c os t to produc e each unit is $18 in the first year . Since the product in each market is essentially identical, this unit cost is the same in each market. However it is projected that this cost will increase each year by 3% p e rc e nt abo v e th e inflati o n r a te each year because of efficiency losses as the production equipment ages. Further, GWYNT will incur general, marketing and administrative costs of $350,000 th e first year. These period costs are ex pected t o incr e a s e a t the in f l a tion rat e in the s ub se quent y e a r s. These general marketing and administrative costs will cover their involvement in either market or both markets. GWYNT’s marginal corpor a t e ta x r ate is 34% perc e nt . Annu a l in f lation i s e x p e c t ed to remain con s tant a t 1.5% . The comp a n y use s a 12% di s c o unt r a te t o evaluate new investment deci s i o n s of this kind . The a ppr o pri a te depr e ci a t i on s ch edule for t he e qui p ment is th e sev en-ye ar MACRS depreciation schedule. This allows the following depreciation schedule for the four years of the project: First year 14.3% Second year 24.5% Third year 17.5% Fourth year 12.5% The immediate initi a l working capital requirement i s $200,000. Ther ea ft e r , the net w orking c apital re quirement s w ill be 11% p ercent of s ale s (i.e., required at the end of each year except the last, when working capital is recovered.) You are asked to provide the following items (and the analysis that leads to them): NPV , IRR, pa y back p e riod , discounted payback period, a nd profitability index for this project . A recommendation about whether Gwynt should proceed with this project based on your decision rules. Assuming that the contract market sales are guaranteed but the Specialty/Hobbyist market sales are not, provide an estimate of the minimum share that Gwynt must achieve in the Specialty/Hobbyist market for this overall project to have a positive net present value

By walking you through a set of Financial data for XYZ, this assignment will help you better understand how theoretical stock prices are calculated

By walking you through a set of Financial data for XYZ, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at XYZ’s stock price. ²o get started, complete the following steps. 1. ³ind and es±mate of the risk-free rate of interest, Krf. ²o obtain this value, go to Bloomberg.com: Market Data ( hTp://www.bloomberg.com/markets/index.html ) and use the “U. S. 10 year ²reasury” bond rate as the risk-free rate. Make sure that you get the yield and not the issue rate. In addi±on, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5% 2. Use the aTached stock informa±on for XYZ for the following informa±on. a. Beta b. Current annual dividend c. 3 year dividend growth rate (g) d. Industry P/E e. EPS 3. With informa±on you now have, use the CAPM to calculate XYZ’s required rate of return or Ks. 4. Use the CGM (Constant Growth Model) to Fne the current stock price of XYZ. We will call this the theore±cal price of Po. 5. Now check the current stock quote, or P. Compare Po and P. do you see any di´erences? Can you explain what factors may be at work for such a di´erence in the two prices? Explain your thoughts clearly. 6. Now assume the market risk premium has increased from 7.5% to 10%; and this increase is due only to the increased risk in the market. In other words assume Krf and the stock’s Beta remains the same for this exercise. What will the new price be? Explain what happened

Chester Financial Corp had a return on equity of 18%. The corporation’s earnings per share was $4.00, its dividend payout ratio was 30%

BA 325 – F13 – Quiz – Chapter 8 Page 1 of 4 1. Chester Financial Corp had a return on equity of 18%. The corporation’s earnings per share was $4.00, its dividend payout ratio was 30% and its profit-retention rate was 70%. If these relationships continue, what will be the Chester Financial Corp’s internal growth rate? a. 5.4% b. 12.6% c. 70.0% d. 28.0% 2. CCT, Inc. expects its current annual $3 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 15% is ________. a. $ 4.50 b. $ 3.53 c. $20.00 d. $45.00 3. Which of the following changes will make the value of a stock go up, other things being held constant? a. The required return decreases b. The required return increases c. In general, investors become more risk averse d. The growth rate of dividends decreases 4. Which of the following statements concerning the required rate of return on stocks is true? a. The higher an investor’s required rate of return, the higher the value of the stock. b. If risk is reduced, the required return will decrease because more investors are risk-averse. c. The required return on preferred stock is generally higher than the required return on common stock. d. The higher the risk, the higher the required return, other things being equal. 5. Butler Corp paid a dividend today of $3.50 per share. The dividend is expected to grow at a constant rate of 8% per year. If Butler Corp stock is selling for $75.60 per share, the stockholders’ expected rate of return is ________. a. 12.63% b. 12.53% c. 13.00% d. 14.38%

6. What is the value of a preferred stock that pays a $3.50 dividend to an investor with a required rate of return of 9% (round your answer to the nearest $1)? a. $39 b. $23 c. $17 d. $31.50 7. How is preferred stock affected by a decrease in the required rate of return? a. the value of a share of preferred stock increases b. the dividend increases c. the dividend decreases d. the dividend yield increases 8. An example of the growth factor in common stock is ________. a. acquiring a loan to fund an investment in Asia b. retaining profits in order to reinvest into the firm c. issuing new stock to provide capital for future growth d. two strong companies merging together to increase their economy of scale 9. Linen Supply Co. paid a dividend of $3.25 on its common stock yesterday. The company’s dividends are expected to grow at a constant rate of 5.5% indefinitely. If the required rate of return on this stock is 17.5%, compute the current value per share of Linen Supply Co. stock. a. $9.14 b. $27.08 c. $28.57 d. $31.82 10. Linen Supply Co.paid a dividend of $3.25 on its common stock yesterday. The company’s dividends are expected to grow at a constant rate of 5.5% indefinitely. The required rate of return on this stock is 17.5%. You observe a market price of $27.50 for the stock. Should you purchase this stock? a. Yes, the market price is below the intrinsic value of the stock b. No, the market price is above the intrinsic value of the stock c. No, the growth rate in dividends is too far below the required return d. Yes, but only if you can keep the stock for at least 5 years 11. Wallace Industries paid a dividend of $1.85 on its common stock yesterday. The dividends of Wallace Industries are expected to grow at 8% per year indefinitely. If the risk free rate is 4% and investors’ risk premium on this stock is 9%, estimate the value of Wallace Industries stock 2 years from now. a. $199.80 b. $46.61 c. $41.81 d. $38.11