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1. The Q&A Reviews, "Open Office" sessions, and conversations with some of you over past week have been a bit depressing for me. It seems to me that too many of you are having continuing trouble with the correct time period at which a periodic annuity or perpetuity cash flow is valued when you use some of our derived formulas. I had hoped my suggestion that you do a musical jingle or song to help memorize the process would have motivated you to write, perform, and record clever finance songs to help remember this. That apparently has not happened. While perhaps too late for this exam, my thoughts have been drifting to how to address the issue in the future. As I walked my dog in the neighborhood recently I came upon Usher who was also out for a walk.
He is somewhat familiar with the business school as Usher's New Look foundation is typically in the building for a week each summer for some programming. As we talked about my frustration, he said he would be happy to record some short educational finance songs to help students if the concept looked promising. He thought my crazy idea might actually work because earlier he found my financial bedtime stories effective at putting his children to sleep when he read them to his kids. Usher and I took the idea to Jeff "Spot" Diamond. By the way, as the company grew Jeff changed its name to Diamond Cash Flow Ventures (DCF Ventures). Spot said he would add the product to the portfolio of company offerings if NPV analysis supported doing so. To develop, record, and sell the finance songs, Spot would need some new specialized advanced equipment. Moving forward would require an immediate purchase of $200,000 in new capital equipment. The equipment would have a four year useful life and be fully depreciated to zero via straight-line depreciation at year four. At the end of its useful life, it is expected that the equipment would be able to be sold for $50,000. If this business activity were to be launched, it would require Spot to immediately increase net working capital by $10,000. This represents 10% of the first year's sales revenue of $100,000.
Sales are expected to grow at a rate of 5% each year and net working capital requirements for the project will always be 10% of the upcoming year's sales revenue. Net working capital that has been required for the project will no longer be needed and therefore is fully recoverable when the project concludes at the end of year four. Assume this business activity has annual costs exclusive of depreciation and taxes that are equal to only 30% of sales revenue. Further, DCF Ventures is an ongoing, profitable firm that pays a 30% tax rate on operating profits and a 20% tax on capital gains.
Please evaluate this project based on the information provided here and determine its NPV. By the way, based on analysis, Spot believes the appropriate rate to use to evaluate cash flows associated with this project is 11%.
Be sure to show and sufficiently explain your work and conclusion. Spot, Usher, and I await your analysis and recommendation. Should we move forward with the "Usher Sings Finance Tunes" Project? Cannot wait to evaluate the add-on possibilities.
For example, my daughter used to help teach dance to the daughter of Ne-Yo and we have already begun to talk to him about a dance competition centered on finance tunes. If Jennifer Lopez, Derek Hough, and Ne-Yo put Geometrie Variable - a trio that combined popping, animation, and tutting to create moving geometric shapes - in the finals of World of Dance this past season, I can see a potential market for World of Finance Dance. Once again, remember that diagrams are your friends. 


2. Please calculate the per share value today of Mitchell Company common stock based on the following information. The company will have earnings per share (EPS) of $400 one year from now. It will reinvest all of that earnings and earn a 25% return on reinvestment which will result in a higher EPS at t=2. Beginning with the EPS at t=2, the company will start to pay a dividend payout rate of 50% and will earn a 20% return on reinvestment for a period of time. The dividend payout rate of 50% will continue forever, but the return on reinvestment will not remain at 20% forever. In fact, the return on reinvestment will fall to 10% beginning with the reinvestment flowing from earnings at t=4. This payout rate of 50% and return on reinvestment of 10% will then continue forever. For your work assume the equity cost of capital for the Mitchell Company is 10%. As always, be sure to show clearly all your work and be precise with your calculations out to five decimal places. Yes, an accurate diagram is your friend. What is the per share value today of Mitchell Company common stock based upon the information above.