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Q1)  Your company operates a steel plant

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Q1) 

Your company operates a steel plant. On average, revenues from the plant are $48 million per year. All of the plant's costs are variable costs, and are consistently 80% of revenues. (This includes the energy costs associated with powering the plant which
represent one quarter of the plant's costs, or an average of $9.60 million per year.) Suppose the plant has an asset beta of 1.03, the risk-free rate is 4%, and the market risk premium is 5%. The tax rate is 30%, and there are no other costs.
a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter a long-term contract which will supply all of the plant's energy needs for a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this contract?

c. How would taking the contract in (b) change the plant's cost of capital? Explain.

a. Estimate the value of the plant today assuming no growth.

The value of the plant today assuming no growth is $|_| million. (Round to two decimal places.)

b. Suppose you enter a long-term contract which will supply all of the plant's energy needs for a fixed cost of 3 million per year (before tax). What is the value of the plant if you take this contract?

The value of the plant if you take this contract $| | million. (Round to two decimal places.)

c. What is the plant's overall cost of capital if you chose to enter the contract in part (b)?

The plant's overall cost of capital, if you choose to enter the contract in part (b) is |e. (Round to one decimal place.)

q2) 

Suppose you purchase a ten-year bond with 10% annual coupons. You hold the bond for four years and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 8.53% when you purchased and sold the bond,
a. What cash flows will you pay and receive from your investment in the bond per $100 face value?

b. What is the internal rate of return of your investment?

Note: Assume annual compounding.

a. What cash flows will you pay and receive from your investment in the bond per $100 face value?

The cash flow at time 1-3 is ${_]. (Round to the nearest cent. Enter a cash outflow as a negative number.)

The cash outflow at time 0 is $|_]. (Round to the nearest cent. Enter a cash outflow as a negative number.)

The total cash flow at time 4 (after the fourth coupon) is $|_]. (Round to the nearest cent. Enter a cash outflow as a negative number.)

b. What is the internal rate of return of your investment?

The internal rate of return of your investment is | |%. (Round to two decimal places.)

q3) 

For fiscal year 2017, Costco Wholesale Corporation (COST) had a net profit margin of 2.08%, asset turnover of 3.55, and a book equity multiplier of 3.37.
a. Use this data to compute Costco's ROE using the DuPont Identity

b. If Costco's managers wanted to increase its ROE by 1.10 percentage points, how much higher would their new asset turnover need to be?

c. If Costco's net profit margin fell by 1.10 percentage points, by how much would their asset turnover need to increase to maintain their ROE?

a. Use this data to compute Costco's ROE using the DuPont Identity

The ROE is |e. (Round to two decimal places.)

b. If Costco's managers wanted to increase its ROE by 1.10 percentage points, how much higher would their new asset turnover need to be?

The new asset turnover is [| which is an increase of [ |. (Round to two decimal places.)

c. If Costco's net profit margin fell by 1.10 percentage points, by how much would their asset turnover need to increase to maintain their ROE?

The new asset turnover is [| which is an increase of [ |. (Round to two decimal places.)

q4) 

Your firm is considering the launch of a new product, the XJ5. The upfront development cost is $12 million, and you expect to earn a cash flow of $3.2 million per year for the next 5 years. Create a table for the NPV profile for this project for discount rates
ranging from 0% to 30% (in intervals of 5%). For which discount rates is the project attractive?
The NPV for a discount rate of 0% is $| million. (Round to three decimal places.)

Thus, at a discount rate of 0%, this project is fy, (Select from the drop-down menu.)
The NPV for a discount rate of 5% is $| | million. (Round to three decimal places.)

At a discount rate of 5% this project is f , (Select from the drop-down menu.)

The NPV for a discount rate of 10% is $| | million. (Round to three decimal places.)

At a discount rate of 10% this project is fy, (Select from the drop-down menu.)

The NPV for a discount rate of 15% is $| | million. (Round to three decimal places.)

At a discount rate of 15% this project is fy, (Select from the drop-down menu.)

The NPV for a discount rate of 20% is $| | million. (Round to three decimal places.)

At a discount rate of 20% this project is fy, (Select from the drop-down menu.)

The NPV for a discount rate of 25% is $| | million. (Round to three decimal places.)

At a discount rate of 25% this project is fy, (Select from the drop-down menu.)

The NPV for a discount rate of 30% is $| | million. (Round to three decimal places.)

At a discount rate of 30% this project is fy, (Select from the drop-down menu.)

q5) Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.85, the risk-free rate is 3.7%, and the market risk premium is 4.9%. If your firm's
project is all-equity financed, estimate its cost of capital.
Harburtin's cost of capital is | |%. (Round to two decimal places.)

q6) For fiscal year 2018, Wal-Mart Stores, Inc. (WMT) had total revenues of $500.34 billion, net income of $9.86 billion, total assets of $204.52 billion, and total shareholders’ equity of $77.87 billion.
a. Calculate Walmart's ROE directly, and using the DuPont Identity.
b. Comparing with the data for Costco FB , use the DuPont Identity to understand the difference between the two firms' ROEs.
a. The ROE calculated directly is | |%. (Round to two decimal places.)
The ROE calculated using the Dupont Identity is |e. (Round to two decimal places.)
b. Wal-Mart has a superior profit margin, but a | asset turnover and a | | equity multiplier (which could represent less leverage). Despite the | y| profit margin, it has a | | ROE that is driven by it's | asset turnover and
leverage.

q7) For fiscal year 2018, Wal-Mart Stores, Inc. (WMT) had total revenues of $500.34 billion, net income of $9.86 billion, total assets of $204.52 billion, and total shareholders’ equity of $77.87 billion.
a. Calculate Walmart's ROE directly, and using the DuPont Identity.
b. Comparing with the data for Costco FB , use the DuPont Identity to understand the difference between the two firms' ROEs.
a. The ROE calculated directly is | |%. (Round to two decimal places.)
The ROE calculated using the Dupont Identity is |e. (Round to two decimal places.)
b. Wal-Mart has a superior profit margin, but a | asset turnover and a | | equity multiplier (which could represent less leverage). Despite the | y| profit margin, it has a | | ROE that is driven by it's | asset turnover and
leverage.
@ _ Data Table =_ X
For fiscal year 2017, Costco Wholesale Corporation (COST) had a net profit margin of 2.08%, asset
turnover of 3.55, and a book equity multiplier of 3.37. Costco’s ROE (DuPont) is 24.88%.

q8) You notice that PepsiCo (PEP) has a stock price of $112.18 and EPS of $6.86. Its competitor, the Coca-Cola Company (KO), has EPS of $2.33. Estimate the value of a share of Coca-Cola stock using only this data.
The value of a share of Coca-Cola stock is $|_ |. (Round to the nearest cent.)

q9) Suppose Johnson & Johnson and Walgreen Boots Alliance have expected returns and volatilities shown here, 8 , with a correlation of 21%. Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that is equally invested in
Johnson & Johnson's and Walgreens' stock.
a. Calculate the expected return.
The expected return is | |e. (Round to one decimal place.)
b. Calculate the volatility (standard deviation).
The volatility is |e. (Round to one decimal place.)
@ Data Table = X
(Click on the following icon © in order to copy its contents into a spreadsheet.)
Expected Return Standard Deviation
Johnson & Johnson 6.9% 14.4%
Walgreens Boots Alliance 9.2% 19.6%

q10) 

You are 35 years old, and decide to save $5,000 each year (with the first deposit one year from now), in an account paying 8% interest per year. You will make your last deposit 30 years from now when you retire at age 65. During retirement, you pI
withdraw funds from the account at the end of each year (so your first withdrawal is at age 66). What constant amount will you be able to withdraw each year if you want the funds to last until you are age 90?

The total savings at age 65 is ${_ |. (Round to the nearest dollar.)

The amount you will be able to withdraw each year until you are 90 is $|_]. (Round to the nearest dollar.)

q11) 

Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $12,000 at the end of each of the next 3 years. The opportunity requires an initial investment of $3,000 plus an additional investment at
the end of the second year of $15,000. What is the NPV of this opportunity if the interest rate is 9% per year? Should Marian take it?

The NPV of this opportunity is $|_]. (Round to the nearest dollar.)

Should Marian make the investment? | yl. (Select from the drop-down menu.)

q12) 

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: (Click on the following icon © in order to copy its contents into a spreadsheet.)
Year 1 2 3 4 5
FCF ($ million) 51.8 68.2 18.8 74.6 80.3

After that, the free cash flows are expected to grow at the industry average of 4.4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.5%:

a. Estimate the enterprise value of Heavy Metal.

b. If Heavy Metal has no excess cash, debt of $295 million, and 42 million shares outstanding, estimate its share price.

a. Estimate the enterprise value of Heavy Metal.

The enterprise value will be $| | million. (Round to two decimal places.)

b. If Heavy Metal has no excess cash, debt of $295 million, and 42 million shares outstanding, estimate its share price.

The stock price per share will be $|_]. (Round to two decimal places.)

q13) 

You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.9 million for
this report, and | am not sure their analysis makes sense. Before we spend the $23 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars):
(Click on the following icon © in order to copy its contents into a spreadsheet.)
—ProjectVear

Earnings Forecast ($ million) 1 2 ae 9 10

Sales revenue 34.000 34.000 34.000 34.000

- Cost of goods sold 20.400 20.400 20.400 20.400

= Gross profit 13.600 13.600 13.600 13.600

- Selling, general, and administrative expenses 1.840 1.840 1.840 1.840

- Depreciation 2.300 2.300 2.300 2.300

= Net operating income 9.460 9.460 9.460 9.460

- Income tax 1.892 1.892 1.892 1.892
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed project?
The free cash flow for year 0 is $| | million. (Round to three decimal places and enter a decrease as a negative number.)
The free cash flow for years 1 to 9 is $|_ | million. (Round to three decimal places and enter a decrease as a negative number.)
The free cash flow for year 10 is $| | million. (Round to three decimal places and enter a decrease as a negative number.)
b. If the cost of capital for this project is 16%, what is your estimate of the value of the new project?
The value of the project is $| million. (Round to three decimal places.)

q14) = Gross profit 13.600 13.600 13.600 13.600 “
- Selling, general, and administrative expenses 1.840 1.840 1.840 1.840
- Depreciation 2.300 2.300 2.300 2.300
= Net operating income 9.460 9.460 9.460 9.460
- Income tax 1.892 1.892 1.892 1.892
= Net unlevered income 7.568 7.568 7.568 7.568
All of the estimates in the report seem correct. You note that the consultants used straight-line deprec.....on for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that
because the project will increase earnings by $7.568 million per year for ten years, the project is worth $75.68 million. You think back to your halcyon days in finance class and realize there is more work to be done!
First, you note that the consultants have not factored in the fact that the project will require $12 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.84 million of selling, general and
administrative expenses to the project, but you know that $0.92 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earnings are not the right thing to focus on!
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed project?
b. If the cost of capital for this project is 16%, what is your estimate of the value of the new project? |
a. Given the available information, what are the free cash flows in years 0 through 10 that should be used to evaluate the proposed project?
The free cash flow for year 0 is $| | million. (Round to three decimal places and enter a decrease as a negative number.)
The free cash flow for years 1 to 9 is $|_ | million. (Round to three decimal places and enter a decrease as a negative number.)
The free cash flow for year 10 is $| | million. (Round to three decimal places and enter a decrease as a negative number.)
b. If the cost of capital for this project is 16%, what is your estimate of the value of the new project?
The value of the project is $| million. (Round to three decimal places.)

q15) 

Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 3%. You hold the bond for five years before selling it.
a. If the bond's yield to maturity is 3% when you sell it, what is the internal rate of return of your investment?

b. If the bond's yield to maturity is 4% when you sell it, what is the internal rate of return of your investment?

c. If the bond's yield to maturity is 2% when you sell it, what is the internal rate of return of your investment?

d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain.

Note: Assume annual compounding.

a. If the bond's yield to maturity is 3% when you sell it, what is the internal rate of return of your investment?

The IRR of your investment if the bond's yield to maturity is 3% when you sell it is | |%. (Round to two decimal places.)

b. If the bond's yield to maturity is 4% when you sell it, what is the internal rate of return of your investment?

The IRR of your investment if the bond's yield to maturity is 4% when you sell it is | |%. (Round to two decimal places.)

c. If the bond's yield to maturity is 2% when you sell it, what is the internal rate of return of your investment?

The IRR of your investment if the bond's yield to maturity is 2% when you sell it is | |%. (Round to two decimal places.)

d. Even if a bond has no chance of default, is your investment risk free if you plan to sell it before it matures? Explain. (Select the best choice below.)
(> A. If there is no chance of default, the investment is risk free no matter when you sell it.

(> B. There is always a chance of default , so every bond has risk.

(> C. Even though the yield to maturity changes, if there is no chance of default, then the bond is risk free.

‘> D. Even without default, if you sell prior to maturity, you are exposed to risk that the YTM may change.

q16) 

Bill Clinton reportedly was paid an advance of $10.0 million to write his book My Life. Suppose the book took three yee ‘o write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn
$8.4 million a year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.3% per year.

a. What is the NPV of agreeing to write the book (ignoring any royalty payments)?

b. Assume that, once the book is finished, it is expected to generate royalties of $4.8 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with
the royalty payments?

a. What is the NPV of agreeing to write the book (ignoring any royalty payments)?

The NPV of agreeing to write the book is $| | million. (Round to three decimal places.)

b. Assume that, once the book is finished, it is expected to generate royalties of $4.8 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with
the royalty payments?

The NPV of the book with the royalty payments is $| | million. (Round to three decimal places.)

q17) Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars):
Year 1 Year 2
Revenues 125.0 160.0
COGS and Operating expenses (other than depreciation) 40.0 60.0
Depreciation 25.0 36.0
Increase in working capital 5.0 8.0
Capital expenditures 30.0 40.0
Corporate tax rate 20% 20%
a. What are the incremental earnings for this project for years 1 and 2?
b. What are the free cash flows for this project for the first two years?
a. What are the incremental earnings for this project for years 1 and 2?
The incremental earnings for year 1 is $| | million. (Round to one decimal place.)
The incremental earnings for year 2 is $| | million. (Round to one decimal place.)
b. What are the free cash flows for this project for the first two years?
The free cash flow for year 1 is $| | million. (Round to one decimal place.)
The free cash flow for year 2 is $| | million. (Round to one decimal place.)