Question 1
Problems 11.2 The CAPM computer expected rate of return using the following model (described in the chapter) E[REj] = E[RF] + ?j x {E[RM] ? E[RF]} explain the role of each of the three components of the model. Problems 11.3 Non diversifiable and diversifiable risk factors. Identify the type of firm specific factors that increase a firm?s non-diversifiable risk (systematic risk). Identity the firm specific factors that increase a firm?s diversifiable risk (idiosyncratic risk or nonsystematic risk). Why do models of risk adjusted expected return premia for diversifiable risk? Problems 11.4 Debt and the weighted average cost of capital: why do investors typically accept a lower risk adjusted rate of return on debt capital that equity capital? Suppose a stable, financially healthy, profitable tax paying firm that has been financed with all equity and not debt decides to add a reasonable amount of debt to its capital structure. What effect will that change in capital structure likely have on the firm?s weighted average cost of capital? Problems 11.5 The dividends valuation approach. Explain the theory behind the dividends valuation approach. Why are dividends values relevant to common equity shareholders? Chapter 12 Problems 12.2 The free cash flows valuation approach. Explain the theory behind that free cash flows valuation approach. Why are free cash flows value relevant to common equity shareholders when they are not cahs flow to those shareholder, but rather are cash flows in the firm? Problems 12.6 The free cash flows valuation when free cash flow are negative. Suppose you are valuing healthy growing profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five year. Can you use the free cash flows valuation approach when cash flows valuation approach when cash flows are negative? If so explain how the free cash flows approach can produce valuations of firms when they are expected to generate negative free cash flows over the next five years.
Question 2
P17-1. Nickolas Industries has daily cash receipts of $350,000. A recent analysis of the firm?s collections indicated that the customer?s payments are in the mail an average of 2 days. Once received, the payments are processed in 1/5 days. After payments are deposited, the receipts clear the banking system, on average 2.5 days. Assume a 365 day year. a. How much collection float (in days) does the firm have ? b. if the firm?s opportunity cost is 11%, would it be economically advisable foe the firm to pay an annual fee of $84,000 for a lockbox system that reduces collection float by 2.5 days? Explain why or why not. P17-3. Qtime Products believes that using a lockbox system can shorten its accounts receivable collection period by four days. The firm?s annual sales, all on credit, are $65 million and are billed on a continuous basis. The firm can earn 9% on its short-term investments. The cost of the lockbox system is $57,500 per year. Assume a 365 day year. a. What amount of cash will be made available for others uses under the lockbox system? b. What net benefit (or cost) will the firm receive if it adopts the lockbox system? Should it adopt the proposed lockbox system?
Question 3
Can these 2 questions be completed in the template provided using solver. Thank you 8-4 (Animal feed mix problem) The Battery Park Stable feeds and houses the horses used to pull tourist-filled carriages through the streets of Charleston?s historic waterfront area. The stable owner, an ex-racehorse trainer, recognizes the need to set a nutritional diet for the horses in his care. At the same time, he would like to keep the overall daily cost of feed to a minimum. The feed mixes available for the horses? diet are an oat product, a highly enriched grain, and a mineral product. Each of these mixes contains a certain amount of five ingredients needed daily to keep the average horse healthy. The table on this page shows these minimum requirements, units of each ingredient per pound of feed mix, and costs for the three mixes. In addition, the stable owner is aware that an overfed horse is a sluggish worker. Consequently, he determines that 6 pounds of feed per day are the most that any horse needs to function properly. Formulate this problem and solve for the optimal daily mix of the three feeds. 8-6 Eddie Kelly is running for reelection as mayor of a small town in Alabama. Jessica Martinez, Kelly?s campaign manager during this election, is planning the marketing campaign, and there is some stiff competition. Martinez has selected four ways to advertise: television ads, radio ads, billboards, and newspaper ads. The costs of these, the audience reached by each type of ad, and the maximum number of each is shown in the following table:
Question 4
Prob 18-1 AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders? equity of $4 million, and pretax interest expense of 10 percent. a. What is AQ&Q?s indifference level of EBIT? Indifference level of EBIT b. Given its current situation, might it benefit from increasing or decreasing its use of debt? Current EBIT Explain. c. Suppose we are told AQ&Q?s average tax rate is 40 percent. How does this affect your answers to (a) and (b)? Prob 18-9 The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011: BALANCE SHEET 2010 2011 Cash $50,000 $40,000 Accounts receivable $200,000 $260,000 Inventory $450,000 $500,000 Total current assets $700,000 $800,000 Fixed assets (net) $300,000 $400,000 Total assets $1,000,000 $1,200,000 Bank loan, 10% $90,000 $90,000 Accounts payable $130,000 $170,000 Accruals $50,000 $70,000 Total current liabilities $270,000 $330,000 Long-term debt, 12% $300,000 $400,000 Common stock, $10 par $300,000 $300,000 Capital surplus $50,000 $50,000 Retained earnings $80,000 $120,000 Total liabilities and equity $1,000,000 $1,200,000 a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.63 percent and a cost of common equity of 16.5 percent. WACC b. The current market value of Genatron?s long-term debt is $350,000. The common stock price is $20 per share and there are 30,000 shares outstanding. Calculate the WACC using market value weights and the component capital costs in (a). Total equity wd we WACC c. Recalculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be 18 percent, the company is in the 40 percent income tax bracket, and the after-tax cost of common equity capital is 21 percent. kd ke Book value WACC Market value WACC
Question 5
1. In 2010, Margaret and John Murphy are married taxpayers who file a joint tax return with AG1 of $25,000. During the year they incurred the following expenses: Hospitalization insurance premiums $1,050 Premiums on an insurance policy that pays 300 $100 per day for each day Margaret is hospitalized Medical care lodging (two people, one night) 65 Hospital bills 2.200 Doctor bills 850 Dentist bills 175 Prescription drugs and medicines 340 Psychiatric-care 300 In addition, during the year they drove 109 miles for medical transportation, and their insurance company reimbursed them $900 for the above expenses. Calculate the Murphy's medical expense deduction. 2. Ken paid the following amounts for interest during 2010: Qualified interest on home mortgage $4,700 Auto loan interest 850 ?Points" on the mortgage for acquisition of his 300 personal residence Service changes on his account 40 Mastercard interest 300 Calculate Ken's itemized deduction for interest on Schedule A. 3. Jerry made the following contributions during 2010: His synagogue (by check) $680 The Republican Party (by check) 180 The American Red Cross (by check) 150 His lodge for a holiday party ' " 100 In addition, Jerry donated used furniture to the Salvation Army costing $2,000 with a fair market value of $400. Assuming Jerry has adjusted gross income of $45,000, has the necessary written acknowledgments, and itemizes deductions. Complete the Gifts to Charity section of Schedule A, what is Jerry?s deduction for 2010.
