Question: Using the following criteria, specify the legal

> The owners of the Laguna Golden Beachfront Hotel are deciding whether they should tear down their current hotel and replace it with a new hotel or simply remodel it. If they decide to tear down the current hotel and rebuild, the initial outlay would be $

> Rib & Wings-R-Us is considering the purchase of a new smoker oven for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $50,000, last for 8 years, and produce annual free cas

> Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because both hotels would occupy the sam

> The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with these projects are as follows: The required rate of return on these projects is 10 percent. a. What is each project’s

> The D. Dorner Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required

> Determine to the nearest percent the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of year 1, $5,000 at the end of year 2, and $8,000 at the end of year 3 b. An initial outlay of $10,000

> Assume that you write a column for a very widely followed financial blog titled “Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week you are going to address two questions from your readers that h

> You have been assigned the task of evaluating two mutually exclusive projects with the following projected free cash flows: If the appropriate discount rate on these projects is 10 percent, which would be chosen and why? YEAR PROJECT A CASH FLOW

> The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability ind

> Artie’s Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and would generate annual free cash inflows of $2 million per year for 8 years. Calculate the project’s MIRR given: a. A required r

> Dunder Mifflin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce free cash inflows of $150,000 each year at the end of years 1 through 5, then at the end of year 7 there will be a free cash

> Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7 million and will produce free cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and $2 million

> Sheinhardt Wig Company is considering a project that has the following cash flows: YEAR…………………………. PROJECT CASH FLOW 0 ………………………………………………………...2$100,000 1………………………………………………………………. 20,000 2………………………………………………………………60,000 3………………………………………………………………70,000 4

> Mode Publishing is considering building a new printing facility that will involve a large initial outlay and then result in a series of positive free cash flows for 4 years. The estimated cash flows associated with this project are: YEAR………………………....PR

> Determine the IRR on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $1,993 at the end of each year for the next 10 years b. An initial outlay of $10,000 resulting in a free cash flow of $2,054 at the end of each

> Assuming an appropriate discount rate of 11 percent, what is the discounted payback period on a project with an initial outlay of $100,000 and the following free cash flows? Year 1 5………………………………………. $30,000 Year 2 5………………………………………. $35,000 Year 3 5…………

> You are considering a project with the following free cash flows. If the appropriate discount rate is 10 percent, what is the project’s discounted payback period? YEAR…………………..PROJECT CASH FLOW 0 …………………………………………………2$50,000 1………………………….…………………………..20,0

> Camping USA Inc. has been operating for only 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and

> The processes of discounting and compounding are related. Explain this relationship.

> What is the time value of money? Why is it so important?

> What information do the price/earnings ratio and the price/book ratio give us about the firm and its investors?

> What are the differences among a firm’s gross profit margin, operating profit margin, and net profit margin?

> Why is a firm’s operating return on assets a function of its operating profit margin and total asset turnover?

> Distinguish between a firm’s operating return on assets and its operating profit margin.

> What is liquidity, and what is the rationale for its measurement?

> What are the limitations of industry average ratios? Discuss briefly.

> Describe the “five-question approach” to using financial ratios.

> Where can we obtain industry norms?

> Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado’s Rocky Mountains. Your firm manufactures only one product, a state-of-the-art snow ski. Up to this p

> What is Economic Value Added? Why is it used?

> Explain what determines a company’s return on equity.

> What are the limitations of financial statements?

> What are the differences between GAAP and IFRS?

> Why might one firm have positive cash flows and be headed for financial trouble, whereas another firm with negative cash flows could actually be in a good financial position?

> Why is it that the preferred stockholders’ equity section of the balance sheet changes only when new shares are sold or repurchased, whereas the common stockholders’ equity section changes from year to year regardless of whether new shares are bought or

> How do dividends and interest expense differ?

> How do gross profits, operating profits, and net income differ?

> A company’s financial statements consist of the balance sheet, income statement, and statement of cash flows. Describe what each statement tells us.

> What is the major difference between a negotiated purchase and a competitive bid purchase?

> It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next ass

> What is an investment banker, and what major functions does he or she perform?

> Explain the popular theories for the rationale of the term structure of interest rates.

> Why do you think most secondary-market trading in bonds takes place over the counter?

> It has been said that in recent years the difference between an organized exchange and the over-the-counter market has blurred. What does this statement mean and do you think it is correct?

> Compare and explain the historical rates of return for different types of securities.

> Explain the term opportunity cost with respect to the cost of funds to the firm.

> What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

> Distinguish between the money and capital markets.

> Why might a large corporation want to raise long-term capital through a private placement rather than a public offering?

> Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital-budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also t

> Identify the primary characteristics of each form of legal business organization.

> Define (a) sole proprietorship, (b) partnership, and (c) corporation.

> What is the agency problem, and how might it impact the goal of maximization of shareholder wealth?

> What is the relationship between financial decision making and risk and return? Would all financial managers view risk–return trade-offs similarly?

> Firms often involve themselves in projects that do not result directly in profits. For example, Apple, which we featured in the chapter introduction, donated $50 million to Stanford University hospitals and another $50 million to the African aid organiza

> What are some of the problems involved in implementing the goal of maximization of shareholder wealth?

> Is the evaluation of a direct foreign investment more complicated than the evaluation of a domestic investment?

> What risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic investment?

> What is meant by (a) exchange rate risk and (b) political risk?

> How do purchasing-power parity, interest rate parity, and the Fisher effect explain the relationships among the current spot rate, the future spot rate, and the forward rate?

> ExxonMobil (XOM) is one of the half-dozen major oil companies in the world. The firm has four primary operating divisions (upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years

> This Mini Case is available in My Finance Lab. The final stage in the interview process for an assistant financial analyst at Caledonia Products involves a test of your understanding of basic financial concepts. You are given the following memorandum and

> A share of stock sells for $35 today. The beta of the stock is 1.2 and the expected return on the market is 12 percent. The stock is expected to pay a dividend of $0.80 in one year. If the risk-free rate is 5.5 percent, what should the share price be in

> A stock has a beta of 0.85, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be?

> You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio?

> You own 400 shares of stock A at a price of $60 per share, 500 shares of stock B at $85 per share, and 900 shares of stock C at $25 per share. The betas for the stocks are 0.8, 1.2, and 0.7, respectively. What is the beta of your portfolio?

> You own a stock portfolio invested 10 percent in stock Q, 25 percent in stock R, 50 percent in stock S, and 15 percent in stock T. The betas for these four stocks are 1.4, 0.6, 1.5, and 0.9, respectively. What is the portfolio beta?

> A stock has a beta of 0.8 and an expected return of 11 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?

> A stock has an expected return of 12 percent and a beta of 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be?

> A stock has an expected return of 8.0 percent, its beta is 0.60, and the risk-free rate is 3 percent. What must the expected return on the market be?

> A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

> Calculate the volatility of a portfolio of 35 percent Roll and 65 percent Ross by filling in the following table: Data for Question 7: (1) State of (2) Probability of State of Economy (3) Portfolio Return (4) Squared Devlatlon from Expected Return

> Which of the following is closest to the expected standard deviation of the client’s portfolio if 10 percent of the portfolio is invested in the Quality Commodity (QC) Fund? a. 9.6 percent b. 14.1 percent c. 16.0 percent

> Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): Data for Question 4: Roll Ross (2) Probablity of State of Economy (4) (1) State of (

> Repeat Questions 1 and 2 assuming that all three states are equally likely. Data from Question 1: Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: Data from Question

> Using the information in Question 1, calculate the standard deviation of returns. Data from Question 1: Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: State of P

> Fill in the missing information in the following table. Assume that portfolio AB is 40 percent invested in stock A. Year Stock A Stock B Portfollo AB 2012 11% 21% 2013 37 -38 2014 -21 48 2015 26 16 2016 13 24 Average return Standard deviation

> Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: State of Probablity of State of Economy Security Return If State Occurs Economy Recession .25 -8% Normal .50 13 Вoom

> Atlantis Fisheries’ zero coupon bonds referred to in Problem 8 are callable in 10 years at a call price of $500. Using semiannual compounding, what is the yield to call for these bonds?

> Atlantis Fisheries issues zero coupon bonds on the market at a price of $417 per bond. Each bond has a face value of $1,000 payable at maturity in 20 years. What is the yield to maturity for these bonds?

> May Industries has a bond outstanding that sells for $928. The bond has a coupon rate of 7.5 percent and nine years until maturity. What is the yield to maturity of the bond?

> A bond with a maturity of 12 years sells for $1,047. If the coupon rate is 8.2 percent, what is the yield to maturity of the bond?

> A bond sells for $902.30 and has a coupon rate of 6 percent. If the bond has 12 years until maturity, what is the yield to maturity of the bond?

> Which of the following is closest to the expected return of the client’s portfolio if 10 percent of the portfolio is invested in the New Horizon (NH) Emerging Market Fund? a. 11 percent b. 10.2 percent c. 11.8 percent

> A bond with 25 years until maturity has a coupon rate of 7.2  percent and a yield to maturity of 6 percent. What is the price of the bond?

> A bond has a coupon rate of 8.2 percent and 9 years until maturity. If the yield to maturity is 7.4 percent, what is the price of the bond?

> Rolling Company bonds have a coupon rate of 4 percent, 14 years to maturity, and a current price of $1,086. What is the YTM? The current yield?

> If, instead, the Atlantis Fisheries zero coupon bonds referred to in Problems 8 and 9 are callable in 10 years at a call price of $550, what is their yield to call?

> Aloha Inc. has 7 percent coupon bonds on the market that have 12 years left to maturity. If the YTM on these bonds is 9.1 percent, what is the current bond price?

> How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $1 million face value.

> In Problem 7, what is the bond equivalent yield? Data from Problem 7: What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 million face value.

> What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 million face value.

> Your investments increased in value by 11.6 percent last year, but your purchasing power increased by only 7.6 percent. What was the approximate inflation rate?

> A stock had a return of 8.9 percent last year. If the inflation rate was 2.1 percent, what was the approximate real return?

> Mr. Spice wonders how a fixed-income manager could position his portfolio to capitalize on the expectation of an upward-shifting and twisting term structure. For the twist, interest rates on long-term bonds increase by more than those on shorter-term not

> What is the yield to maturity on a Treasury STRIPS with 4 years to maturity and a quoted price of 70.485?

> A Treasury STRIPS is quoted at 90.875 and has 5 years until maturity. What is the yield to maturity?

> A Treasury STRIPS matures in 7 years and has a yield to maturity of 4.4 percent. If the par value is $100,000, what is the price of the STRIPS? What is the quoted price?

> In Problem 9, what is the bond equivalent yield? Data from Problem 9: How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $1 million face value.

> What is the price of a Treasury STRIPS with a face value of $100 that matures in 10 years and has a yield to maturity of 3.5 percent?