Business and Management
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84355_1_FINC-600-ASSGN-3
$20.00Complete the following problems in either Microsoft Word or Excel.
Your work must be organized. Highlight your final answer.
Chapter 7:
7-2: The following table shows the nominal returns on U.S. stocks and the rate of inflation. a. What was the standard deviation of the market returns?
- Calculate the average real return.
Year Nominal Return (%) Inflation (%)
2004 +12.5 +3.3
2005 +6.4 +3.4
2006 +15.8 +2.5
2007 +5.6 +4.1
2008 -37.2 +0.1
7-7: Suppose the standard deviation of the market return is 20%.
- What is the standard deviation of returns on a well-diversified portfolio with a beta of 1.3?
- What is the standard deviation of returns on a well-diversified portfolio with a beta of 0?
- A well-diversified portfolio has a standard deviation of 15%. What is its beta?
- A poorly diversified portfolio has a standard deviation of 20%. What can you say about its beta?
Chapter 8:
Stock Beta Expected Return
Amazon 2.16 15.4
Ford 1.75 12.6
Dell 1.41 10.2
Starbucks 1.16 8.4
Boeing 1.14 8.3
Disney .96 7.0
Newmont .63 4.7
Exxon Mobil .55 4.2
Johnson & Johnson .50 3.8
Campbell Soup .30 2.4
8-6: Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas above.
- Calculate the expected return from Dell.
- Find the highest expected return that is offered by one of these stocks.
- Find the lowest expected return that is offered by one of these stocks.
- Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
- Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
8-8: Consider a three-factor APT model. The factors and associated risk premiums are:
Factor Risk Premium
Change in GNP 5%
Change in energy prices -1
Change in long-term interest rates +2
Calculate expected rates of return on the following stocks. The risk-free interest rate is 7%.
- A stock whose return is uncorrelated with all three factors.
- A stock with average exposure to each factor (i.e., with b = 1 for each).
- A pure-play energy stock with high exposure to the energy factor (b = 2) but zero expo- sure to the other two factors.
- An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = -1.5 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.)
Show all your work to earn partial credit.
Solitaire Machinery is a Swiss multinational manufacturing company…
$5.00Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering whether to undertake a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of $1,000 and a cash inflow the following year of $1,200. Solitaire estimates that its risk-adjusted cost of capital is 14%. Currently, 1 U.S. dollar will buy 1.62 Swiss francs. In addition, 1-year risk-free securities in the United States are yielding 7.25%, while similar securities in Switzerland are yielding 4.5%. ?
- If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project??
- What is the expected forward exchange rate 1 year from now??
- If Solitaire undertakes the project, what is the net present value and rate of return of the project for Solitaire?
Calculate the project’s initial time 0 cash flow, taking into account all side effects
$7.00Project Evaluation this is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection system (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system a safely discard the chemicals instead. The land was appraised last week for $10.2 million. The company wants to build its new manufacturing plant on this land; the plant will cost $30 million to build. The following market data on DEI’s securities are current:
Debt: 25,000 7 percent coupon bonds outstanding, 15 years to maturity, selling for 92 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
Common stock: 450.000 shares outstanding, selling for $75 per share, the beta is 1.3
Preferred stock: 30,000 shares of 5 percent preferred stock outstanding selling for $72 per share.
Market: 8 percent expected market risk premium; 5percent risk-free rate.DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 9 percent on new common stock issues, 7 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 35 percent. The project requires $900,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.
- Calculate the project’s initial time 0 cash flow, taking into account all side effects.
- The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.
- The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of year 5(, the plant can be scrapped for $5 million. What is the after tax salvage value of this manufacturing plant?
- The company will incur $400,000 in annual fixed costs. The plan is to manufacture 17,000 RDSs per year and sell them at $10,000 per machine; the variable production costs are $9,000 per RDS. What is the annual operating cash flow (OCF) from this project?
- DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project?
- Finally, DEI’s president wants you to throw all your calculation, assumption, and everything else into the report for the chief financial officer, all he wants to known is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. What will you report?
AMT plc is increasing the level of automation of a production line dedicated to a single product
$10.00AMT plc is increasing the level of automation of a production line dedicated to a single product. The options available are total automation or partial automation. The company works on a planning horizon of five years and either option will produce the 10,000 units which can be sold annually. Total automation will involve a total capital cost of £1 million. Material costs will be £12 per unit and labour and variable overheads will be £18 per unit with this method. Partial automation will result in higher material wastage and an average cost of £14 per unit. Labour and variable overhead are expected to cost £41 per unit. The capital cost of this alternative is £250,000. The products sell for £75 each, whichever method of production is adopted. The scrap value of the automated production line, in five years’ time, will be £100,000, while the line which is partially automated will be worthless.
The management uses straight-line depreciation and the required rate of return on capital investment is 16 per cent p.a. Depreciation is considered to be the only incremental fixed cost. In analysing investment opportunities of this type the company calculates the average total cost per unit, annual net profit, the break-even volume per year and the discounted net present value.
Required
- (a) Determine the figures which would be circulated to the management of AMT plc in order to assist their investment analysis.
- (b) Comment on the figures produced and make a recommendation with any qualifications you think appropriate.
Give examples of decisions made at every level of equipment leasing company
$5.00Questions:
- Give examples of decisions made at every level of equipment leasing
- Explain the factors that need to be taken into account when making
- Analyze the arguments for and against the use of decision
- Evaluate the use of accounting ratios when making strategic
Additional Files:
741874_1_CharlotteA.Case-4.docx-1.docxStraight Supply Case Study
$20.00Straight Supply is a major supplier of medical components to large pharmaceutical corporations. Bonnie Straight is a second generation CEO of the company founded by her father forty years ago. Originally established in Moorhead, Minnesota, Bonnie moved the company operations to Denver ten years ago so she could see the mountains from her office window.
The Denver location proved profitable for Straight Supply as the company could take advantage of a larger pool of labor and find and train skilled employees to assemble quality products efficiently. The location also made it easier for shipping around the country as many trucking companies were looking for loads out of the Denver area. Additionally, Bonnie could more easily take advantage of business and medical conferences.
An unexpected benefit of being headquartered in Denver was the close proximity to Colorado Springs and the many Christian organizations based in the area like Focus on the Family. Bonnie became an active contributor to several of these organizations and was invited to serve on the board of some of them. Her work in the medical supply area also provided opportunities to help worthwhile causes through the donation of medical supplies and materials to these organizations. At least ten percent of company profits were donated to Christian organizations every year.
One of Straight Supply’s most successful products is an insulin-monitoring pump, which monitors and measures insulin concentrations and automatically injects insulin into diabetic patients. Due to the technical nature of this pump and its critical function, exacting standards are needed in its design and manufacture. There are several critical components requiring highly skilled labor and the finest quality materials.
Recently, a competitor, began promoting a similar insulin monitoring and pump type product. One of the large pharmaceutical companies, which has been a major customer of Straight, indicated that they were giving serious consideration to the competitors product. This customer wanted to give Straight Supply every opportunity to continue business with them since they have a good relationship, which has existed over a number of years, however, business is business.
Bonnie learned that the competing product was close in quality, but definitely lower in price. While this other insulin pump did not have as long a history for product reliability, the competing company had introduced several successful medical products over the last few years. There was every indication that the competitor’s insulin pump could reach the quality standards required by these major companies at a favorable price.
Straight anticipated that if they wanted to remain a product leader in the insulin monitoring pump product area and maintain their current customer base, they were going to have to make their product more competitive. Given that competitors were able to offer a similar quality product at a lower price meant that Straight would have to consider lower its selling price. However, at the same time, they wanted to maintain as much of the profit margin as possible as this was a critical product to the overall success of the company.
Bonnie realized that they were going to have to reduce production costs. Given that the company had produced this product for some time, they had pretty much taken advantage of the learning curve phenomena. All production efficiencies and the resulting cost savings had pretty much been incorporated into the current cost of the product and it would be difficult to introduce additional efficiencies of cost savings into the production process. Material costs were somewhat out of their control as they had to rely on other suppliers to provide materials and additionally, material costs was not that great of a component of the total costs of the product.
When it came to overhead costs, the company used activity based costing to attempt to get as accurate a measure as possible of appropriate indirect costs to allocate to this particular product line. While there is never a guarantee of complete accuracy with the allocation process, top management believed that their costing procedure was reasonable. This process of determining total costs was further confirmed by an independent consulting firm which recommended and implemented their current cost allocation system.
Outsourcing was quickly becoming the only option for production of this product. The production process was fairly labor intensive, involving a skilled workforce to insure that the critical intricacies and components of the product were properly assembled. Straight had depended on some of their most talented work force to assemble this important product. Naturally, the labor cost on a per part basis was relatively high due to many factors. The product was made in the Denver plant, which also had a high cost of living, and the demand for qualified employees was critical which resulted in a higher wage rate. Also, well-trained technically skilled individuals were needed in many disciplines, which also demanded a higher wage rate. The employees working for Straight were some of the more dependable with a greater number of years working at the company which added to the labor costs. The potential for considerable cost savings in labor was available if the product could be assembled overseas.
Straight identified a medical supply company in India that apparently employed a highly skilled work force with appropriate training in the assembly of similar products. The labor rate was considerably lower, enough so, that the product could be shipped to India and back by air for just the assembly process and money could be saved.
Before making any critical decisions of this nature, Bonnie thought it best to conduct a financial analysis of alternative proposals for a five-year time period. The choice for Straight Supply in this situation was to either continue production in Denver or have the product assembled in India. The production and finance departments came up with some critical cost factors to aid in the decision process.
At the Denver plant, 25 employees worked on this specific product. Their average wage rate including benefits is $30 per hour. Employees at the Denver plant are able to produce 75 of the insulin pumps per hour on an eight-hour shift for 250 days in the year. Indirect costs related to the production of the insulin pump were allocated to the product at 180 percent of the direct labor costs. Wage rates will increase at 6 percent per year. The cost to ship the product to their pharmaceutical customer in Chicago was $0.75 per item and that shipping cost would increase 4 percent per year.
If the insulin pump were no longer assembled in Denver, in addition to a reduction in the labor force, there would be an immediate one-time reduction in capacity related costs of $120,000.
For this current year, the anticipated annual demand was equal to the current production capacity. If Straight Supply maintains its market share with existing customers, there should be a 10% increase in demand for this product for each of the next five years. The annual increase in demand could actually have been 20%; however, top management thought it better to estimate conservatively given the potential increase in competition. Additional employees would need to be hired at the Denver plant to keep up with demand.
Each insulin pump sold for $100 this year with the price forecasted to increase at five percent per year over the next five years. Increases in working capital directly associated with the product have been equal to 12 percent of the total sales revenue figure.
In India the wage rate was only $10.50 per hour, and each employee could assemble an average of two insulin pumps per hour. Given this was a new production process at the India location, learning curve efficiencies could apply to the insulin pump and it was expected that production levels would increase 15% per year over the next three years before leveling out in the fourth and fifth years. Also, the hourly rate would increase at 10% per year for each of the next five years. The management at the India plant promised to hire enough skilled workers to meet the production demand every year.
Round trip shipping cost to and from India would be at $5.00 per item with that rate increasing at 4% per year. The additional shipping requirement will increase the production time by one week. To maintain its just-in-time inventory philosophy Straight Supply will need to begin the production of the insulin pump one week earlier so the final product will be available to the customer at the agreed upon delivery date. Starting the production process one week sooner will create an initial cost increase of $260,000 for the earlier ordering of required materials.
In completing capital budgeting projects, Straight Supply has used a weighted average cost of capital process to determine a correct discount rate and then add a premium depending on perceived additional risk factors. The basic discount rate for this year is 14.8%. If a new product is being considered a risk premium of 2.5% is added. If there is a change in a domestic location a risk premium of 1.5% is added. A project involving an international element results in a risk premium of from 3.0% to 6.0% depending upon a number of factors including political stability, economic security, language and cultural differences, and governmental factors.
Required:
- Evaluate the two proposed alternatives regarding the insulin pump.
- Based upon your evaluation identify which alternative should be selected and support your decision.
- Identify some non quantitative factors which might be critical in this decision making situation.
- Based on both your quantitative analysis and non quantitative issues identify which alternative should be selected and support your decision.
- How does the consideration of an international opportunity complicate this decision making process?
- Explain and give an illustration if possible on how the capital budgeting process will be incorporated into your business plan?
Glentech Manufacturing is considering the purchases of an automated parts…
$7.00Glentech Manufacturing is considering the purchases of an automated parts handler for theassembly and test area of its Phoenix, Arizona, plant. The handler will costs $250,000 topurchase plus $10,000 for installation and employee training. If the company undertakes theinvestment, it will automate a part of the semiconductor test area and reduce operatingcosts by $70,000 per year for the next 10 years. However, five years into the investment’slife, Glentech will have to spend an additional $100,000 to update and refurbish the handler.The investment in the handler will be depreciated using straight-line depreciation over 10-years, and the refurbishing costs willbe depreciated over the remaining five-year life of thehandler (also using straight-line depreciation). In 10 years, the handler is expected to beworth $5,000 although its book value will be zero. Glentech’s tax rate is 30%, and itsopportunity cost of capital is 12%.
- a)Is the project good for Glentech? Why or why not?
- b)What can we tell about the project from the NPV profile?
- c)If the project were partially financed by borrowing, how would this affect the investment cash flows? How would borrowing a portion of the investment outlay affect the value of the investment to the firm?
- d)The project calls for two investments: one immediately and one at the end of Year 5. How much would Glentech earn on its investment, and how should we account for the additional investment outlay in our calculations?
- e)What are the considerations that make this investment somewhat risky, and how would you investigate the potential risks of this investment?
Jimmy Johnson Marginal costs
$15.00Marginal costs Jimmy Johnson is interested in buying a new Jeep SUV. There are two options available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and then sell it. Assume that the trade-in value of the two vehicles at the end of the 5-year ownership period will be identical.
There are definite differences between the two models, and Jimmy needs to make a financial comparison. The manufacturer’s suggested retail price (MSRP) of the V-6 and V-8 are $30,260 and $44,320, respectively. Jimmy believes the difference of $14,060 to be the marginal cost difference between the two vehicles. However, there is much more data available, and you suggest to Jimmy that his analysis may be too simple and will lead him to a poor financial decision. Assume that the prevailing discount rate for both vehicles is 5.5% annually. Other pertinent information on this purchase is shown in the following table:
V-6 V-8 MSRP $30,260 $44,320 Engine (liters) 3.7 5.7 Cylinders 6 8 Depreciation over 5 years $17,337 $25,531 Finance charges* over entire 5-year period $5,171 $7,573 Insurance over 5 years $7,546 $8,081 Taxes and fees over 5 years $2,179 $2,937 Maintenance/repairs over 5 years $5,600 $5,600 Average miles per gallon 19 14 Ownership period in years 5 5 Miles driven per year over 5 years 15,000 15,000 Cost per gallon of gas over 5-year ownership $3.15 $3.15 a. Calculate the total “true” cost for each vehicle over the 5-year ownership period.
b. Calculate the total fuel cost for each vehicle over the 5-year ownership period.
c. What is the marginal fuel cost from purchasing the larger V-8 SUV?
d. What is the marginal cost of purchasing the larger and more expensive V-8 SUV?
e. What is the total marginal cost associated with purchasing the V-8 SUV? How does this figure compare with the $14,060 that Jimmy calculated?
Ethical Dilemma and Enron’s Collapse
$20.00The aim of this assignment is as follows:
This questions must be answered in the essay in details
*******In the essay explain what justified mr ebbers to take out the loans from his company? How this example was considered as a conflict of interest was the compensation scheme in the best interest of share holders interests ? explain the justification of board of directors to approve these loans to mr ebbers and other members. What are the consequences of these compensation schemes on the board of directors CEO’s and shareholders? What alternative and solution you would suggest to solve this ethical dilemma?
- & Understand the basic ethics behind agency problem in business.
- &; Use what you have learnt so far on the course to this project
WHAT YOU HAVE TO DO:
You should submit a 1000 words case study report on Principle agent problem in business companies.
You must follow Qatar University’s formatting guidelines and include references. The report will be graded on the detailed criteria outlined on page three of this document. The recommended layout of your report is given in the following bullet points.
- &; Cover page (your names, date & number of words)
- & Executive summary (A high level summary of the project)
- & Table of contents
- & Introduction (background of chosen banks, firm or institution)
- &; What the chosen company is doing regarding your chosen topic.
- & Analysis and evaluation.
- & Recommendations
- & Conclusion (summarize all the above)
- & References
- &; Your project should be no more than 1000 words (executive summary and any references and appendices do not count towards the word limit).
