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mauvegnat752Lv1

28 Sep 2019

What is the marginal impact on tax liability for a profitable corporation in the 20% marginal tax bracket that incurs an additional dollar of depreciation expense?

A decrease of 80 cents

An increase of 80 cents

An increase of 20 cents

A decrease of 20 cents.

Marshal Arts, President/CEO of Potato Corp. is paid an annual salary of $5 million and he also owns more than 30% of the company's shares. Having just won a big lottery, he is trying to decide whether to invest his new cash in Potato Corp., Safeway Groceries, T-bills, or S&P 500. Given what you know about the modern portfolio theory, the worst investment choice for Marshall is to invest in:

S&P 500 Index

Safeway Groceries

T-Bill

Potato

Other things being equal, a sudden increase in the marketâs risk aversion should in theory cause the market price of a security to:

Fall

Rise

First rise, then fall

Move sideways

Which of the following would be the BEST stock to be combined with Stock X if the objective was to minimize the portfolioâs risk?

A stock with a correlation coefficient of -.5 with X.

A stock with a correlation coefficient of zero with X.

A stock with a correlation coefficient of +.5 with X.

Portfolio A is poorly diversified and has a beta of .5. Portfolio B is fully diversified and has a beta of 1.5. Which of the following statements must be true about these portfolios?

A has more market risk than B.

A has less unique risk than B.

A has a lower required rate (opportunity cost) than B.

A's total risk is less than B.

Which of the following risks would be classified as a unique risk for an auto manufacturer?

Business cycles

Interest rates

Steel price

Based only on the following rates of return for the past three years, which of the following is a correct estimate for Ralf Corp.'s beta?

Year Market Portfolio Ralf Company

1 -0.20 +0.10

2 -0.10 +0.11

3 -0.00 +0.12

b = -1

b = +1

b < 1

b=0

Information: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders." Here is the 1st question. Two more to follow.
Question: Given that the decision was made in the best interest of shareholders, what do you believe was the outcome of the NPV analyses undertaken by Quaker?

These business lines had positive NPVs.

These business lines had negative NPVs.

Same info as in last qt: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders."
Here is another question: Were these businesses able to earn their required rate of return?

No, they did not. Otherwise, they would have had positive NPVs.

Yes, they did.

Cannot tell because the IRR is not given.

Same info as in previous qt: The following quote is from the 1996 Annual Report of Quaker Oats. "In 1996 we sold our Italian oils businesses and our frozen food businesses. These businesses were in mature categories and did not have the competitive scale to improve their low operating income margins." Most likely, Quaker management did extensive investment analyses of these divestiture decisions, including Net Present Value analyses, making decisions in the best interest of their shareholders. Question: What should have happened to the stock price of Quaker Oats when they announced they were divesting themselves of these business lines?

Most likely it went up especially if the announcement was unanticipated.

Most likely it went down because the announcement had to do with losing divisions.

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Elin HesselLv2

28 Sep 2019

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Related questions

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

1. The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

ultramarineguinea-pig196

Consider the following model of the saving-investment balance. In this model, the following relationship must remain in balance: S + (M-X) = I + (G-T) where,

S is domestic saving by households and businesses

M is U.S. imports of goods and services

X is U.S. exports of goods and services

I is private domestic investment in capital goods

G is total federal, state and local government spending on goods and services, and

T is the net receipt of tax revenues by federal, state and local governments

The presentation: âLesson 1: The Savings and Investment Balanceâ in this weekâs lesson can help you understand this identity better.

Clearly, as with any high-level model, there are limitations but letâs try to understand how this model functions mechanically.Consider the model of the saving-investment balance only as an algebraic accounting identity (i.e., do not consider any economic repercussions or additional complications (those can come later)), What does the model predict will happen to gross private domestic investment (I) if:

a) Domestic saving by households was to decrease, everything else remaining the same?

b) U.S. net tax receipts were to increase, everything else remaining the same?

c) There was a sudden increase in exports from the U.S., everything else remaining the same?

d) Pre-tax business profits were to increase, everything else remaining the same?

e) Federal grants to state and local governments were to disappear, everything else remaining the same?

2. Examine the note and bond yields presented below for Treasury and Corporate AAA, AA and A-rate bonds. Why do the yields differ across the securities and within securities, across time? Which premiums or market expectations most appropriately explain those differences? In particular, what accounts for the differences in rates across securities types for the same maturities? And speculate on what factor or factors can best explain why the yields rise as maturities lengthen (within particular types of bonds). Finally, do any securities look out of place and, if so, which and why?

Treasuries

2 year 0.33%

5 year 1.39%

10 year 2.64%

20 year 3.42%

Corporate, AAA

2 year 0.40%

5 year 1.77%

10 year 3.52%

20 year 4.93%

(table continues on next page)

Corporate, AA

2 year 0.63%

5 year 1.91%

10 year 3.50%

20 year 4.43%

Corporate, A

2 year 0.84%

5 year 2.15%

10 year 3.67%

20 year 4.75%

3. Suppose that today the one-year Treasury note yields 0.12% (0.0012 in decimal form), the two-year note yields 0.40% (0.0040), the three-year note yields 0.78% (0.0078), the five-year note yields 1.60% (0.0160), the seven-year note yields 2.22% (0.0222) and the ten-year note yields 2.81% (0.0281). Under the pure expectations theory with no maturity risk:

a) What is the expected yield on a one-year note delivered one year from now?

b) What is the expected yield on a one-year note delivered two years from now?

c) What is the expected yield on a three-year note delivered two years from now?

d) What is the expected yield on a two-year note delivered five years from now?

e) What is the expected yield on a five-year note delivered five years from now?

f) What is the expected yield on a seven-year note delivered three years from now?

Note: This concept is discussed in Chapter 3 of the text and in âLesson 2: More On Yield Curves and Forward Rate Determinationâ in this weekâs online materials.

4. Assume that interest rate parity holds so that future or forward exchange rates adjust to eliminate investor arbitrage profits. If interest rates in Britain are higher than corresponding interest rates in Japan, would you expect an appreciating pound or a depreciating pound in the futures (forward) market relative to the current spot market rate? In terms of the supply and demand for pounds in the spot and forward currency markets, what is implicitly occurring in each as a result of interest rate parity? Is the pound selling forward at a premium or at a discount relative to the yen? (The presentation âLesson 3: On Exchange Ratesâ from this weekâs materials can help shed light on this subject. The portion on interest rate parity later in the presentation, so stick with it. Itâs also discussed in Chapter 16.)

5. The spot market rate for the euro is 1.4059 Canadian dollars per euro. The 3-month futures (forward) rate on the euro is 1.4147 Canadian dollars per euro. The yield on a 3-month Canadian government security is 1.16 percent (0.0116 decimal), annual percentage rate (APR). The yield on a 3-month euro area security is 0.24 percent (0.0024 decimal), annual percentage rate (APR). Show that interest rate parity (IRP) does not hold by solving for the forward rate that ensures IRP. How would you take advantage of the arbitrage opportunity arising from the actual data (i.e., borrow 1,000,000 euros, convert to Canadian dollars, invest in Canada, sell the proceeds forward and then repay your loan or borrow 1,000,000 Canadian dollars, convert to euros, invest in Europe, sell the proceeds forward and then repay your loan)?

plumduck388

You are the senior financial analyst for Fosbeck Generic Drug Co (Fosbeck). The firm manufactures and sells generic over-the-counter drugs in plants located throughout the country. You have been asked to generate some answers to questions emanating from the Board of Directors. These questions can be grouped into two broad categories â what projects to choose for the near future and how to finance these projects.

Deliverable:

Please present your recommendations in a report written for your supervisor, the firm Controller. Clearly show your analysis and communicate your conclusions and recommendations. Support your report by calculations in the Excel spreadsheets. In your report, explain the results of each portion of your analysis (represented by the tabs on the Excel template). Submit all the completed Excel worksheets with the completed responses to the questions posed to support your report and recommendation.

Steps to Completion:

Individual Project Analysis

Your first task is to analyze the companyâs three projects and provide your recommendations about their implementation.

Automation project

One of Fosbeckâs plants is trying to decide whether to automate its drug manufacturing by purchasing a fully automated bioreactor machine complex.

The proposed machine costs $400 M and it will have a five year anticipated life and will be depreciated by using the 3-year MACRS depreciation method toward a zero salvage value. (MACRS depreciation rates are: Year 1: 33%, Year 2: 45%, Year 3: 15% and Year 4: 7%) However, the plant will be able to sell the machine in the after-market for 25% of its original costs at the end of year 5. The firm estimates that the installation of the bioreactor will bring annual costs savings of $50 M from reduced labor costs, $10 M per year from reduced waste disposal costs, and $80 M per year from the sales byproduct of bioreactor process net of selling expenses. Fosbeck requires a 12% of return from its investment and has a 38% marginal tax rate.

Decision Criteria â NPV and IRR

Calculate the NPV and IRR for the project.

The manager of the plant raised some concerns about the revenues from the byproduct sale. He projects that the price of the byproduct in year 1 could be 10% to 50% less than what was projected. However, the savings from reduced labor costs and reduced waste disposal costs would remain same. He presented the following probability distribution on the projected reclaimed plastic sales:

Remain same as projected 40%

Decrease by 10% 30%

Decrease by 30% 20%

Decrease by 50% 10%

Estimate the NPV and IRR for each of these scenarios. Estimate the expected NPV.

Break-even Analysis

At what volume of byproduct sales would Fosbeck have a break-even NPV=0?

Fosbuvir Project

The company considers development of a new drug to treat Hepatitis C, code-named the Fosbuvir Project. Fosbeck has already spent $420 M on preliminary research for drug development and it will need another $600 M on development this year (tax deductible) and $2 B in CapEx next year (these cash outlays are not part of the cash flows that you have estimated earlier, because this project is not approved yet). Capital expenditures will be depreciated over 10 years using straight line depreciation.

The patent for the drug is pending and the company expects to receive an FDA approval and start selling the drug in two years. Its expected revenues in the first year of sales are $1 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 7 years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are estimated to be 20% of revenues and SG&A expenses are $2 B a year if the drug is produced and zero otherwise.

NPV and IRR

Please estimate the NPV and IRR of the Fosbuvir Project, using the companyâs WACC of 12%.

Crystal Ball

Expected revenues and expenses take into account the uncertainty of getting the patent and FDA approval. The company estimates the probability of getting the approval in two years is 10% (i.e., if the company gets the approval the revenue is $10 B, if it does not, the revenue is zero). Even if Fosbuvir gets approved by FDA, each year there is a 5 % probability of the patent becoming obsolete due to a new drug entering the market, in which case the revenues will drop to zero.

Therefore, your next task is to evaluate the Fosbuvir Project using Crystal Ball simulation (see the template) based on probability of FDA approval in two years and patent obsolescence in each subsequent year. Alternatively you are welcome to use Random Data generator in Data Analysis Pack.

What is the probability of a positive NPV?

Please discuss the riskiness of the project.

Real Option

One of your colleagues pointed out that instead of starting construction before the FDA approval, the company can invest only $0.8 B next year (depreciated over 10 years) and delay the remaining $1.2 B investment (depreciated over 8 years) for two years until the drug gets approved. Only if the drug gets approved will Fosbeck proceed with the second stage investment, which will take place in three years. The sales will commence in four years at the level of $10 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 5 years â due to delay the company will lose two years of revenues. The probability of patent obsolescence remains the same as before â 5% each year.

What is the NPV of this two-stage investment?

Is the option to delay the project valuable? Explain.

Pharmaset, Inc. Acquisition

The reason of the low probability of FDA approval for Fosbuvir is that another company, Pharmaset, Inc., is working on a similar drug, called FosbuvirP, and is very close to getting FDA approval and a patent. If Pharmaset gets a patent, Fosbeckâs own application will be denied. Therefore, instead of developing Fosbuvir internally, Fosbeck can acquire Pharmaset. Pharmaset already has manufacturing facilities in place and FosbuvirP is its only product. The book value of the companyâs fixed assets is $3 B, which will be depreciated using the straight-line depreciation over the next 10 years. Pharmaset expects to receive the FDA approval and patent by the end of this year with sales starting next year. Its next year revenues are expected to be $4 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 7 years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are expected to be 20% of revenues and SG&A expenses are $3.5 B a year if the drug is produced and zero otherwise. In other words, in case of FDA approval Pharmasetâs revenues and costs will be similar to Fosbeckâs, but SG&A expenses will be higher. If Fosbeck were to acquire Pharmaset, it would be able to bring SG&A costs down to Fosbeckâs level. The probability of FDA approval is 40% and the probability of patent obsolescence remains the same as before â 5% each year.

Mergers and Acquisitions. Target (Pharmaset) Valuation

Pharmasetâs management would be open to the sale in the valuation range of $ 20 to 24 Billion. Please estimate Pharmasetâs value to Fosbeck, if it gets acquired.

Recommendations

Upon reviewing Fosbeckâs choices, what project(s) would you recommend?

Venture Capital Financing

Finally, to further reduce its risk Fosbeck considers to keep acquired Pharmaset as a separate company. In this case Fosbeck will eventually shift its R&D to Pharmaset, which will continue as a viable business even after the initial patent expires. Therefore, we can ignore the probability of a patent becoming obsolete. However, if FDA approval is not received this year, Pharmaset will go bankrupt, in which case its assets will be sold at residual book value.

A venture capital (VC) firm Menlo Ventures is willing to provide financing of up to $5 B in acquisition of Pharmaset.

If the VC agrees to invest in Pharmaset, it plans to exit after eight years at which time it expects that the companyâs value would be eight times its year 8 EBIT.

Menlo Ventures offers three different ways of structuring the financing:

Straight common stock where the VC will not receive any dividend for the first four years and will receive 20% of NOPAT as a dividend for the remaining four years. The tax rate for Pharmaset is 38%. In addition, the VC will receive a 20% ownership of the companyâs equity at the end of eight years.

Redeemable convertible debt with 10% coupon rate (interest is tax-deductible). The debt will be converted for 15% ownership of the equity of Pharmaset at the end of eight years. In the case of bankruptcy the debt will be immediately redeemed at its face value or at the residual assets' book value, whichever number is lower.

Redeemable preferred stock with 7.5% dividend plus warrants for 15% of the equity for an exercise price of $150 M. In the case of bankruptcy the debt will be immediately redeemed at its face value or at the residual assets' book value, whichever number is lower.

NOTE: Please provide email address for excel file. Thank you

tealwildebeest936

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