All Exotic Rental Problems Count 4 Points Each Exotic Rentals has four independent projects under consideration each with a required rate of return of 14%.  The total projects budget is $800,000. A table showing the investments and projected free cash flows follows: NOTE: If using Excel Investments should be entered as negative numbers.   Project/Year Maserati Lamborghini Ferrari BMW i8 Coupe 0 (investment) $150,380 $221,320 $286,550 $175,500 1 $40,000 $85,000 $100,000 $52,000 2 $80,000 $110,000 $125,000 $90,000 3 $60,000 $110,000 $125,000 $90,000 4 $60,000 $92,000 $125,000 $70,000 5 $95,000 $125,000 $150,000 $135,000 No additional cash flows are expected from any of the five projects after year 5. Year 5 cash flow includes rentals and auction of the exotic vehicles into the secondary car market.  Which of the 4 projects has the highest IRR?  The correct answer was determined using an Excel spreadsheet. Take answer to at least two decimal positions.

Compared to Junk Bonds (CCC), Investment Grade Bonds (AAA) typically offer __________  yields because they are __________  risky.

Continuing with Charley & Waldo, what was the total NPV calculated in the problem above for the Catch Air project? NOTE: This should be the NPV you you should have used to make your decision between Zip and Catch Air. Enter your answer in exactly this format: xxx,xxx (example: 174,059)

Possible consequences of climate change include ___________________________.

Problem Counts 5 Points Authentic Products is a maker of authentic metal toys sold in elite Toy Stores and by catalog in the US and Western Europe. Authentic Products  was started in January 2017 and an Equity Capital firm  has expressed an interest acquiring the company. Authentic’s CFO has developed a set of financial projections which are summarized in the table below (all amounts are in $000).   2022     2023     2024     2025     2026 2027 EBIT $500 $400 $400 $1,700 $2,800 $4,200 Capital Expenditures $400 $600 $1000 $1000 $800 $800 Changes in Working Capital $400 $400 $200 $100 $100 ($100) Depreciation $80 $160 $205 $210 $220 $230   Beginning after year 2027 the annual growth in EBIT is expected to be 2.20%, a rate that is projected to be constant over Authentic’s remaining life as an enterprise. Beginning after 2027 Authentic’s capital expenditures and depreciation are expected to offset each other (capex – depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2022 as year 1. Assume a tax rate of 21% and a cost of capital of 7.25% Determine the company valuation of Authenic Products using the NPV method and the cash flow information provided above. The answer to this question was determined in Excel. Your answer may deviate slightly (if you are using a calculator) depending upon differences in truncation and rounding.  Answers below are in $000.

Lane Robertson, CFO of Carter Electric, was asked by the CEO to do an estimate of the firm’s Free Cash Flow for FY2022. After some analysis Lane developed the following data: the tax loss carry forward into FY2022 will be -$1,280,000; the EBIT is projected to be $2,750,000 (profit); the tax rate will be 21%; and the estimated depreciation and amortization expense for FY2022 will be $622,000. For FY2022 working capital is expected to decrease by $150,000; and the expected capital expenditures for FY2022 will be $566,000. The firm will not be raising any capital nor distributing any earning in FY2022. Using the method explained to him 10 years earlier by his college professor, Dr. Jayaraman, and the data he developed, his projection of Free Cash Flow should be ____________. Round your answer to the nearest $1000.

This Problem Counts 4 Points Charley & Waldo’s World of Wonder is a science-oriented children’s museum. The museum has a “free” section where children have unlimited use science oriented exhibits and a premium section where children (or their parents) pay on a per exhibit basis. For example one of the premium exhibits is a narrated demonstration of “Tesla Balls”. Revenue earned on premium exhibits is tracked separately for each exhibit. Charley and Waldo are considering expanding their premium area and are looking at adding a new exhibit. They plan to only add one new exhibit. After viewing a number of ideas suggested by high school science teachers and children psychologists, they have narrowed the list down to two alternatives. The investment required and the anticipated free cash flow for each alternative is shown in the table below. Zip is a demonstration of friction and air resistance; and Catch Air is an inverted wind tunnel that allows children to float in air as if they are flying. If Charley and Waldo believe that the NPV technique is the best in terms of selecting capital projects, which project should they pick. In answering this question assume that the cost of capital is 6.5%. The Zip attraction will have a useful life of 6 years with zero salvage value, Catch Air would have a useful life of 3 years with zero salvage value.   Year Zip Catch Air Investment -600,000 -650,000 1 250,000 300000 2 225,000 300000 3 175,000 250000 4 100,000 ——- 5 100,000 ——- 6 75000 ——-    

Consider the following two projects for Copper Mountain Sports. Both project are projected to produce cash flows for 5 years at which time the equipment will have been technologically obsolete. For these projects calculate the “cross-over rate”.    Year Snow Shoes Snowmobiles 0 -$250,000 -$250,000 1 $25,000 $150,000 2 $80,000 $160,000 3 $200,000 $75,000 4 $190,000 $50,000 5 $150000 $5000 This Problem Counts 3 Points

The Lenox Feed, a chain of Pet Supply Stores had a free cash flow for FY 2021 of $5,250 (all amounts are in $000). Chester Smart , CEO, has developed a four year free cash projection, along with estimated cost of capital during the 4 year period, and terminal growth and cost of capital projections. — a copy of which has been reproduced in the table below.  FY2022-FY2023 FY2024-FY2025 From the end of FY2025  to perpetuity Growth Rate 3.2% 2.5% 1.5% Cost of Capital 4.25% 5.20% 5.00% Considering this forecast he asked his CFO (you) to determine the company’s valuation using the NPV (net present value) method. Choose the best answer from the list of options below. For this question consider FY2022 as Year 1 and FY2025 as Year 4.  (NOTE THAT EXCEL WAS USED TO CALCULATE THE ANSWER TO THIS PROBLEM) Problem Counts 6 Points

Accounting Formulas: Gain/Loss on Equipment (Sale) = Market Value – Book Value (a positive is a gain, a negative is a loss). A gain is a positive cash flow. Note that the book value of piece of equipment is equal to its original capitalized cost less its accumulated depreciation. Finance Formulas: WACC = (Cost of Debt * (1 -t)) * (Total Debt/(Total Debt + Total Equity)) PLUS  (Cost of Equity* (Total Equity/(Total Debt + Total Equity))) Cost of Debt = Risk Free Rate + Default Risk Premium  Cost of Equity = Risk Free Rate + (Beta * Market Risk Premium) Market Value Added (MVA): Formula not provided. You need to know this one. Stock Valuation Models:             Zero Growth Rate for Dividends into Perpetuity: Price = Div0/r            Constant Growth Rate for Dividends into Perpetuity: Price = Div1/(r-g).   OR. Price = (Div0 * (1+g))/(r-g) Growth Opportunities             P = (EPS/R) + NPVGO Cash Flow Models:             Annual Firm Level Free Cash Flow: FCF = (EBIT * (1-t)) – Capex – Change in WC + Depreciation                OR FCF = (EBITDA – Depreciation expense) * (1-t) + Depreciation – Capex – Change in WC                                                      Firm Terminal Value at year N: = (EBIT (n) * (1+g) * (1-t))/(r-g)                         (note similarity to constant growth dividend model) Net Present Value/Future Value/IRR/Payment Annuities: Use Excel macros Payback Period/ Discount Payback Period: No formulas — use methods shown in class. Profitability Index: PI = PV of Benefit Stream (Free Cash Flows)/Initial Investment NET Debt = Total Debt – Cash (and Cash Equivalents)