<p> 1. A company needs to elect 10 directors. A shareholder owns 80 shares. What is the maximum number of votes that he or she can cast for a favorite candidate under (10 points) a. Straight voting? 80 b. Cumulative voting? 80*10 = 800</p><p>2. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio by throwing darts at the Wall Street Journal.” Explain why this is not so. (10 points) This strategy does not consider risk.</p><p>3. The NuPress Valet Company has an improved version of its hotel stand. The investment cost is expected to be 72 million dollars and will return 13.50 million dollars for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. What is the NPV of the project? (10 points) WACC = .5*13+.5*9*(1-.34) = 9.47% PMT = 13,500,000, i=9.47%, n=5, PV = ?; NPV = PV – 72,000,000 = -20,123,870.16</p><p>4. TXI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective betas, are as follows: (10 points) Subsidiary Percentage of Beta Business Electric Utility 60% 0.70 Cable Company 25% 0.90 Real Estate 10% 1.30 International Projects 5% 1.50</p><p> a. What is the holding company’s beta? Β = .6*.7+.25*.9+.10*1.3 + .05*1.5 = 0.85 b. Assume that the risk-free rate is 6 percent and the market risk premium is 5 percent. What is the holding company’s required return? R = 6 + 0.85(5) = 10.25%</p><p>5. The Marx Brewing Company recently installed a new bottling machine. The machine’s initial cost is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years. The machine’s per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling price per unit is $1.50. Marx’s tax rate is 34%, and it uses a 16% discount rate. (10 points) a. Calculate the accounting break-even point on the new machine. Q=(1800+400)/1.0 = 2,200 b. Calculate the present-value break-even point. (Q-1800)(1-.34)+.34*400 = OCF Find the OCF that makes NPV = 0. Let PV = 2000, n=5, I=16%, PMT=? = 610.82=OCF; Substituting above find Q=2519.</p><p>6. Use the probability distribution to answer the following questions: (30 points) Return on Return on State Prob Security A Security B Boom .6 15% 8% Bust .4 5% 20% Expected Return 11% 12.8% Standard Deviation 4.9% 5.88% a. What is the expected return on Security B? 12.8% b. What is the expected return on a portfolio that is 40% invested in A and 60% invested in B? 12.08% c. What is the standard deviation of Security A? 4.9% d. What is the expected return on a portfolio that is equally split among A, B and the risk free asset? The expected return on the risk free asset is 4%. 9.27% (11+12.8+4)/3 e. What is the covariance between A and B? -28.8%% Cov = .6(15-11)(8-12.8)+.4(5-11)(20-12.8) f. What is the standard deviation of a portfolio with weights of .25 in security A and the remainder in security B? 3.2% Portfolio Standard Deviation = .252(4.9)2+.752(5.88)2+2*.25*.75*(-28.8) Or = .6(9.75-12.35)2+.4(16.25-12.35)2</p><p>7. You are evaluating a project for The Ultimate recreational tennis racket. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000, which is depreciated straight-line to zero over the 3-year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment in the project is $75,000. The tax rate is 34% and the required return on the project is 10%. (20 points)</p><p> a. What is the initial cash flow? CF0 = -165,000-75,000=-240,000 b. What is the operating cash flow for the project in year 2? OCF2=(400*1250-225*1250-100,000)(1-.34) + 55,000(.34) c. What is the depreciation tax-shield in year 3? D*T = 18,700 d. What is the total cash flow for the project in year 3? OCF3 = (400*1325-225*1325-100,000)(1-.34)+18,700=$105,737.50 CF(SV) = 35,000-(35,000-0)(.34)=23,100; CF(NWC) = 75,000 CF3 = 203,837.50 </p>