The rate used to discount future cash flows to their present values is a key variable of this process. A firm's weighted average cost of capital (after tax) is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt. Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm's investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital. An NPV calculated using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than one calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker[3] for more detailed relationship between the NPV value and the discount rate. For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired...

...commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
In accordance with the Coursera Honor Code, I (Shravan Vepa) certify that the answers here are my own work. Thank you!
Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/project.
False.
True.
Question 2
(5 points) The return on equity is equal to the return on assets of a project/firm.
Always true.
Never true.
Sometimes true.
Question 3
(10 points) Moogle, Inc. is in the same business as Google, Inc., but has recently retired all its debt to become an all-equity firm. Its return on equity has dropped from 12.25% to 10.60% as a result of this. Google, Inc. continues to have debt in its capital structure, and its debt-to-equity ratio is 30%. What is the return on assets of Google, Inc.(No more than two decimals in the percentage interest rate, but do not enter the % sign.)
Answer for Question 3
Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.00. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 4.5% and the risk-free rate is...

...following information:
• Debt: $75,000,000 book value outstanding. The debt is trading at 90 percent of par.
The yield to maturity is 9 percent.
• Equity: 2,500,000 shares selling at $42 per share. Assume the expected rate of return
on Federated’s stock is 18 percent.
• Taxes: Federated’s marginal tax rate is Tc = .35
What are the key assumptions underlying your calculation? For what type of project
would Federated’s weighted-average cost of capital be the right discountrate?
2. Suppose Federated Junkyards decides to move to a more conservative debt policy. A
year later its debt ratio is down to 15 percent (D/V =.15 ). The interest rate has dropped
to 8.6 percent. Recalculate Federated’s WACC under these new assumptions. The company’s
business risk, opportunity cost of capital, and tax rate have not changed. Use the
three-step procedure explained in Section 19.3.
3. True or false? Use of the WACC formula assumes
a. A project supports a fixed amount of debt over the project’s economic life.
b. The ratio of the debt supported by a project to project value is constant over the
project’s economic life.
c. The firm rebalances debt, each period, keeping the debt-to-value ratio constant.
4. What is meant by the flow-to-equity valuation method? What discountrate is used
in this method? What assumptions are necessary for this method to give an...

...uniform
1. There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60,000. The discountrate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting Rate of Return (ARR)
3. Net present value method (NPV)
Proposal A is better than B, because ARR and NPV are higher than Proposal B
2. There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80,000 and Proposal B costs $ 100,000. The discountrate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
1 13,000 15,000
2 15,000 14,000
3 18,000 19,000
4 16,000 16,000
5 19,000 13,000
6 14,000 13,000
7 16,000 19,000
8 20,000 15,000
9 0 18,000
10 0 17,000
Evaluate the above proposals according to:
1. ARR
2. NPV
3. Pay Back Period
We can select Proposal A, because ARR, NPV and PBP are positive and reject Proposal B
3.There are two Proposals. Proposal A and Proposal B. The discount...

...
Raising the Interest Rate
Principles of Finance
Introduction
After years of declining interest rates, we are facing a dilemma; should the Federal government increase rates to contain inflation, or keep rates low to boost the US economy? Increases in consumption of oil, metals, materials, and food, both foreign and domestic, are increasing demand. Prices are rising on a global scale as demand increases. Additionally, the US is experiencing rising costs for healthcare and education. Yet, the US economy is suffering through declining home values, a banking crisis, and an uncertain stock market. So, what would an increase in the interest rate mean for consumer financing for big-ticket items, the present and future values of annuities; net present values, weighted average costs of capital, and corporate earnings?
Cost of Capital
The cost of capital can be measured in a variety of ways. One may look at short- and long-term debt where payments will rise as interest rates rise, increasing capital costs. Or, one might consider that shifting interest rates create difficulties in predicting future capital costs, so some organizations may find themselves incurring greater costs than expected. Also, with increased interest rates, money becomes more valuable invested in interest-bearing bonds, or saved, versus spent.
Weighted Average Cost of Capital...

...THE DIRECT D E T E R M I N A T I O N of RISK-ADJUSTED DISCOUNTRATES and LIABILITY BETA
RUSSELL E. BINGHAM T H E H A R T F O R D FINANCIAL SERVICES G R O U P
Table of Contents
Page 2 3 5 7 8 11 12 13 14 14 15 16 17 17
18
Subject Abstract 1. Summary 2. Total Return Model 3. After-Tax Discounting 4. Derivation of Risk-Adjusted DiscountRate and Liability Beta Figure l : Baseline Risk / Return Line vs Leverage 5. Liability Beta Figure 2: Equity vs Liability Beta Figure 3: Equity Beta vs Risk-Adjusted DiscountRate (After-Tax) 6. Underwriting Profit Margin Figure 4: Underwriting Profit Margin vs Loss Payout Figure 5: Underwriting Profit Margin vs Investment Yield Figure 6: Underwriting Profit Margin vs Market Risk Premium Figure 7: Underwriting Profit Margin vs Leverage 7. Conclusion Related Background Reference Reading Appendix - Example Exhibit I - Balance Sheet, Income, Cash Flow and Rates of Return Exhibit II - Net Present Value Without Risk Adjustment Exhibit I I I - Net Present Value With Risk Adjustment Exhibit IV - Myers-Cohn "Fair" Premium With After-Tax Discounting
19 20 23 24 25 27
Abstract
The development of a complete financial structure including balance sheet, income and cash flow statements, coupled with conventional accounting and economic valuation rules, provides the foundation from which risk-adjusted discount...

...Sears, Roebuck and Co. vs Wal-Mart Stores
Case Background
Sears, Roebuck and Co. Wal-Mart Stores
Started as a company dealing in catalogue sales Diversification into 3 types of business – Retail, Service and Credit Retail store types – Full line stores, Auto stores, Home and lifestyle stores
Started as a franchisee type variety store Primarily Retail business – Discount stores, Supercenters, Sam’s club warehouses
Focus on price conscious consumers
Comparison of Retail Strategy
Parameters Sears, Roebuck and Co.
Increase of 15% from 3070 in 1995 to 3530 in 1997
Walmart Stores
Increase of 5% from 2558 in 1995 to 2740 in 1997
Comments
No. of stores
Retail selling space has increased more for Walmart as compared to Sears Retail space Increase of 13% from 81 to 93 mn sq ft Increase of 12.5% from 278 to 313 mn sq ft
Revenue per sq. ft. Operating lease Capital lease
Decrease from $323 to $318
Increase from $335 to $348
Increase of 23% from 357 to 439 Increase of 12% from 531 to 596 mn mn
Increase of 15% from 433 to 498 Increase of 9% from 2782 to 3040 mn mn
Higher rentals and lower depreciation for Sears
Credit card
56.6% of total sales come from Sears charge business
Risk of delinquencies borne by Manhattan chase bank
Credit payment default risk is higher for Sears
Accounting Policies
Depreciation – Straight Line Method
• SEARS 5-10 years on furniture and 40-50 years on buildings • WALMART 5-12...

... |Amount |Rate |PV |
|1 | $ 400.00 |0.926 | $ 370.40 |
|2 | $ 750.00 |0.857 | $ 642.75 |
|3 | $ 945.00 |0.794 | $ 750.33 |
|4 | $ 145.00 |0.735 | $ 106.58 |
|5 | $ 78.00 |0.681 | $ 53.12 |
| | |Total | $ 1,923.17 |
3. If you invested $2,000 per year into an IRA for 30 years and received 6 percent return each year, what would the account balance be in 30 years? (8 points)
$2,000 * 79.058 = $158,116.37
4. A friend gives you a proposition. If you give him 1,500 dollars today, he will guarantee your receive 12 percent a year for the next 5 years. How much money will you receive from him at the end of 5 years? (8 points)
$1,500 * 1.7623 = $2,643.51
5. You want to buy a new Computer Aided Design (CAD) system for your business. The cost of the system is $150,000 and you expect to save over $40,000 per year in reduced labor costs. Please calculate the net present value of the CAD if your required return is 10 percent and the life of the system is expected to be 5 years. (12 points)
|Investment |Cost savings |Net cash flows |PV @10%...

...percentages rates (APRs)?
Answer: The APR is equal to the monthly interest rate multiplied by 12
Give an interest rate of zero percent, the future value of a lump sum invested today will always:
Answer: remain constant
Answer: II and IV
A firm created as a separate and distinct legal entity that may be owned by one or more individuals or entities is called a: corporation
The capital structure of a firm refers to the firm’s: Long-term debt and equity
The Anderson Co. wants to borrow 5000 at the beginning of each year for six years at 7 percentage interest. The firm will repay this money in one lump sum at the end of year 6. How much of the firm’s loan repayment id due to the 5000 it received in year 4? Answer: 6125.22
Tayor has just received an insurance settlement of 58400. She want to save this money until her oldest daughter goes to college. Tayor can earn of 8.5 percent, compound annually, on this monty. How much will she saved for her daugther’s college education if her enters college 14 years from now? 182990.77
Warren’s diner needed a new location. This establishment spent 65000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at 8 percent interest for 11 years. What is the amount of each monthly payment? 556.5
How much money does Melinda need to deposit into her investment account today if she wishes to withdraw 8000 a year for...