1. Genuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. The company's cost of capital is 20 percent. Cash flow analysis indicates the following:

Year	Machine A	Machine B
0	-$2,000	-$2,000
1	0	832
2	0	832
3	0	832
4	3,877	832

1. What is the payback period of each machine? Which one should be selected if company evaluates projects using payback period method?
2. What is the net present value of each machine? Which one should be selected if company evaluates projects by comparing their net present values?
3. What is the internal rate of return of each machine? Which one should be selected if company evaluates projects by comparing their internal rates of return?

2. The lower the firm's tax rate, the lower will be the firm's after tax cost of debt and WACC, other things held constant. Explain whether you agree or disagree.

3. The Textbook Production Company has been hit hard due to increased competition. The company’s analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that k_s = 11 percent and D₀ = $2.00.

a. How much should you be willing to pay for this security?

b. If the current market price of this security is $ 9.50, what type of action will you take?

c. Suppose that you purchased this security and hold it for three years. At what price do you expect to sell this security three years from now?

4. (16 points) Dumb and Dumber Development Company has two mutually exclusive projects to evaluate. Assume both projects can be repeated indefinitely. The following cash flows are associated with each project:

Period	Project A Cash Flows	Project B Cash Flows
0	-$100,000	- $70,000
1	30,000	30,000
2	50,000	30,000
3	70,000	30,000
4		30,000
5		10,000

The project types are equally risky and the firm's cost of capital is 12 percent. If the firm evaluates projects using equivalent annual annuity (EAA), which project should be selected?

5. Fiasco Corporation has a target capital structure of 60 percent equity and 40 percent debt. The firm can raise an unlimited amount of debt at a before-tax cost of 9 percent. The company expects to retain earnings of $300,000 in the coming year and to face a tax rate of 35 percent. The last dividend (D₀) was $2 per share and the growth rate of the company is constant at 6 percent. If the company needs to issue new equity, then the flotation cost will be $5 per share. However, if Fiasco issues new common stock more than $150,000, then the underwriters will charge $6 per share as flotation cost. The current stock price (P₀) is $30.

a. How many breaks are there in the MCC schedule? At what dollar amounts do the break(s) occur, and what causes them?

b. What is the weighted average cost of capital (WACC) in each interval between the breaks?

6. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield in the market is 14 percent. Given these facts, what is the annual coupon interest rate on this bond?

7. A father is planning a savings program to put his daughter through college. His daughter is now 13 years old. She plans to enroll at the university in 5 years, and it should take her 4 years to complete her education. Currently, the cost per year (for everything – food, clothing, tuition, books, transportation, and so forth) is $12,500, but a 5 percent annual inflation rate in these costs is forecasted. The daughter recently received $7,500 from her grandfather’s estate; this money which is invested in a bank account paying 8 percent interest, compounded annually, will be used to help meet the costs of the daughter’s education. The rest of the cost will be met by money the father will deposit in the savings account. He will make 6 equal deposits to the account, one deposit each year from now until his daughter starts college. These deposits will begin today and will also earn 8 percent interest, compounded annually.

a. What will be the present value of the cost of 4 years of education at the time his daughter becomes 18?

b. What will be the value of $7,500 which the daughter received from her grandfather’s estate when she starts college at age 18?

c. If the father is planning to make the first of 6 deposits today, how large must each deposit be for him to be able to put his daughter through college? (Hint: An annuity due assumes interest is earned on all deposits; however, the sixth deposit earns no interest – therefore, the deposits are an ordinary annuity).