solve the question

List at least three factors that affect the MARK, and discuss how each one affects it. State whether each of the following involves debt financing or equity financing. (a) $10,000 taken from one partner's savings ac- count to pay for equipment repair (b) Issuance of preferred stock worth $1.3 mil- lion (c) Short-term loan of $75,000 from a local bank (d) Issuance of $3 million worth of 20-year bonds (e) Del Engineering buyback of $8 million of its own stock using internal funds Helical Products, Inc. uses an after-tax MARR of 12% per year. If the company's effective tax rate (federal, state, and local taxes) is 40%, determine the company's before-tax MARK. The owner of a small pipeline construction com- pany is trying to figure out how much he should bid in his attempt to win his first "big" contract. He estimates that his cost to complete the project will be $7.2 million. He wants to bid an amount that will give him an after-tax rate of return of 15% per year if he gets the job, but he doesn't know how much he should bid on a before-tax basis. He told you that his effective state tax rate is 7% and his effective federal tax rate is 22%. (a) The expression for determining the overall effective tax rate is state rate + (1 - state rate)(federal rate) What should his before-tax MARR be in order for him to make an after-tax MARK of 15% per year? (b) How much should he bid on the job?CASE STUDY WHICH IS BETTER-DEBT OR EQUITY FINANCING? Background Information Pizza Hut Corporation has decided to enter the catering busi- Plan A is debt financing for 50% of the capital ($750,000) ness in three states within its Southeastern U.S. Division, with the 8% per year compound interest loan repaid over using the name Pizza Hut At-Your-Place. To deliver the meals 10 years with uniform year-end payments. (A simplifying as- and serving personnel, it is about to purchase 200 vans with sumption that $75,000 of the principal is repaid with each custom interiors for a total of $1.5 million. Each van is ex- annual payment can be made.) pected to be used for 10 years and have a $1000 salvage Plan B is 100% equity capital raised from the sale of $15 value. per share common stock. The financial manager informed the A feasibility study completed last year indicated that the engineer that stock is paying $0.50 per share in dividends and At-Your-Place business venture could realize an estimated that this dividend rate has been increasing at an average of annual net cash flow of $300,000 before taxes in the three 5% each year. This dividend pattern is expected to continue, states. After-tax considerations would have to take into ac- based on the current financial environment. count the effective tax rate of 35% paid by Pizza Hut An engineer with Pizza Hut's Distribution Division has Case Study Exercises worked with the corporate finance office to determine how to best develop the $1.5 million capital needed for the purchase 1. What values of MARR should the engineer use to deter- of vans. There are two viable financing plans. mine the better financing plan? 2. The engineer must make a recommendation on the fi- Taxes = (taxable income )(tax rate) nancing plan by the end of the day. He does not know Taxable income = net cash flow how to consider all the tax angles for the debt financing - loan interest in plan A. However, he does have a handbook that gives He decides to forget any other tax consequences and use these relations for equity and debt capital about taxes this information to prepare a recommendation. Is A or B and cash flows: the better plan? Equity capital. no income tax advantages 3. The division manager would like to know how much the WACC varies for different D-E mixes, especially After-tax net cash flow = (before-tax net cash flow)(1 - tax rate) about 15% to 20% on either side of the 50% debt finance ing option in plan A. Plot the WACC curve and compare Debi capital: income tax advantage comes from interest its shape with that of Figure 10-2. paid on loans After-tax net cash flow = before-tax net cash flow - loan principal - loan interest - taxesA consumer is trying to decide between two long-distance calling plans. The first one charges a flat rate of 104 per minute, whereas the second charges a flat rate of 994for calls up to 20 minutes in duration and then104 for each additional minute exceeding 20 (assume that calls lasting a noninteger number of minutes are charged proportionately to a whole-minute's charge). Suppose the consumer's distribution of call duration is exponential with parameter a. Explain intuitively how the choice of calling plan should depend on what the expected call duration is. b. Which plan is better if expected call duration is 10 minutes? 15 minutes? [Hint. Let h, (x) denote the cost for the first plan when call duration is x minutes and let h,(x) be the cost function for the second plan. Give expressions for these two cost functions, and then determine the expected cost for each plan.]Construct a probability plot that will allow you to assess the plausibility of the lognormal distribution as a model for the rainfall data of Exercise 83 in Chapter 1. Reference exercise 83 Consider numerical observations X,.........X, . It is frequently of interest to know whether the xi s are (at least approximately) symmetrically distributed about some value. If n is at least moderately large, the extent of symmetry can be assessed from a stem-and-leaf display or histogram. However, if n is not very large, such pictures are not particularly informative. Consider the following alternative. Let y, denote the smallest x;, y2 the second smallest xi, and so on. Then plot the following pairs as points on a two-dimensional coordinate system: X1, . . . . *," There are n/2 points when n is even and (n-1)/2 when n is odd. a. What does this plot look like when there is perfect symmetry in the data? What does it look like when observations stretch out more above the median than below it (a long upper tail)? b. The accompanying data on rainfall (acre-feet) from 26 seeded clouds is taken from the article "A Bayesian Analysis of a Multiplicative Treatment Effect in Weather Modification" (Technometrics, 1975: 161-166). Construct the plot and comment on the extent of symmetry or nature of departure from symmetry.An alternative with an infinite life has a B/C ratio of 1.5. The alternative has benefits of $50,000 per year and annual maintenance costs of $10,000 per year. The first cost of the alternative at an interest rate of 10% per year is closest to: (a) $23,300 (b) $85.400 (c) $146,100 (ad) $233,000 Cost-effectiveness analysis (CEA) differs from cost-benefit (B/C) analysis in that: (a) CEA cannot handle multiple alternatives. (b) CEA expresses outcomes in natural units rather than in currency units. (c) CEA cannot handle independent alternatives. (d) CEA is more time-consuming and resource- intensive. Several private colleges claim to have programs that are very effective at teaching enrollees how to become entrepreneurs. Two programs, identi- fied as program X and program Y, have produced 4 and 6 persons per year, respectively, who were recognized as entrepreneurs. If the total cost of the programs is $25,000 and $33,000, respec- tively, the incremental cost-effectiveness ratio is closest to: (a) 6250 (b) 5500 (c) 4000 (d) 1333Return to the situation described in Exercise 3. a. Determine the marginal pmf of X1, and then calculate the expected number of customers in line at the express checkout. b. Determine the marginal pmf of X2. c. By inspection of the probabilities P(X, =4), P(X2 = 0), and P(X, = 4, X2 = 0), are X, and X2 independent random variables? Explain. Reference exercise 3 A certain market has both an express checkout line and a superexpress checkout line. Let X1 denote the number of customers in line at the express checkout at a particular time of day, and let X2 denote the number of customers in line at the superexpress checkout at the same time. Suppose the joint pmf of X1 and X2 is as given in the accompanying table. X, a. What is P(X, = 1, X2 = 1), that is, the probability that there is exactly one customer in each line? b. What is P(X, = X2), that is, the probability that the numbers of customers in the two lines are identical? c. Let A denote the event that there are at least two more customers in one line than in the other line. Express A in terms of X, and X2, and calculate the probability of this event. d. What is the probability that the total number of customers in the two lines is exactly four? At least four?The joint probability distribution of the number X of cars and the number Y of buses per signal cycle at a proposed left-turn lane is displayed in the accompanying joint probability table. p(x, y) 0 2 .025 015 010 050 030 020 .125 .075 .050 UAWNEO .150 .090 060 .100 .060 040 .050 030 .020 a. What is the probability that there is exactly one car and exactly one bus during a cycle? b. What is the probability that there is at most one car and at most one bus during a cycle? c. What is the probability that there is exactly one car during a cycle? Exactly one bus? d. Suppose the left-turn lane is to have a capacity of five cars, and that one bus is equivalent to three cars. What is the probability of an overflow during a cycle? e. Are X and Y independent rv's? Explain