1. You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 0.9. You are considering selling $100,000 worth of one stock with a beta of 0.85 and using the proceeds to purchase another stock with a beta of 1.3. What will the portfolio's new beta be after these transactions? Do not round intermediate calculations. Round your answer to two decimal places.

2.
The table below gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains.
Travellers Inn: December 31, 2012 (Millions of Dollars)
Cash $10 Accounts payable $10
Accounts receivable 20 Accruals 10
Inventories 20 Short-term debt 5
Current assets $50 Current liabilities $25
Net fixed assets 50 Long-term debt 30
Preferred stock 5
Common equity
Common stock $10
Retained earnings 30
Total common equity $40
Total assets $100 Total liabilities and equity $100
The following facts also apply to TII:
Short-term debt consists of bank loans that currently cost 8%, with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis, bank loans are zero in the off-season.
The long-term debt consists of 25-year, semiannual payment mortgage bonds with a coupon rate of 10%. Currently, these bonds provide a yield to investors of rd= 12%. If new bonds were sold, they would have a 12% yield to maturity.
TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend of $1.50, and has a yield to investors of 8%. New perpetual preferred would have to provide the same yield to investors, and the company would incur a 7% flotation cost to sell it.
The company has 4 million shares of common stock outstanding. P0 = $20, but the stock has recently traded in price the range from $17 to $23. D0 = $1 and EPS0 = $2. ROE based on average equity was 23% in 2008, but management expects to increase this return on equity to 30%; however, security analysts and investors generally are not aware of management's optimism in this regard.
Betas, as reported by security analysts, range from 1.3 to 1.7; the T-bond rate is 10%; and RPM is estimated by various brokerage houses to be in the range from 4.5% to 5.5%. Some brokerage house analysts reports forecast dividend growth rates in the range of 10% to 15% over the foreseeable future.
TII's financial vice president recently polled some pension fund investment managers who hold TII's securities regarding what minimum rate of return on TII's common would make them willing to buy the common rather than TII bonds, given that the bonds yielded 12%. The responses suggested a risk premium over TII bonds of 4 to 6 percentage points.
TII is in the 40% federal-plus-state tax bracket.
TII's principal investment banker predicts a decline in interest rates, with rd falling to 10% and the T-bond rate to 5%, although the bank acknowledges that an increase in the expected inflation rate could lead to an increase rather than a decrease in interest rates.
Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the company's WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the assets TII now operates. Do not round intermediate steps. Round your answer to two decimal places.

3. NPVs and IRRs for Mutually Exclusive Projects
Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $21,500, whereas the gas-powered truck will cost $17,960. The cost of capital that applies to both investments is 13%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,860 per year and those for the gas-powered truck will be $4,600 per year. Annual net cash flows include depreciation expenses.
a. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
Electric-powered truck $
Gas-powered truck $
b. Calculate the IRR for each type of truck. Round your answers to two decimal places.
Electric-powered truck %
Gas-powered truck %

4. Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $17 million, of which 85% has been depreciated. The used equipment can be sold today for $4.25 million, and its tax rate is 35%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$

5. Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $17 million, of which 85% has been depreciated. The used equipment can be sold today for $4.25 million, and its tax rate is 35%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$

6. Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $170,000. The project will produce 1,200 cases of mineral water per year indefinitely. The current sales price is $146 per case, and the current cost per case is $115. The firm is taxed at a rate of 38%. Both prices and costs are expected to rise at a rate of 4% per year. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.
a. What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)
$
Should the firm accept the project?
b. Suppose that total costs consisted of a fixed cost of $8,000 per year plus variable costs of $85 per unit, and suppose that only the variable costs were expected to increase with inflation. Would this make the project better or worse? Continue with the assumption that the sales price will rise with inflation.
This will make the project .

1. You have a $2 million portfolio consisting of a $100,000 investm...