2. On a certain date the following represents the stock price for Universal Business Machines (UBM).
52 Week High $54.05, 52 Week Low $41.73, Dividends paid $0.80, yesterday's closing price $47.25
According to the Value Line Investment, the growth rate in dividends for UBM Corporation is expected to be
15%/year for the next 6 years. Assume that UBM meets this anticipated abnormal dividend growth rate as
expected, and then the growth rate falls to 4% per year forever. Assume investors require 17% return on the
Is the stock priced correctly? Use the answer obtained from the model discussed in the class to rationalize
your discussion. What other factors could affect your answer?
3. Adams County has 90 older model school buses. The county officials are contemplating replacing all the
buses with 83 larger buses, each costing $131,000. Because of new routings, the school board believes
that the traffic is manageable with fewer buses.
The busses operate 250 days per year and the average travel distance per bus is 32 miles per day. The new
buses' fuel efficiency is rated at 11 mpg whereas the current fleet is providing 8 mpg. Fuel is assumed to cost
an average of $2.50/gallon.
Under the existing system, the average annual wage is $30,000/ driver. Under the new system that wage is
$32,000/driver. The new system will result in permanent discharge of 7 drivers. However the discharge will
result in a one-time severance package of $20,000/driver incurred immediately.
Other non-people related operating costs (like insurance, oil change etc.) is estimated to be $6,800 per year
per vehicle for the new fleet and $8,900 per year per vehicle for the existing older fleet. The new vehicles are
expected to last 12 years, at which time they will be replaced. The expected salvage value of the new
vehicles at the end of 12 years is $12,500 per bus. The county uses MARR (i.e., interest rate) of 6%.
The existing buses have a salvage value (today) of $15,000 each. If the Commission decides to keep the
existing buses, they need to spend $17,000 per bus for improvements so that they too can be made to last
next 12 years. Such a makeover is expected to occur at the end of 3rd year (3 years from today). The
existing buses' salvage value at the end of 12 years are expected to be $0.
Determine the Present Worth of replacing the fleet. What is the corresponding value when converted to
Annual Worth value that would be typically useful for discussion with county decision board? Note that
the analysis is performed as a before tax analysis this is a county problem and as such there are no tax
issues or federal depreciation issues to contend with.
4. Roman Gardens is a famous upscale Italian restaurant operating is the little Italy area of Dallas, TX. It is
part of certain large corporation known for gourmet international foods. It is headquartered in Chicago,
and has several upscale restaurants (of international flavor) located in major cities throughout the world.
The parent corporation's composite tax rate is 38%; Before Tax Cost of Capital is 20%, & Capital Gains
Tax Rate is 20%
Roman Gardens is thinking of replacing existing kitchen equipment purchased few years ago with similar
newer equipment. The replacement does not result in any increase in annual revenue. The information
pertaining to the Defender and the Challenger are given below.
The defender was bought four years ago for $340,000. The firm began depreciating it immediately using 7-
year MACRS method. The current market value of the defender is $80,000.
Estimated future market values are listed below.
Market Value, one year from today is estimated to be $40,000.
Market Value, two years from today is estimated to be $15,000.
Market Value, three years from today (and beyond) is estimated to be $0
The defender equipment's maintenance charge for the next year is estimated to be $20,000. Because of the
age of the equipment the maintenance charges are expected to grow at an abnormal rate of 25% per year.
The challenger is a new similar equipment that costs $310,000. The item can be depreciated using 5-year life
Estimated future market values are listed below.
Market Value, one year from today is estimated to be $260,000.
Market Value, two years from today is estimated to be $210,000.
Market Value, three years from today is estimated to be $170,000.
Market Value, four years from today is estimated to be $130,000.
Market Value, five years from today is estimated to be $100,000
Market Value, six years from today is estimated to be $65,000
Market Value, seven years from today is estimated to be $50,000
Market Value, eight years from today is estimated to be $10,000
The challenger's maintenance charge for the first three years is estimated to be $0 covered under warranty.
The maintenance charges for the 4th year is estimated to be $8,000. It is expected to grow at 7% per year.
You need to compute the Net Annual Value (NAV) if the Asset is held for year, 2 years, etc. Fill in the
answers in the table below. Do After Tax Cash Flow Analysis only. Use the template provided.
What is your decision? Would you replace it? What is the rationalization behind your decision?
5. The table below provides pertinent information about four stocks: A, B, C and D.
Rate of Return if State Occurs
State of Economy
Your portfolio consists of 40% Stock A, 20% each of Stocks B, C, and D. Answer the following.
a) What is your portfolio's Expected Return? The Standard Deviation?
b) If the T-Bill rate is 2.6%, what is the expected risk premium of the portfolio?
If the expected inflation rate is 3. 1%, what is the approximate real return of the portfolio? And the
approximate real risk premium of the portfolio?
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.