## Mini Case: Will Leasing Fly at Continental?

CFM 3 Ch 21 Minicase Will Leasing Fly at Continental? in \$28 only

1. Calculate the net advantage to leasing, using the expected residual value and assuming Continental can use all the tax benefits of ownership with a tax rate of 40% and straight line depreciation to the expected residual value. Assume that Continental issues 80% secured debt and 20% unsecured debt to finance a purchase.

a) Calculate rt–the project cost of capital.

b) Calculate the expected lease residual value per aircraft.

c) Calculate the quarterly CFAT per aircraft under the leasing option.

• Hint: It should be the same each quarter hroughout the term of the lease.
• The lease payment is tax deductible.
• Under the leasing option Continental forgoes the depreciation tax deduction.

d) Calculate the NAL.

• Assume quarterly compounding to match the lease payments.
• Continental’s required return on the asset—r, is given.
• Assume no incremental difference in operating expenses between the purchasing and leasing options.
• Assume that the lessor claims the ITC.

2.  Calculate the net advantage to leasing, assuming Continental cannot use any of the tax benefits of ownership and the residual value is (i) the expected residual value, (ii) \$50 million, and (iii) \$10 million

## Economics Questions (Objective Type)

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1. Economics

• studies human behavior when scarcity exists and choices must be made
• provides the only reasonable explanation of how people make decisions
• can accurately explain all human behavior since it is based on the assumption of rationality
• is better at showing the way things ought to be than the other social sciences are

2. The expression “There’s no such thing as a free lunch” means

• that even if the lunch is free, we pay for it in extra calories
• that resources used up in producing the lunch are not available to satisfy other wants
• the same thing as “The best things in life are free”
• you have to work before you can eat

3. To say that people make marginal decisions means that

• they usually wait until the last minute before making a decision to buy
• they weigh the additional costs and additional benefits of various activities before they make a decision
• most people just barely get by on the incomes they earn and live from day to day on the very edge of subsistence
• given a choice, most people would prefer to make their own decisions concerning the things that affect their lives

4. Economic theories are

• useful because they are as exact as theories in the physical sciences
• useless because they are based on abstractions
• useful because they allow us to make predictions
• too complex to understand because they include all of reality

5. Economists believe that individuals respond in a predictable way to changes in costs and benefits. The term that best describes this belief is

• rational behavior
• scarcity
• demand
• supply

## Mini Case: The Power to Cool Off in Florida (Indiantown Cogeneration Project)

CFM3 Ch 10 Minicase The Power to Cool Off in Florida             in \$19 only

Objective:
This case demonstrates the use of NPV, IRR, and financial ratios for evaluating a capital budgeting project.
Case Discussion:
The Indiantown Cogeneration Project involved the construction and operation of a coal-fired plant in Martin County, Florida, that produces electricity and steam. The capital cost (including interest during construction) was approximately \$770 million. Since completion, it has an electric generating capacity of 330 megawatts (net) and a steam capacity of 175,000 pounds per hour. The project sells the electric power to Florida Power & Light Company (FPL) under a 30-year contract and the steam to Caulkins Indiantown Citrus Company under a 15-year contract.

FPL’s electricity payments have two parts: one for electric capacity and the other for the electric energy that it receives.

The project’s financing consisted of \$630 million of 30-year 9% APR interest rate debt and \$140 million of equity. The debt requires equal annual sinking fund payments of \$31.5 million beginning in year 11. Depreciation is straight line to zero over 20 years. The tax rate is 40%. Other information about the project includes:

## STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

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STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

Schweser Satellites Inc. Produces satellite earth stations that sell for \$100,000 each. The firm’s fixed cost, F, are \$2 million; 50 earth stations are produced and sold each year; profits total \$500,000; and the firms assets (all equity financed) are \$5million. The firm estimates that it can change its production process, adding \$4million to investment and \$500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by \$10,000 and (2) increase output by 20 units, but (3) sales price on all units will have to be lowered to \$95,000 to permit sales of the additional output. The firm has tax loss carry forwards that cause its tax rate to be zero, its cost equity is 15 percent, and it uses no debt.

1. Should the firm make the change?
2. Would the firms operating leverage increase or decrease if it made the change? What about its breakeven point?
3. Would the new situation expose the firm to more or less business risk than the old one?

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## Mini Case: Getting Off the Ground at Boeing

CFM3 Ch 09 Mini Case:  Getting Off the Ground at Boeing in \$9 only

Objective:

This case asks the student to calculate the incremental cash flows and use the NPV and IRR methods to evaluate Boeing’s investment project to build a new plane. This project, because of its size and importance to Boeing, was potentially a “make-or-break” investment for the firm. It was therefore critical to Boeing to “get it right” when it performed the capital budgeting analysis.

Case Discussion:
By the time Boeing announced the newest addition to its fleet, much of the preliminary work was already computed. The new plane was an enormous undertaking. Research and development, begun two and a half years earlier, would cost between \$4 billion and \$5 billion. Production facilities and personnel training would require an additional investment of \$2.0 billion, and \$1.7 billion in working capital would be required. The exhibit included in the case furnishes profit, depreciation, and capital expenditure projections for the project.

## Regression, Beta, Standard Dev, Correlation and other Calculation for S&P500

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The assignment will be collected at the beginning of final exam. You should turn in the Excel
workbook for this assignment with your report.
1. Use http://finance.yahoo.com to obtain daily closing prices for your company. Use Excel to
calculate daily returns for the period January 1, 2010 – December 31, 2010. Calculate,
• Average daily return,
• Standard deviation of returns.
Repeat the analysis for the Dow Jones Industrial Average (DJIA). Ticker is ^DJI.
Your report should contain,
• Average daily return for your stock, yourstock R
• Standard deviation of daily returns, yourstock σ
• Average daily return for DJIA, DJIA R
• Standard deviation of daily returns on the DJIA, DJIA σ .