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8. A friend, Ms. Michelle, was renting a house for $1,000 per month, but recently purchased a comparable home for $200,000 plus 1% for various fees, inspections, etc. Ms. Michelle's opportunity cost of capital is 6% per year and she will have to pay a 5% commission when she sells the house. Assuming that she has to move and sell the house in one year, how much the house appreciate in value for her to be better off than renting? Mulligan Manufacturing (MM) is a fast growing firm with expected earnings of $3 million next year. MM expects earnings to grow 10% per year indefinitely and MM's cost of capital is 14%. MM has creative accounts, so it pays no taxes. What is the market value of MM? If MM has no debt, then what is its P/E ratio? If MM has $25 million in debt with an interest rate of 8% (cost of capital (WACC) remains 14%), what is the new P/E ratio? 10. I just bought a $1 lottery ticket with a promised jackpot of $90 million dollars. The lottery claims that my odds of winning the jackpot are 1 in 20 million, so it seems like a good deal. The jackpot is paid in equal annual installments with the first one paid today. The winnings are also taxable; my marginal tax rate is 25% and the appropriate discount rate is 5% annually. Was the lottery ticket a good investment? What is the expected value of the lottery ticket? 11. Cliff Corp. (CC) is considering moving its widgets division to a new building costing $220,000. The new building will be more efficient and will save the widget division $20,000/year in operating expenses indefinitely. The move will also allow the gadget division to expand its operations in the old building resulting in $4,000/year of additional cashflow. CC's cost of capital is 10%. Should CC move the widget division? What is the NPV of the move? If all of the cost of the new building is allocated to the widget division, will the widget division manager be in favor of the move? 12. Cogswell Cogs (CC) produces cogs - surprise! The estimated cost to produce cogs is ($4 + $18/(x+2)) per cog, where x is the number of cogs produced/sold. CC can currently sell 20 cogs for $10 each. What is the current profit per cog and total profit for CC? What is the marginal cost of producing the next cog? A new customer has offered to buy an additional 10 cogs, but wants a discount of $1 per cog, should you sell the 5 cogs to the new customer? Assuming your old customers find out and also demand the discount, should you still sell the 5 cogs to the new customer? What is CC's total profit if they take the new customer? 13. Crazy Cliff's Car Coral (CCCC) is considering buying a company van for $50,000. CCCC expects the van to last 5 years and be disposed of at the end of 5 years for $5,000. CCCC will fully depreciate the van over 5 years using straight-line depreciation. CCCC expects the van to increase sales by $30,000 per year over the life of the van. CCCC also expects maintenance costs to be $4,000 per year. CCCC's tax rate is 25% and its cost of capital is 10%. What are CCCC's net income and cashflow in each year? What is the NPV of the van? 14. My medical insurance has $1,500 deductible and then covers 90% of my medical expenses above the deductible amount up to a maximum of $100,000. Draw the payoff diagram for my insurance policy. 15. Draw the payoff diagrams for both the equity and debt of a firm with $5 million in debt

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