1. I ask  you to tie my shoe. You agree to tie my shoe, however, prior to you tying my shoe you change your mind and refuse to tie my shoe. Using the elements of the contract, determine if this is a valid contract.

2.  Bill agrees to sell James some cocaine for $100. James pays Bill $100 but Bill does not  deliver the cocaine. Is this a valid contract, a voidable contract or a void contract? Explain your answer.

3. Marissa rent an apartment from Cabana Bay in January. The lease was for a year. In June, Marissa received a job offer in another state. She did not want to break her lease, therefore she sub-leased or assigned her lease to Olivia. Marissa did not get permission from Cabana Bay. Olivia moves in and pays rent from June to October. Cabana Bay sues Marissa for the two months of rent. Marissa believes she is not liable for the rent because she assigned her lease to Olivia. Using IRAC, determine whether Marissa correct.

4. Sarah’s house caught on fire. Through the prompt assistance of her neighbor Odessa, the fire was quickly extinguished. In gratitude, Sarah promised to pay Odessa, $1000. Using IRAC determine whether Odessa enforce this promise?

5. William E. Story agreed to pay his nephew, William E. Story II, $50,000 if he refrains from drinking liquor, using tobacco, swearing, and playing cards or billiards for money until he should come to be 21 years of age. William E. Story II refrained from all the things his uncle listed until he was 21 years of age. Shortly after his 21st birthday, William E. Story died. His executor refused to pay the money. He believed that there was no contract because there was no consideration. Using IRAC, how would you decide this case?

6. I was watching a telethon on the TV late on evening. I was so moved by the telethon; I called and pledged $10,000. In the morning when I informed my husband what I pledged, he was not pleased. I did not fulfill my responsibility. Using IRAC and determine if the telethon sued me for my pledge what would be the outcome?

7. John Smith is 16 years old; his parents purchase a red Volkswagen bug for his birthday. He does not like the car because he wanted a red Porsche. The parents take the car back to the dealership. The parents tell the dealership this contract is void because our son lacked capacity to enter into this contract. Are the parents right? Use IRAC format.

8. List the contracts that must be in writing according to the statutes of frauds.

9. Farmer John entered into a contract with Farmer Bill to purchase Farmer John’s cow Bessie. They both thought Bessie was barren so they agreed on a price below market value. The day before Farmer Bill picked up Bessie, it was determined that Bessie was pregnant. Using IRAC determine if Farmer John void the contract under mutual mistake.

10. Claudia and Jose contracted with Mercedes Homes to build a three story home on Lake Emma. Mercedes began to build the home and discovered that it would cost them more than they anticipated to build this home on the lake. Mercedes refused to continue to build the home unless Claudia and Jose agree to pay $10,000 more. The couple want the house completed so they agree to pay the additional money. Once the house is completed, they refuse to pay Mercedes Homes and Mercedes sues the couple for breach of contrac

FIN701, Spring 2020 AP1 Practical Application for M4

DHC Development Co. has several new projects that look attractive, but some are riskier than the firm’s past projects. DHC has received a $15 million inflow of cash from a venture capital firm, in exchange for 20% of the firm’s closely held stock. The VC firm has asked DHC managers to “run the numbers” to examine both the market outlook and the expected returns on each of the projects they are considering.

For each of the following questions, you will need to show your work. That means to show the equations used for items such as required return, average expected return, profitability index, etc. When you are using the financial calculator (or Excel), identify each of your inputs. Anyone looking at your work should be able to replicate your answer based on the backup info you provide.

1. Based on DHC’s earnings history over the past 15 years, which have covered various states of the economy, the venture capital execs want DHC to estimate their overall returns. Given the following estimates of economy over the next several years, determine DHC’s expected rate of return. (3 pts)

Note, this type of development firm has much higher than normal returns under normal and boom conditions.

Expected return for “average” company project =

2. Historically, DHC projects have had an average beta of 1.15 Assuming the return on the overall market is 9.25% and the risk free rate is 1.5%, what is the required return for an “average” DHC project using based on its average project beta? Round the average required return to 2 decimal places (x.xx%). Hint: Remember that the market risk premium = return on the market – risk free rate, R = Rf + (β*(Rm – Rf)) (3 pts)

Expected return for “average” company project =

3. The potential projects that DHC is considering have the following expected cash flows. Each project has its own unique risk and as such, the beta on each project is given. Using the data from part 2 for the risk free rate and market returns, what is the required percentage return for each of the projects? Show the required returns to 2 decimals, that is xx.xx% (4 pts)

4-7. For each project, calculate the NPV, IRR, profitability index (PI) and the payback period. For each capital budgeting decision tool, indicate if the project should be accepted or rejected, assuming that each project is independent of the others. Important Note: The venture capital folks have a hard and fast rule on payback period, all projects must be completed within 6 years or less.

Expected cash flows for the four potential projects that DHC is considering as shown below:

I have provided a suggested template for your final answers. Below the grid (and/or next page) is where you should put all your required backup calculations. If you are working this in Excel, feel free to submit your Excel sheet, where the equations in the cells will provide the required backup. Be sure to clearly indicate the required rate of return (from part 3) you are using for each project.

8. Discuss your results. What I’m looking for is a short discussion of how some capital budgeting techniques provide the same accept/reject decision, while others do not. Can this be a problem for the firm? Which of the decisions methods seems the most helpful (and why) and which least helpful (and why)? (6 points max, no outside sources necessary)

9. Finally, recall that the venture capital firm only provided $15 million in funding. That $15 million is the funding that will cover the initial investments required on projects. Assuming all projects that are acceptable using the “gold standard”, NPV, which of those projects should be accepted, while staying within the $15 mm budget. Identify the projects that should be accepted, the total outflow at time 0 (must be within your budget) and the total NPV. (2 pts) Hint: look at Practice Problem 14.

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