Finance Hmwrk set1

14

LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 13%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Round your answer to two decimal places.

 %

REDO WITH THE FOLLOWING EQUATION

You need to accumulate $10,000. To do so, you plan to make deposits of $2,000 per year - with the first payment being made a year from today - into a bank account that pays 7.3% annual interest. Your last deposit will be less than $2,000 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal? Round your answer up to the nearest whole number.  year(s)

How large will the last deposit be? Round your answer to the nearest cent. $

15

Summerdahl Resort's common stock is currently trading at $39.00 a share. The stock is expected to pay a dividend of $2.75 a share at the end of the year (D1 = $2.75), and the dividend is expected to grow at a constant rate of 8% a year. What is the cost of common equity? Round your answer to two decimal places.

 %

16

Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 3% and the yield on a 10-year T-bond is 7%. The market risk premium is 6.5%, and the return on an average stock in the market last year was 13.5%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

 %

17

David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9%, and the company's tax rate is 40%. Ortiz's CFO has calculated the company's WACC as 10.95%. What is the company's cost of equity capital? Round your answer to two decimal places.

 %

18

A project has an initial cost of $58,050, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 9%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.

$

REDO WITH THE FOLLOWING EQUATION

A project has an initial cost of $49,400, expected net cash inflows of $15,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.

19

A project has an initial cost of $50,000, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 9%. What is the project's IRR? Round your answer to two decimal places.

 %

20

A project has an initial cost of $36,925, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 13%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

 %

REDO WITH THE FOLLOWING EQUATION

A project has an initial cost of $72,100, expected net cash inflows of $8,000 per year for 9 years, and a cost of capital of 11%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

 %

21

A project has an initial cost of $68,700, expected net cash inflows of $8,000 per year for 10 years, and a cost of capital of 13%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.____

Answer: PI = 0.75

REDO WITH THE FOLLOWING EQUATION

A project has an initial cost of $37,275, expected net cash inflows of $12,000 per year for 9 years, and a cost of capital of 10%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

22

A project has an initial cost of $54,175, expected net cash inflows of $11,000 per year for 8 years, and a cost of capital of 13%. What is the project's payback period? Round your answer to two decimal places.

 years

23

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%. What is the project's discounted payback period? Round your answer to two decimal places.

 years

24

NPVs, IRRs, and MIRRs for Independent Projects

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:

Year	Truck	Pulley
1	$5,100		$7,500
2	5,100		7,500
3	5,100		7,500
4	5,100		7,500
5	5,100		7,500

a. Calculate the IRR for each project. Round your answers to two decimal places.

Truck:  % What is the correct accept/reject decision for this project? Is it accept or reject

Accept

a. Pulley:  % What is the correct accept/reject decision for this project?

b. Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $  What is the correct accept/reject decision for this project?

Pulley: $  What is the correct accept/reject decision for this project?

c. Calculate the MIRR for each project. Round your answers to two decimal places.

Truck:  % What is the correct accept/reject decision for this project?

Pulley:  % What is the correct accept/reject decision for this project?

25

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $14 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 30%.

a. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000. $

b. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?

No change in investment outlay - it still remains at $ 17 million.

c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer? The project's cost will  .

26

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales	$25 million
Operating costs (not including depreciation)	$11 million
Depreciation	$4 million
Interest expense	$5 million

The company faces a 30% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

$

REDO WITH THE FOLLOWING EQUATION

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales	$25 million
Operating costs (not including depreciation)	$12 million
Depreciation	$4 million
Interest expense	$4 million

The company faces a 35% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

$

27

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $19 million, of which 70% has been depreciated. The used equipment can be sold today for $6.65 million, and its tax rate is 40%. 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.

$6,270,000

28

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $41,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,400 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?

29

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $21,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $669,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $366,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

a. What is the Year 0 net cash flow? $

b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar. $

d. If the project's cost of capital is 10 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should the machine be purchased?

REDO WITH THE FOLLOWING EQUATION

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $800,000, and it would cost another $19,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $506,000. The machine would require an increase in net working capital (inventory) of $16,000. The sprayer would not change revenues, but it is expected to save the firm $441,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

a. What is the Year 0 net cash flow? $

b. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

c. What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar. $

d. If the project's cost of capital is 15 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should the machine be purchased?

30

Broussard Skateboard's sales are expected to increase by 15% from $9.0 million in 2016 to $10.35 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

$

31

Broussard Skateboard's sales are expected to increase by 25% from $7.6 million in 2016 to $9.50 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. $

Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A0*/S0) is  than Broussard's; therefore, the identical firm is  capital intensive - it would require  increase in total assets to support the increase in sales.

more

a larger

Item 4

15.05

12.2

14.65

8367.8

17.31

15

4.93

6.44

14.99

20.00

Accept

409

Item 6

3318

14.54

8.45

17.19

1700000

increase

1700000

Yes

-1040500

375612

418521

304148

803657

26

309750

632500

higher than