Finance assignment ASPS

FIN311 In-class Assignment #3

Name _______________________________________________________________________________

1. Burton, a manufacturer of snowboards, is considering adding a more sophisticated machine. The following information is given.

 The proposed machine will cost $120,000 and have installation costs of $15,000. It will be depreciated using a 5 year MACRS recovery schedule. It can be sold for $10,000 after five years of use (at the end of year 5).

 The incremental earnings before taxes and depreciation (EBITDA) are projected to be: o Year 1: 43,000, Year 2: 45,000, Year 3: 46,000, Year 4: 49,000, Year 5: 53,000

 Burton pays 34 percent taxes on ordinary income and capital gains.

 They expect a large increase in sales so their Net Working Capital will increase by $20,000.

 The maximum payback period allowed is 4 years.

 They are currently using a WACC of 14% to evaluate investment projects. a. Calculate the initial investment required for this project b. Determine the incremental after-tax operating cash flows c. Find the terminal cash flow for the project d. Find the Payback period, NPV, IRR, and MIRR. e. Should the new machine be purchased? Why or why not?

2. Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $12, and 20,000 shares of common stock ($20 par) with a market price of $53 per share. They have used a WACC of 12% in the past to evaluate projects but want to determine their current required return for new investments. Debt: Burton can sell a 10-year, $1,000 par value, 7 percent annual coupon bond for $975. A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 34 percent. Preferred Stock: Burton pays $1 dividends annually on their preferred shares. The shares are currently selling for $12 in the secondary market. They do not have plans to issue any additional preferred stock. Common Stock: Burton's common stock is currently selling for $53 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 3% rate. It is expected that to sell all the shares, a new common stock issue must be underpriced $1 per share and the firm must pay 1% of market value per share in flotation costs. a. Calculate the after-tax cost of debt b. Calculate the cost of preferred equity c. Calculate the cost of common equity d. Calculate the WACC e. Re-calculate the NPV for the project in #1 above using the new WACC. f. Should Burton accept the project when considering this revised cost of capital?

3. Explain the general components of insurance (coverage, premiums, deductibles and claims), and describe how these components interrelate. Explain how changes in these components can affect your cost (premiums) for insurance.

4. Your current job pays $45,000 annually. You contribute 3% of your gross income to your 401(k)

because your employer will match this amount. Your current take-home pay after taxes and contributions is $37,443.75. You know it is important to invest as much as you can for retirement and would like to contribute 5% of your income (pre-tax) to your 401(k). Determine how much your take home pay will decrease if you contribute 5% of your income instead of 3%. a) SINGLE person (including head of household)—

If the amount of wages (after subtracting withholding allowances) is:

The amount of income tax to withhold is:

Not over $2,250........ $0 Over— But not over— of excess over—

$2,250 —$11,325 .. $0.00 plus 10% —$2,250 $11,325 —$39,150 .. $907.50 plus 15% —$11,325 $39,150 —$91,600 .. $5,081.25 plus 25% —$39,150 $91,600 —$188,600 .. $18,193.75 plus 28% —$91,600 $188,600 —$407,350 .. $45,353.75 plus 33% —$188,600 $407,350 —$409,000 .. $117,541.25 plus 35% —$407,350