1. LL Incorporated's currently outstanding 10% coupon bonds havea yield to maturity of 13%. LL believes it could issue new bonds atpar that would provide a similar yield to maturity. If its marginaltax rate is 35%, what is LL's after-tax cost of debt? Round youranswer to two decimal places.
2. Summerdahl Resort's common stock is currently trading at$36.00 a share. The stock is expected to pay a dividend of $2.50 ashare at the end of the year (D1 = $2.50), and the dividend isexpected to grow at a constant rate of 4% a year. What is the costof common equity? Round your answer to two decimal places.
3. Booher Book Stores has a beta of 1.1. The yield on a 3-monthT-bill is 4.5% and the yield on a 10-year T-bond is 7%. The marketrisk premium is 4.5%, and the return on an average stock in themarket last year was 11.5%. What is the estimated cost of commonequity using the CAPM? Round your answer to two decimal places.
4. David Ortiz Motors has a target capital structure of 35% debtand 65% equity. The yield to maturity on the company's outstandingbonds is 11%, and the company's tax rate is 40%. Ortiz's CFO hascalculated the company's WACC as 9.44%. What is the company's costof equity capital? Round your answer to two decimal places.
5. A project has an initial cost of $37,925, expected net cashinflows of $14,000 per year for 12 years, and a cost of capital of13%. What is the project's NPV? (Hint: Begin by constructing a timeline.) Do not round your intermediate calculations. Round youranswer to the nearest cent.
6. A project has an initial cost of $52,125, expected net cashinflows of $12,000 per year for 8 years, and a cost of capital of8%. What is the project's IRR? Round your answer to two decimalplaces.
7. A project has an initial cost of $43,650, expected net cashinflows of $8,000 per year for 12 years, and a cost of capital of11%. What is the project's MIRR? Do not round intermediatecalculations. Round your answer to two decimal places.
8. A project has an initial cost of $71,950, expected net cashinflows of $9,000 per year for 6 years, and a cost of capital of10%. What is the project's PI? Do not round your intermediatecalculations. Round your answer to two decimal places.
9. A project has an initial cost of $54,925, expected net cashinflows of $12,000 per year for 8 years, and a cost of capital of11%. What is the project's payback period? Round your answer to twodecimal places.
10. A project has an initial cost of $40,000, expected net cashinflows of $9,000 per year for 9 years, and a cost of capital of11%. What is the project's discounted payback period? Round youranswer to two decimal places. Edelman Engineering is consideringincluding two pieces of equipment, a truck and an overhead pulleysystem, in this year's capital budget. The projects areindependent. The cash outlay for the truck is $19,000 and that forthe pulley system is $20,000. The firm's cost of capital is 12%.After-tax cash flows, including depreciation, are as follows: YearTruck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,1007,500 5 5,100 7,500 a. Calculate the IRR for each project. Roundyour answers to two decimal places. Truck: % What is the correctaccept/reject decision for this project? Pulley: % What is thecorrect accept/reject decision for this project? b. Calculate theNPV for each project. Round your answers to the nearest dollar, ifnecessary. Enter each answer as a whole number. For example, do notenter 1,000,000 as 1 million. Truck: $ What is the correctaccept/reject decision for this project? Pulley: $ What is thecorrect accept/reject decision for this project? c. Calculate theMIRR for each project. Round your answers to two decimal places.Truck: % What is the correct accept/reject decision for thisproject? Pulley: % What is the correct accept/reject decision forthis project?
11. Talbot Industries is considering launching a new product.The new manufacturing equipment will cost $14 million, andproduction and sales will require an initial $1 million investmentin net operating working capital. The company's tax rate is 35%. a.What is the initial investment outlay? Write out your answercompletely. For example, 2 million should be entered as 2,000,000.$ b. The company spent and expensed $150,000 on research related tothe new project last year. Would this change your answer? c. Ratherthan build a new manufacturing facility, the company plans toinstall the equipment in a building it owns but is not now using.The building could be sold for $1.5 million after taxes and realestate commissions. How would this affect your answer? Theproject's cost will .
12. The financial staff of Cairn Communications has identifiedthe following information for the first year of the roll-out of itsnew proposed service: Projected sales $25 million Operating costs(not including depreciation) $12 million Depreciation $6 millionInterest expense $3 million The company faces a 40% tax rate. Whatis the project's operating cash flow for the first year (t = 1)?Write out your answer completely. For example, 2 million should beentered as 2,000,000. $
13. Allen Air Lines must liquidate some equipment that is beingreplaced. The equipment originally cost $22 million, of which 80%has been depreciated. The used equipment can be sold today for $7.7million, and its tax rate is 40%. What is the equipment's after-taxnet salvage value? Write out your answer completely. For example, 2million should be entered as 2,000,000.
14. Although the Chen Company's milling machine is old, it isstill in relatively good working order and would last for another10 years. It is inefficient compared to modern standards, though,and so the company is considering replacing it. The new millingmachine, at a cost of $40,000 delivered and installed, would alsolast for 10 years and would produce after-tax cash flows (laborsavings and depreciation tax savings) of $9,500 per year. It wouldhave zero salvage value at the end of its life. The Project cost ofcapital is 10%, and its marginal tax rate is 35%. Should Chen buythe new machine?
15. The Campbell Company is considering adding a robotic paintsprayer to its production line. The sprayer's base price is$1,080,000, and it would cost another $19,500 to install it. Themachine falls into the MACRS 3-year class (the applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $587,000. The machine would requirean increase in net working capital (inventory) of $16,000. Thesprayer would not change revenues, but it is expected to save thefirm $446,000 per year in before-tax operating costs, mainly labor.Campbell's marginal tax rate is 30%. a. What is the Year 0 net cashflow? $ b. What are the net operating cash flows in Years 1, 2, and3? Do not round intermediate calculations. Round your answers tothe nearest dollar. Year 1 $ Year 2 $ Year 3 $ c. What is theadditional Year 3 cash flow (i.e, the after-tax salvage and thereturn of working capital)? Do not round intermediate calculations.Round your answer to the nearest dollar. $ d. If the project's costof capital is 14 %, what is the NPV of the project? Do not roundintermediate calculations. Round your answer to the nearest dollar.$ Should the machine be purchased?
16. Broussard Skateboard's sales are expected to increase by 25%from $7.2 million in 2016 to $9.00 million in 2017. Its assetstotaled $5 million at the end of 2016. Broussard is already at fullcapacity, so its assets must grow at the same rate as projectedsales. At the end of 2016, current liabilities were $1.4 million,consisting of $450,000 of accounts payable, $500,000 of notespayable, and $450,000 of accruals. The after-tax profit margin isforecasted to be 3%, and the forecasted payout ratio is 60%. Usethe AFN equation to forecast Broussard's additional funds neededfor the coming year. Round your answer to the nearest dollar. Donot round intermediate calculations. $
17. Broussard Skateboard's sales are expected to increase by 25%from $8.4 million in 2016 to $10.50 million in 2017. Its assetstotaled $6 million at the end of 2016. Broussard is already at fullcapacity, so its assets must grow at the same rate as projectedsales. At the end of 2016, current liabilities were $1.4 million,consisting of $450,000 of accounts payable, $500,000 of notespayable, and $450,000 of accruals. The after-tax profit margin isforecasted to be 7%, and the forecasted payout ratio is 70%. Whatwould be the additional funds needed? Do not round intermediatecalculations. Round your answer to the nearest dollar. $ Assumethat an otherwise identical firm had $7 million in total assets atthe end of 2016. Broussard's capital intensity ratio (A0*/S0) isthan the otherwise identical firm; therefore, Broussard is capitalintensive - it would require increase in total assets to supportthe increase in sales.
1. LL Incorporated's currently outstanding 10% coupon bonds havea yield to maturity of 13%. LL believes it could issue new bonds atpar that would provide a similar yield to maturity. If its marginaltax rate is 35%, what is LL's after-tax cost of debt? Round youranswer to two decimal places.
2. Summerdahl Resort's common stock is currently trading at$36.00 a share. The stock is expected to pay a dividend of $2.50 ashare at the end of the year (D1 = $2.50), and the dividend isexpected to grow at a constant rate of 4% a year. What is the costof common equity? Round your answer to two decimal places.
3. Booher Book Stores has a beta of 1.1. The yield on a 3-monthT-bill is 4.5% and the yield on a 10-year T-bond is 7%. The marketrisk premium is 4.5%, and the return on an average stock in themarket last year was 11.5%. What is the estimated cost of commonequity using the CAPM? Round your answer to two decimal places.
4. David Ortiz Motors has a target capital structure of 35% debtand 65% equity. The yield to maturity on the company's outstandingbonds is 11%, and the company's tax rate is 40%. Ortiz's CFO hascalculated the company's WACC as 9.44%. What is the company's costof equity capital? Round your answer to two decimal places.
5. A project has an initial cost of $37,925, expected net cashinflows of $14,000 per year for 12 years, and a cost of capital of13%. What is the project's NPV? (Hint: Begin by constructing a timeline.) Do not round your intermediate calculations. Round youranswer to the nearest cent.
6. A project has an initial cost of $52,125, expected net cashinflows of $12,000 per year for 8 years, and a cost of capital of8%. What is the project's IRR? Round your answer to two decimalplaces.
7. A project has an initial cost of $43,650, expected net cashinflows of $8,000 per year for 12 years, and a cost of capital of11%. What is the project's MIRR? Do not round intermediatecalculations. Round your answer to two decimal places.
8. A project has an initial cost of $71,950, expected net cashinflows of $9,000 per year for 6 years, and a cost of capital of10%. What is the project's PI? Do not round your intermediatecalculations. Round your answer to two decimal places.
9. A project has an initial cost of $54,925, expected net cashinflows of $12,000 per year for 8 years, and a cost of capital of11%. What is the project's payback period? Round your answer to twodecimal places.
10. A project has an initial cost of $40,000, expected net cashinflows of $9,000 per year for 9 years, and a cost of capital of11%. What is the project's discounted payback period? Round youranswer to two decimal places. Edelman Engineering is consideringincluding two pieces of equipment, a truck and an overhead pulleysystem, in this year's capital budget. The projects areindependent. The cash outlay for the truck is $19,000 and that forthe pulley system is $20,000. The firm's cost of capital is 12%.After-tax cash flows, including depreciation, are as follows: YearTruck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,1007,500 5 5,100 7,500 a. Calculate the IRR for each project. Roundyour answers to two decimal places. Truck: % What is the correctaccept/reject decision for this project? Pulley: % What is thecorrect accept/reject decision for this project? b. Calculate theNPV for each project. Round your answers to the nearest dollar, ifnecessary. Enter each answer as a whole number. For example, do notenter 1,000,000 as 1 million. Truck: $ What is the correctaccept/reject decision for this project? Pulley: $ What is thecorrect accept/reject decision for this project? c. Calculate theMIRR for each project. Round your answers to two decimal places.Truck: % What is the correct accept/reject decision for thisproject? Pulley: % What is the correct accept/reject decision forthis project?
11. Talbot Industries is considering launching a new product.The new manufacturing equipment will cost $14 million, andproduction and sales will require an initial $1 million investmentin net operating working capital. The company's tax rate is 35%. a.What is the initial investment outlay? Write out your answercompletely. For example, 2 million should be entered as 2,000,000.$ b. The company spent and expensed $150,000 on research related tothe new project last year. Would this change your answer? c. Ratherthan build a new manufacturing facility, the company plans toinstall the equipment in a building it owns but is not now using.The building could be sold for $1.5 million after taxes and realestate commissions. How would this affect your answer? Theproject's cost will .
12. The financial staff of Cairn Communications has identifiedthe following information for the first year of the roll-out of itsnew proposed service: Projected sales $25 million Operating costs(not including depreciation) $12 million Depreciation $6 millionInterest expense $3 million The company faces a 40% tax rate. Whatis the project's operating cash flow for the first year (t = 1)?Write out your answer completely. For example, 2 million should beentered as 2,000,000. $
13. Allen Air Lines must liquidate some equipment that is beingreplaced. The equipment originally cost $22 million, of which 80%has been depreciated. The used equipment can be sold today for $7.7million, and its tax rate is 40%. What is the equipment's after-taxnet salvage value? Write out your answer completely. For example, 2million should be entered as 2,000,000.
14. Although the Chen Company's milling machine is old, it isstill in relatively good working order and would last for another10 years. It is inefficient compared to modern standards, though,and so the company is considering replacing it. The new millingmachine, at a cost of $40,000 delivered and installed, would alsolast for 10 years and would produce after-tax cash flows (laborsavings and depreciation tax savings) of $9,500 per year. It wouldhave zero salvage value at the end of its life. The Project cost ofcapital is 10%, and its marginal tax rate is 35%. Should Chen buythe new machine?
15. The Campbell Company is considering adding a robotic paintsprayer to its production line. The sprayer's base price is$1,080,000, and it would cost another $19,500 to install it. Themachine falls into the MACRS 3-year class (the applicable MACRSdepreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and itwould be sold after 3 years for $587,000. The machine would requirean increase in net working capital (inventory) of $16,000. Thesprayer would not change revenues, but it is expected to save thefirm $446,000 per year in before-tax operating costs, mainly labor.Campbell's marginal tax rate is 30%. a. What is the Year 0 net cashflow? $ b. What are the net operating cash flows in Years 1, 2, and3? Do not round intermediate calculations. Round your answers tothe nearest dollar. Year 1 $ Year 2 $ Year 3 $ c. What is theadditional Year 3 cash flow (i.e, the after-tax salvage and thereturn of working capital)? Do not round intermediate calculations.Round your answer to the nearest dollar. $ d. If the project's costof capital is 14 %, what is the NPV of the project? Do not roundintermediate calculations. Round your answer to the nearest dollar.$ Should the machine be purchased?
16. Broussard Skateboard's sales are expected to increase by 25%from $7.2 million in 2016 to $9.00 million in 2017. Its assetstotaled $5 million at the end of 2016. Broussard is already at fullcapacity, so its assets must grow at the same rate as projectedsales. At the end of 2016, current liabilities were $1.4 million,consisting of $450,000 of accounts payable, $500,000 of notespayable, and $450,000 of accruals. The after-tax profit margin isforecasted to be 3%, and the forecasted payout ratio is 60%. Usethe AFN equation to forecast Broussard's additional funds neededfor the coming year. Round your answer to the nearest dollar. Donot round intermediate calculations. $
17. Broussard Skateboard's sales are expected to increase by 25%from $8.4 million in 2016 to $10.50 million in 2017. Its assetstotaled $6 million at the end of 2016. Broussard is already at fullcapacity, so its assets must grow at the same rate as projectedsales. At the end of 2016, current liabilities were $1.4 million,consisting of $450,000 of accounts payable, $500,000 of notespayable, and $450,000 of accruals. The after-tax profit margin isforecasted to be 7%, and the forecasted payout ratio is 70%. Whatwould be the additional funds needed? Do not round intermediatecalculations. Round your answer to the nearest dollar. $ Assumethat an otherwise identical firm had $7 million in total assets atthe end of 2016. Broussard's capital intensity ratio (A0*/S0) isthan the otherwise identical firm; therefore, Broussard is capitalintensive - it would require increase in total assets to supportthe increase in sales.
