1) Company XYZ has the following capital structure as of 12/31/10:

Debt 250,000

Equity (Common Stock) 100,000

Equity (Preferred Stock) 50,000

The company expects to maintain this capital structure in the future and any futurefinancing will be done as they have done in the past.In '11, they are considering the purchase of as asset which would cost $75,000. The '11 information includes the impact of this asset. All changes from '10 to '11 can be attributed to the benefits of this asset.

The asset would be depreciated based on 10 year MACRS. The project will be evaluatedover 3 years.

The company's financial situation is as follows: 12/31/2010 12/31/2011

Revenue 1,000,000 1,094,000

Expenses 880,000 935,000

Revenue is expected to increase by 4% each and every year (after year 1) ; Expenses areexpected to decrease by 2% each and every year (after year 1).

Company is in the 40% tax bracket

Select information relative to projected stock prices, dividends and bond rates are as follows:

Stock prices: Common - projected'11 $50.00

Preferred - projected'11 $55.00

Dividends

Dividend - Common '07 0.75

Dividend - Common '08 0.82

Dividend - Common '09 0.87

Dividend - Common '10 0.94

Dividend - Preferred '11 -projected 2.85

Bond - Market rates

Market rate - '09 11.0%

Market rate - '10 12.0%

Market rate - '11 10.0%

Anticipated administrative cost to issue stock are as follows:

Common 5% of sales price

Preferred 6% of sales price

Based on NPV - at Cost of Capital plus 3%- should the asset be purchased?

Based on NPV - If the company elects to finance strictly via bonds - should the purchase be made?

What is the IRR of this project?

What is the Payback?

2) In '06 ABC Company is considering the purchase of an asset which would cost $100,000. The '06 information includes the impact of this asset. All changes from '05 to '06 can be attributed to the benefits of this asset.

The asset would be depreciated based on 7 year MACRS

The company's financial situation is as follows:

12/31/2005 12/31/2006

Revenue 245,000 350,000

Expenses 200,000 250,000

Revenue is expected to increase by 6% each and every year (after year 1) ; Expenses areexpected to increase by 1% each and every year (after year 1).

The company's cost of capital is 10%. The company's internal guidelines require thatin order to be approved all projects must provide a return greater than cost of capital plus 5%.

The company evaluates only the first three years of the life of a project. The company is in the 40% tax bracket.

Based on NPV - should the asset be purchased?

What is the IRR of this project? Provide proof

A company is considering, in'11,the purchase of a piece of equipment which provides the following incrementaleconomics:

* Increase revenue by $15M with growth of 5% in each of years 2 & 3

* Decrease expenses by $15M with additional decreases of 1% per year in both 2 & 3

The asset has a cost of $65M and is depreciated via 5 year Marcs

The company is in the 40% tax bracket

Select information relative to projected stock prices, dividends and bond rates are as follows:

Stock prices: Common - projected'11 26.75

Preferred - projected'11 32.00

Dividends

Dividend - Common '07 1.20

Dividend - Common '08 1.16

Dividend - Common '09 1.36

Dividend - Common '10 1.47

Dividend - Preferred '11-projected 2.50

Bond - Market rates

Market rate - '09 5.0%

Market rate - '10 6.5%

Market rate - '11 8.4%

Anticipated administrative cost to issue stock are as follows:

Common 2% of sales price

Preferred 2% of sales price

Company XYZ has the following capital structure as of 12/31/10:

Debt 125,000

Equity (Common Stock) 75,000

Equity (Preferred Stock) 50,000

The company expects to maintain this capital structure in the future.The company evaluate only the first three years of the life of a project.

The company has the following choices of financing:

a) 100% debt

b) 100% Equity (Common Stock)

c) Weighted average Cost of Capital

Based on NPV - which financing choice(s) would permit the asset to be purchased?

What is the payback?

4) A company is considering two projects which provides the following cash flows:

Project A Project B

Year Cash Flow Year Cash Flow

1 27,000 1 0

2 14,000 2 0

3 16,000 3 55,000

4 30,000 4 35,000

The company's cost of capital is 9%. The initial investment would be $60,000

The company internal criteria for project acceptance are:

a) Payback of 4 years or less

b) NPV - based on cost of capital plus 5%

Which project(s) would be accepted under payback?

Which project(s) would be accepted under NPV?

Company XYZ is considering an investment in a project. The financials associated with this project for year 1 are:

Sales 60,000

Expenses (Ex Dep) 50,000

Sales & Expenses are expected to increase by 2% per year - after year 1

Fixed Asset (Investment) associated with this project are expected to cost 25,000

Fixed Assets will be depreciated via the 5 year MACRS.

The project will be evaluated over 3 years.

The Company is in the 40% tax bracket

What is the maximum acceptable hurdle rate for this product to be approved via NPV? Provide proof.

What is the payback?

6)Company is considering the purchase of a piece of equipment in '12. The projected cost of the equipment is 50,000

The equipment will be depreciated via the MACRS - 5 year life

This equipment is expected to generate the following economics:

Revenue for first year will be 45,700

Revenue will increase by 1.0% per year thereafter

Expenses for first year will be 29,700

Expenses will decrease by 1.0% per year thereafter

Company's Capital Structure is as follows:

Bonds 50,000

Preferred Stock 75,000

Common Stock 0

Company will finance projects based on their historic approach.

Relevant financing information is as follows:

Bond Market rate in year - (2012) 5%

Company Tax Rate 35%

Preferred Stock Information

Sales Price 40.00

Dividend 2.35

Flotation Cost (Percentage) 4.0%

Common Stock Information

Sales Price 50.00

Flotation Cost (Percentage) 2%

Dividend History

Year Dividend

2009 0.98

2010 1.04

2011 1.12

Company will evaluate the first four years of cash flows only

1) Based on Payback criteria of 3 years - should the asset be purchased

2) Based on NPV - Hurdle rate of Cost of Capital plus 2% - should the asset be purchased

3) At what rate is the company indifferent

4) If the company financed solely with P/S, should the asset be purchased

7) If the NPV associated with any project is -0- , what does that mean? Would the project be accepted?

If the NPV associated with any project is positive, what does that mean? Would the project be accepted?

Compare the NPV & Payback methods.

8) Company XYZ is considering an investment opportunity in '11. The financials associated with this project for year 1 are:

Sales 350,000

Expenses (Ex Dep) 265,000

Sales & Expenses are expected to increase by 2% per year - after year 1

Fixed Asset (Investment) associated with this project are expected to cost 150,000

Fixed Assets will be depreciated via the 5 year MACRS. The project will be evaluated over 3 years.

The Company's tax bracket is: 40%

The company intends to finance the project similar to the way they have financed projects historically. Pertinent data is as follows:

Existing Capital Structure

Bonds 50,000

P/S 150,000

C/S 300,000

Bond Market rate '10 6.0%

Bond Market rate '11 (projected) 7.0%

Company believes they could issue Preferred Stock at a price: 22.00

The dividend associated with this would be: 1.50

Flotation costs would be: 2% of sales price

Company also believes they could issue Common Stock at a price: 28.00

Flotation costs would be: 1% of sales price

Dividend will be based on historic growth. Dividend History is as follows:

Dividend History

Year Dividend

2008 1.50

2009 1.55

2010 1.59

The Company's internal criteria are:

- Payback within 3 years

- Hurdle rate of Cost of Capital plus 5%

Does the project pass the company's criteria for:

a) Payback ? Why?

b) NPV? Why?

c) What is the maximum hurdle rate that at which this project would be accepted?