1.

The following cash flows are estimated for two mutually exclusive projects being considered by Hutchinson Aviation, Inc. The firm's cost of capital is 7 percent. (18 points)

Time

Project S

Project T

Project S-T

0

-$1700

-1800

100

1

880

700

180

2

550

350

200

3

300

550

-250

4

420

720

-300

(a)

Referring to projects S and T above which project is preferred and why?

(b)

Compute the IRR of Project S and Project T.

(c)

What is the crossover rate?

2

(d)

What is the payback period for Project S and Project T?

2.

Gutierrez Industrial Corporation is considering the purchase of a new machine which will reduce manufacturing and operating costs by $15,000 annually and increase revenues by $30,000 annually. Depreciation and taxes are excluded. Finance.com will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $20,000 before taxes. The 5-year MACRS depreciation rates are 20%, 32%, 19%, 12%, 12%, and 5%. Gutierrez Industrial Corporation's marginal tax rate is 30 percent, and uses a 12 percent cost of capital to evaluate projects of this type. (a) If the machine's cost is $250,000 (including set up costs), what is the project's NPV? There are no other relevant cash flows. (18 points).

(b).

What is the terminal (or non-operating) cash flow for the project?

3

3.

A corporation has decided to replace an existing asset with a newer model. Three years ago, the existing asset originally cost $890,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $65,000. The new asset will cost $150,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 30 percent on ordinary income and capital gains, what is the initial investment? (The 5-year MACRS depreciation rates are 20%, 32%, 19%, 12%, 12%, and 5%.) (5 points)

4.

A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 15 percent, and the projects have the following initial investments and cash flows: (12 points)

Project 1

Project 2

Initial Investment:

$80,000

$98,000

Cash flows: 1

$30,000

$40,000

2

30,000

55,000

3

30,000

60,000

4

30,000

5

30,000

Which of two projects should be selected by a wealth maximizing manager and why?

4

5.

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $200,000, accounts receivable by $450,000, and inventories by $350,000. At the same time accounts payable will increase by $160,000, accruals by $45,000 and long-term debt by $150,000. What is the change in net working capital? (4 points)

6.

A firm is analyzing two possible capital structures - 40 and 60 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of 21 percent on ordinary income. If the interest rate on debt is 5 percent and 7 percent for the 40 percent and the 60 percent debt ratios, respectively, the amount of interest on the debt under each of the capital structures being considered would be ________. (8 points)

7.

A firm has an operating profit of $300,000, interest of $35,000, and a tax rate of 40 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 15 percent. The firm's target capital structure is set at a mix of 40 percent debt and 60 percent equity. Assuming this as the optimum capital structure, the value of the firm is ________. (10 points)

5

8.

Wesley Stationery Corporation has a stockholders' equity account as shown below. The firm's common stock currently sells for $20 per share.

Preferred stock

$500,000

Common stock (2,000,000 @ $1 par)

2,000,000

Paid-in capital in excess of par

10,000,000

Retained earnings

11,600,000

Total stockholders' equity

$24,100,000

(25 points)

a) What is the maximum dividend per share Wesley Stationery Corporation can pay? (Assume capital includes all paid-in capital.)

(b) Recast the partial balance sheet (the stockholders' equity accounts) to show independently

(1) a 2-for-1 stock split of the common stock.

(2) a cash dividend of $1.50 per share.

(3) a stock dividend of 5% on the common stock.

(c) At what price would you expect Moore Stationery Corporation stock to sell after

(1) the stock split?

(2) the stock dividend?