Question
a) Stock R has a beta of 1.3, Stock S has a beta of 0.95, the expected rate of return on an average stock is
a) Stock R has a beta of 1.3, Stock S has a beta of 0.95, the expected rate of return on an average stock is 8%, and the risk-free rate is 6%. By how much does the required return on the riskier stock exceed that on the less risky stock? Do not round intermediate calculations. Round your answer to two decimal places.
b) Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $17.5 million, of which 75% has been depreciated. The used equipment can be sold today for $5 million, and its tax rate is 25%. What is the equipment's after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar
c) Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.
r = | 10.00% | |||
Year | 0 | 1 | 2 | 3 |
Cash flows | $1,000 | $450 | $450 | $450 |
d) Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?
Equipment cost (depreciable basis) | $65,000 |
Sales revenues, each year | $60,000 |
Operating costs (excl. deprec.) | $25,000 |
Tax rate | 25.0% |
e) Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
Project cost of capital (r) | 10.0% |
Opportunity cost | $100,000 |
Net equipment cost (depreciable basis) | $65,000 |
Straight-line deprec. rate for equipment | 33.333% |
Sales revenues, each year | $123,000 |
Operating costs (excl. deprec.), each year | $25,000 |
Tax rate | 25% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started