ABC, Inc. is considering expanding. They can invest in a new asset, FIN2001 that is expected to produce the following cash flows (see bottom of chart below). They will pay for the machine by issuing bonds in increments of $1,000. Use the information in the chart at the bottom of the question to answer the following questions. Show your work on all math questions for partial credit.

1. The company paid a dividend yesterday of $0.75 a share. Investors want to know how much the stock is worth. Assume the dividend will grow at a constant level of 6% indefinitely and the investor has an 8% required rate of return. Calculate the intrinsic value and explain why you would or would not invest in it. (7 points)
2. The company requires a 3.5-year payback on all projects. Briefly discuss the main advantages of using Payback AND based on this would the company accept the project based on just the Payback method. Explain your reasoning. (8 points)
3. Calculate the WACC for this company. Hint: Note most of the information you need is in the lower right-hand side of the information box. The percent equity and debt can be calculated using the Balance Sheet. If you can't figure the WACC out in a timely manner use 10% as your discount rate. You will lose the 5 points but save valuable time. (5 points)
4. Calculate the NPV for this project. You examine the payback and the NPV. What decision do you make about the project? Be sure to explain what is meant by a positive and negative NPV. Note: Cant figure out the discount rate to use-- I mentioned this in class several times. Still don't know-- use 10% with a 3% penalty. (10 points)
5. We have learned 4 capital budgeting methods. Why do we really need 4 when there is one which always gives us the correct decion and the others all have flaws. (6 points)

Cash	$190,000		Accounts Payable	250000
Accounts Receivable	$240,000		Notes Payable	75000
Inventory	$700,000		Current Liabilities	325000
Current Liabilities	$1,130,000		Long-Term Debt	350000
Fixed Assets	$500,000		Total Liabilities	675000
			Equity	$955,000
Total Assets	$1,630,000		Total Liabilities & Equity	$1,630,000
Sales	$900,000		Price of the Stock today	$39.50
Cost of Goods Sold	$460,000		Cost of Equity	11.75%
Gross Profit	$440,000		After Tax Cost of Debt	3.60%
Selling & Admin. Expense	$280,000		Par Value of Bond	$10,000
Depreciation	$50,000		Coupon Rate	4.50%
EBIT	$110,000		YTM Rate	3.50%
Interest Expense	$85,000		Dividend Per Share Last Period	$0.75
Taxable Income	$25,000		Growth Rate	6.00%
Taxes	$5,000		Required Return for Computing Stock Price	8.00%
Net Income	$20,000
Project FIN
Time	0	1	2	3	4
Cash Flows	-$250,000.00	$70,000.00	$75,000.00	$80,000.00	$75,000.00

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