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19) What is the internal rate of returm (IRR) of an investment that an initial investment of 19) $11,000 today and pays $15,400 in one year's time? A) 37% 40% C)44% D) 43% 20; An investor has the opportunity to invest in four new retail stores. The amount that can be 20) invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose? A) Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of B) Initial investment: S90,000; Cash flow in year l: $10,000, Growth Rate:1.50%; Cost of Capita C) Initial investment: $80,000, Cash flow in year l: $8,000; Growth Rate: 1.75%, cost of Capita (D, Initial investment: $60,000; Cash flow in year 1: S6,000; Growth Rate: 2.50%, Cost of Capital: Capital: 9.1% 9.3% 8.0% 72% 21) A firm reports that in a certain year it had a net income of $5.0 million, depreciation expenses of21) S3.0 million, capital expenditures of $2.0 million, and Net Working Capital decreased by $1.1 million. What is the firm's free cash flow for that year? A) $A.9 million B) S5.1 million O $7.1 million D) S11.1 million 22) A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer 22) plans to spend $4 million promoting this product this year, which is expected to expand the sales of this product to $11 million this year and S8 million next year. They do expect there will be loss of sales of SI million this year and next year in their other products as customers switch to drinking the new ginger ale. The gross profit margin for the new ginger ale is 40%, the gross profit margin of all of the brewer's other products is 30%, and the brewer's marginal corporate tax rate is 35%, what are incremental earnings arising from the promotional campaign this year? A) $2.11 million C) s1.625 million C) S1.26 million D) $4.40 million 23) Bubba Ho- Tep Company reported net income of $290 million for the most recent fiseal year. The 23) firm had depreciation expenses of $100 million and capital expenditures of S150 million. Although it had no interest expense, the firm did have an increase in net working capital of S30 million. What is Bubba Ho- Tep's free cash flow? A) $270 million B) S570 million C) S10 million D$210 million 24) Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the 24) company's free cash flow is expected togrow at a rate of 10% After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost ofcapital is 12% and Gonzales Corporation has cash of S 100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 22 A) $968.97 $1384.24 C) 31107.39 D) $1245.82 Div, Div r (+r) PN = DIV N +1 Div Discounted dividend model (DDM): with Constant Growth DDM model PV(Future Total Dividends and Net Repurchases) Shares Outstandingo Total Payout model Earnings Growth Rate Retention Rate X Return on New Investment (ROE) Where Retention Rate-1-Payout rate If earnings growth rate is the same as the dividend growth rate, then G Retention Rate X Return on New Investment Project Evaluation NPV -PV(Benefits)- PV(Costs) IRR is the discount rate that sets NPV = 0 Profitability index-Value Created/Resource Consumed - NPV/Resource consumed Capital Budgeting Incremental Earnings = (Incremental Revenues-Incremental Cost-Depreciation) X (1-Tax Rate) Free Cash Flow (Revenues - Costs - Depreciation) X (1 - Tax Rate) + Depreciation CapEx - Change in NWC After-Tax Cash Flow from Asset Sale Sale Price-(Tax Rate X Capital Gain) Capital Gain = Sale Price-Book Value Book Value Purchase Price - Accumulated Depreciation Formulas BUS241 Time Value of Money and Interest Rates Future value in n periods of one cash flow C received today: FV = C * (1 + r)" Present value today of one cash flow C received in n periods Rate of return in order to go from PV to FV in period n: Present value of perpetuity PV FV i PV PV(C in perpetuity) C/hr Present value of growing perpetuity: PV(C in perpetuity grows at rate g) Present value of regular annuity: Future value of a regular annuity: PMT in a regular annuity: C/(r-g) rl (1+r) PV Present Value of a growing annuity Equivalent n-period discount rate (I+r)-1 where r is the discou Converting an APR to EAR: nt rate for one period 1+EAR:(1+Amey where m is the number of compounding periods per year Bonds Coupon payment (CPN)Coupon Rate x Face Value Zero Coupon Bonds: Number of Coupon Payments per Year 1+YTM=/ Face Value1 Price YTM for a zero coupon bond: Coupon Bonds: Face Value Stocks r, = Div, +B-Po Shares Ous tan dinge, xDividend Pao and P,21+ Holding Period Return Earnings,xDividend Payout Rate, Dividend: Shares Outs tan ding - EPS,xDividend Payout Rate, Formula Sheet Final