| What is the projects NPV?(Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).) | We are evaluating a project that costs $924,000, has a four-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 87,600 units per year. Price per unit is $34.55, variable cost per unit is $20.80, and fixed costs are $756,000 per year. The tax rate is 35 percent, and we require a return of 13 percent on this project. |
| Required: | | Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within 10 percent. Calculate the best-case and worst-case NPV figures.(Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.Round your answers to 2 decimal places (e.g., 32.16).) | A proposed new investment has projected sales of $750,000. Variable costs are 55 percent of sales, and fixed costs are $182,500; depreciation is $86,000. Assume a tax rate of 35 percent. |
| Required: | | What is the projected net income?(Do not round intermediate calculations.) | Pappys Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappys paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $725,000 per year. The fixed costs associated with this will be $187,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $835,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappys is in a 40 percent tax bracket and has a required return of 13 percent. |
| Requirement 1: | | Calculate the payback period for this project.(Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) | | Requirement 2: | | Calculate the NPV for this project.(Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) | | Requirement 3: | | Calculate the IRR for this project.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces (e.g., 32.16).) | | | | Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,900, and the company expects to sell 1,540 per year. The company currently sells 2,040 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,860 units per year. The old board retails for $22,800. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,490,000 per year, and fixed costs are $1,390,000 per year. |
| Required: | | If the tax rate is 30 percent, what is the annual OCF for the project?(Do not round intermediate calculations. Round your answer to the nearest whole dollar amount (e.g., 1,234,567).) | A stock has had the following year-end prices and dividends: |
| Year | Price | Dividend | | 1 | $ 64.53 | | | | | 2 | 71.40 | | $ 0.64 | | | 3 | 77.20 | | 0.69 | | | 4 | 63.47 | | 0.75 | | | 5 | 73.51 | | 0.84 | | | 6 | 81.75 | | 0.91 | | | What are the arithmetic and geometric returns for the stock?(Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimalplaces(e.g., 32.16).) |
| Arithmetic average return | % | | Geometric average return | % | | A stock has a beta of 1.15, the expected return on the market is 10.9 percent, and the risk-free rate is 4.5 percent. |
| Required: | | What must the expected return on this stock be?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) | | Consider the following information on Stocks I and II: |
| State of Economy | Probability of State of Economy | Rate of Return if State Occurs | | Stock I | Stock II | | Recession | .22 | .055 | .27 | | Normal | .67 | .355 | .19 | | Irrational exuberance | .11 | .215 | .47 | | The market risk premium is 11.7 percent, and the risk-free rate is 4.7 percent. |
| (a) | Calculate the beta and standard deviation of Stock I.(Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) |
| Stock I | | Beta | | | Standard deviation | % | | (b) | Calculate the beta and standard deviation of Stock II.(Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) |
| Stock II | | Beta | | | Standard deviation | % | | | You own a stock portfolio invested 18 percent in Stock Q, 22 percent in Stock R, 38 percent in Stock S, and 22 percent in Stock T. The betas for these four stocks are .92, .98, 1.38, and 1.83, respectively. |
| Required: | | What is the portfolio beta?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) | | What are the portfolio weights for a portfolio that has 185 shares of Stock A that sell for $94 per share and 160 shares of Stock B that sell for $122 per share?(Round your answers to 4 decimal places (e.g., 32.1616).) |
| Portfolio weight | | Stock A | | | Stock B | | | | Consider the following information: |
| | | Rate of Return if State Occurs | | State of | Probability of State | | Economy | of Economy | Stock A | Stock B | | Recession | .20 | .035 | .40 | | Normal | .60 | .115 | .30 | | Boom | .20 | .290 | .53 | | Requirement 1: | | Calculate the expected return for the two stocks.(Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Expected return | | E(RA) | % | | E(RB) | % | | Requirement 2: | | Calculate the standard deviation for the two stocks.(Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Standard deviation | | A | % | | B | % | | | Consider the following information: |
| State of Economy | Probability of State of Economy | Rate of Return if State Occurs | | Recession | .41 | .10 | | Boom | .59 | .22 | | Required: | | Calculate the expected return.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | You have a portfolio with the following: |
| Stock | Number of Shares | Price | Expected Return | | W | 875 | $ 52 | 14% | | X | 775 | 29 | 18 | | Y | 525 | 65 | 16 | | Z | 750 | 50 | 17 | | Required: | | What is the expected return of your portfolio?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Expected return of the portfolio | % |
| | You own a portfolio that is 34 percent invested in Stock X, 49 percent in Stock Y, and 17 percent in Stock Z. The expected returns on these three stocks are 8 percent, 11 percent, and 13 percent, respectively. |
| Required: | | What is the expected return on the portfolio?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Expected return on the portfolio | % |
| ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with eight years to maturity that is quoted at 114.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually. |
| Requirement 1: | | What is ICUs pretax cost of debt?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Requirement 2: | | If the tax rate is 34 percent, what is the aftertax cost of debt?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Sixth Fourth Bank has an issue of preferred stock with a $5.60 stated dividend that just sold for $98 per share. |
| Required: | | What is the banks cost of preferred stock?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Cost of preferred stock | % |
| Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.61 million after taxes. In five years, the land will be worth $7.91 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.04 million to build. The following market data on DEIs securities are current: |
| Debt: | 45,100 6.9 percent coupon bonds outstanding, 21 years to maturity, selling for 94.9 percent of par; the bonds have a $1,000 par value each and make semiannual payments. | | | | | Common stock: | 751,000 shares outstanding, selling for $94.10 per share; the beta is 1.21. | | | | | Preferred stock: | 35,100 shares of 6.25 percent preferred stock outstanding, selling for $92.10 per share. | | | | | Market: | 7.05 percent expected market risk premium; 5.25 percent risk-free rate. | | DEIs tax rate is 34 percent. The project requires $830,000 in initial net working capital investment to get operational. |
| Requirement 1: | | Calculate the projects Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs.(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) | | Initial Time 0 cash flow | $ |
| Requirement 2: | | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +3 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEIs project.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Requirement 3: | | The manufacturing plant has an eight-year tax life, and DEI uses straightline depreciation. At the end of the project (i.e., the end of year 5), the plant can be scrapped for $1.51 million. What is the aftertax salvage value of this manufacturing plant?(Do not round intermediate calculations.Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) | | Requirement 4: | | The company will incur $2,310,000 in annual fixed costs. The plan is to manufacture 13,100 RDSs per year and sell them at $10,500 per machine; the variable production costs are $9,700 per RDS. What is the annual operating cash flow, OCF, from this project?(Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) | | Requirement 5: | | (a) | Calculate the net present value.(Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) | | (b) | Calculate the internal rate of return.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) |
| Internal rate of return | % |
| | Mullineaux Corporation has a target capital structure of 62 percent common stock, 7 percent preferred stock, and 31 percent debt. Its cost of equity is 12.7 percent, the cost of preferred stock is 5.7 percent, and the cost of debt is 7.4 percent. The relevant tax rate is 30 percent. |
| Required: | | (a) | What is Mullineauxs WACC?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | (b) | What is the aftertax cost of debt?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) |
| Nally, Inc., is considering a project that will result in initial aftertax cash savings of $6.1 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .60, a cost of equity of 13 percent, and an aftertax cost of debt of 5.5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. |
| Requirement 1: | | Calculate the WACC.(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | | Requirement 2: | | What is the maximum cost Nally would be willing to pay for this project?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) | | Stock in CDB Industries has a beta of 1.12. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.2 percent. CDBs most recent dividend was $3.60 per share, and dividends are expected to grow at a 5.2 percent annual rate indefinitely. |
| Required: | | If the stock sells for $58 per share, what is your best estimate of CDBs cost of equity?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces(e.g., 32.16).) | |
