eBook Problem 9 2 After Tax Cost of Debt LL Incorporated's currently outstanding 9 coupon bonds have a yield to maturity of 14 LL believes it could issue new bonds at par that would provide a similar yield to maturity If its marginal tax rate is 40 , what is LL's after tax cost of debt Round your answer to two decimal places Problem 9 6 Cost of Equity CAPM Booher Book Stores has a beta of 0 9 The yield on a 3 month T bill is 4 5 and the yield on a 10 year T bond is 8 The market risk premium is 4 5 , and the return on an average stock in the market last year was 12 5 What is the estimated cost of common equity using the CAPM Round your answer to two decimal places Problem 9 8 WACC David Ortiz Motors has a target capital structure of 40 debt and 60 equity The yield to maturity on the company's outstanding bonds is 9 , and the company's tax rate is 40 Ortiz's CFO has calculated the company's WACC as 9 24 What is the company's cost of equity capital Round your answer to two decimal places Problem 10 01 NPV A project has an initial cost of $61,975, expected net cash inflows of $12,000 per year for 12 years, and a cost of capital of 9 What is the project's NPV ( Hint Begin by constructing a time line ) Do not round your intermediate calculations Round your answer to the nearest cent Problem 10 02 IRR A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 11 What is the project's IRR Round your answer to two decimal places Problem 10 03 MIRR A project has an initial cost of $38,450, expected net cash inflows of $12,000 per year for 6 years, and a cost of capital of 14 What is the project's MIRR Do not round intermediate calculations Round your answer to two decimal places Problem 10 04 Profitability Index A project has an initial cost of $63,400, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 14 What is the project's PI Do not round your intermediate calculations Round your answer to two decimal places Problem 10 05 Payback A project has an initial cost of $54,625, expected net cash inflows of $10,000 per year for 7 years, and a cost of capital of 13 What is the project's payback period Round your answer to two decimal places Problem 10 06 Discounted Payback A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11 What is the project's discounted payback period Round your answer to two decimal places Problem 10 08 NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget The projects are independent The cash outlay for the truck is $17,100 and that for the pulley system is $22,430 The firm's cost of capital is 14 After tax cash flows, including depreciation, are as follows Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500 Calculate the IRR for each project Round your answers to two decimal places Truck What is the correct accept reject decision for this project Select AcceptRejectItem 2 Pulley What is the correct accept reject decision for this project Select AcceptRejectItem 4 Calculate the NPV for each project Round your answers to the nearest dollar, if necessary Enter each answer as a whole number For example, do not enter 1,000,000 as 1 million Truck $ What is the correct accept reject decision for this project Select AcceptRejectItem 6 Pulley $ What is the correct accept reject decision for this project Select AcceptRejectItem 8 Calculate the MIRR for each project Round your answers to two decimal places Truck What is the correct accept reject decision for this project Select AcceptRejectItem 10 Pulley What is the correct accept reject decision for this project Select AcceptReject Problem 11 01 Investment Outlay Talbot Industries is considering launching a new product The new manufacturing equipment will cost $18 million, and production and sales will require an initial $2 million investment in net operating working capital The company's tax rate is 35 What is the initial investment outlay Write out your answer completely For example, 2 million should be entered as 2,000,000 $ The company spent and expensed $150,000 on research related to the new project last year Would this change your answer Select YesNoItem 2 Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using The building could be sold for $1 5 million after taxes and real estate commissions How would this affect your answer The project's cost will Select increasedecreasenot changeItem 3 Problem 11 02 Operating Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll out of its new proposed service Projected sales $25 million Operating costs (not including depreciation) $12 million Depreciation $6 million Interest expense $3 million The company faces a 35 tax rate What is the project's operating cash flow for the first year (t 1) Write out your answer completely For example, 2 million should be entered as 2,000,000 Problem 11 03 Net Salvage Value Allen Air Lines must liquidate some equipment that is being replaced The equipment originally cost $12 million, of which 75 has been depreciated The used equipment can be sold today for $4 2 million, and its tax rate is 35 What is the equipment's after tax net salvage value Write out your answer completely For example, 2 million should be entered as 2,000,000 Problem 11 04 Replacement Analysis Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years It is inefficient compared to modern standards, though, and so the company is considering replacing it The new milling machine, at a cost of $39,000 delivered and installed, would also last for 10 years and would produce after tax cash flows (labor savings and depreciation tax savings) of $8,300 per year It would have zero salvage value at the end of its life The Project cost of capital is 9 , and its marginal tax rate is 35 Should Chen buy the new machine Problem 11 06 New Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line The sprayer's base price is $850,000, and it would cost another $21,500 to install it The machine falls into the MACRS 3 year class (the applicable MACRS depreciation rates are 33 33 , 44 45 , 14 81 , and 7 41 ), and it would be sold after 3 years for $532,000 The machine would require an increase in net working capital (inventory) of $13,000 The sprayer would not change revenues, but it is expected to save the firm $410,000 per year in before tax operating costs, mainly labor Campbell's marginal tax rate is 35 What is the Year 0 net cash flow $ What are the net operating cash flows in Years 1, 2, and 3 Do not round intermediate calculations Round your answers to the nearest dollar Year 1 $ Year 2 $ Year 3 $ What is the additional Year 3 cash flow (i e, the after tax salvage and the return of working capital) Do not round intermediate calculations Round your answer to the nearest dollar $ If the project's cost of capital is 13 , what is the NPV of the project Do not round intermediate calculations Round your answer to the nearest dollar $ Should the machine be purchased Problem 12 01 AFN equation Broussard Skateboard's sales are expected to increase by 20 from $8 0 million in 2016 to $9 60 million in 2017 Its assets totaled $2 million at the end of 2016 Broussard is already at full capacity, so its assets must grow at the same rate as projected sales At the end of 2016, current liabilities were $1 4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals The after tax profit margin is forecasted to be 6 , and the forecasted payout ratio is 75 Use the AFN equation to forecast Broussard's additional funds needed for the coming year Round your answer to the nearest dollar Do not round intermediate calculations Problem 12 02 AFN equation Broussard Skateboard's sales are expected to increase by 25 from $7 4 million in 2016 to $9 25 million in 2017 Its assets totaled $6 million at the end of 2016 Broussard is already at full capacity, so its assets must grow at the same rate as projected sales At the end of 2016, current liabilities were $1 4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals The after tax profit margin is forecasted to be 5 , and the forecasted payout ratio is 65 What would be the additional funds needed Do not round intermediate calculations Round your answer to the nearest dollar $ Assume that an otherwise identical firm had $7 million in total assets at the end of 2016 The identical firm's capital intensity ratio (A 0 S 0 ) is Select higher thanlower thanequal toItem 2 than Broussard's therefore, the identical firm is Select lessmorethe sameItem 3 capital intensive it would require Select a smallera largerthe sameItem 4 increase in total assets to support the increase in sales

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eBook Problem 9-2 After-Tax Cost of Debt LL Incorporated's currently outstanding 9% coupon bonds have a yield to maturity of 14%. LL believes it could

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Problem 9-2 After-Tax Cost of Debt

LL Incorporated's currently outstanding 9% coupon bonds have a yield to maturity of 14%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is LL's after-tax cost of debt? Round your answer to two decimal places.

Problem 9-6 Cost of Equity: CAPM

Booher Book Stores has a beta of 0.9. The yield on a 3-month T-bill is 4.5% and the yield on a 10-year T-bond is 8%. The market risk premium is 4.5%, and the return on an average stock in the market last year was 12.5%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

Problem 9-8 WACC

David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9%, and the company's tax rate is 40%. Ortiz's CFO has calculated the company's WACC as 9.24%. What is the company's cost of equity capital? Round your answer to two decimal places.

Problem 10-01 NPV

A project has an initial cost of $61,975, expected net cash inflows of $12,000 per year for 12 years, and a cost of capital of 9%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.

Problem 10-02 IRR

A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 11%. What is the project's IRR? Round your answer to two decimal places.

Problem 10-03 MIRR

A project has an initial cost of $38,450, expected net cash inflows of $12,000 per year for 6 years, and a cost of capital of 14%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Problem 10-04 Profitability Index

A project has an initial cost of $63,400, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Problem 10-05 Payback

A project has an initial cost of $54,625, expected net cash inflows of $10,000 per year for 7 years, and a cost of capital of 13%. What is the project's payback period? Round your answer to two decimal places.

Problem 10-06 Discounted Payback

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%. What is the project's discounted payback period? Round your answer to two decimal places.

Problem 10-08 NPVs, IRRs, and MIRRs for Independent Projects

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:

Year	Truck	Pulley
1	$5,100	$7,500
2	5,100	7,500
3	5,100	7,500
4	5,100	7,500
5	5,100	7,500

Calculate the IRR for each project. Round your answers to two decimal places.

Truck: % What is the correct accept/reject decision for this project? -Select-AcceptRejectItem 2

Pulley: % What is the correct accept/reject decision for this project? -Select-AcceptRejectItem 4
Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $ What is the correct accept/reject decision for this project? -Select-AcceptRejectItem 6

Pulley: $ What is the correct accept/reject decision for this project? -Select-AcceptRejectItem 8
Calculate the MIRR for each project. Round your answers to two decimal places.

Truck: % What is the correct accept/reject decision for this project? -Select-AcceptRejectItem 10

Pulley: % What is the correct accept/reject decision for this project? -Select-AcceptReject

Problem 11-01 Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $18 million, and production and sales will require an initial $2 million investment in net operating working capital. The company's tax rate is 35%.

What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000. $
The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer? -Select-YesNoItem 2
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer? The project's cost will -Select-increasedecreasenot changeItem 3 .

Problem 11-02 Operating Cash Flow

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales	$25 million
Operating costs (not including depreciation)	$12 million
Depreciation	$6 million
Interest expense	$3 million

The company faces a 35% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Problem 11-03 Net Salvage Value

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4.2 million, and its tax rate is 35%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Problem 11-04 Replacement Analysis

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $39,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,300 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 9%, and its marginal tax rate is 35%. Should Chen buy the new machine?

Problem 11-06 New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $850,000, and it would cost another $21,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $532,000. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change revenues, but it is expected to save the firm $410,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.

What is the Year 0 net cash flow? $
What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

Year 1 $

Year 2 $

Year 3 $
What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar. $
If the project's cost of capital is 13 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should the machine be purchased?

Problem 12-01 AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $8.0 million in 2016 to $9.60 million in 2017. Its assets totaled $2 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Problem 12-02 AFN equation

Broussard Skateboard's sales are expected to increase by 25% from $7.4 million in 2016 to $9.25 million in 2017. Its assets totaled $6 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 65%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. $

Assume that an otherwise identical firm had $7 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A₀*/S₀) is -Select-higher thanlower thanequal toItem 2 than Broussard's; therefore, the identical firm is -Select-lessmorethe sameItem 3 capital intensive - it would require -Select-a smallera largerthe sameItem 4 increase in total assets to support the increase in sales.