Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections:

Year	0123
Sales (Revenues)	100,000 100,000 100,000
- Cost of Goods Sold (50% of Sales)	50,000 50,000 50,000
- Depreciation	30,000 30,000 30,000
= EBIT	20,000 20,000 20,000
- Taxes (35%)	7000 7000 7000
= unlevered net income	13,000 13,000 13,000
+ Depreciation	30,000 30,000 30,000
+ changes to working capital	-5000 -5000 10,000
- capital expenditures	-90,000

HW 5

Name

ID

4) Please fill in the following blanks:

Year	0123
Sales (Revenues)	100,000 100,000 100,000
- Cost of Goods Sold (50% of Sales)	50,000 50,000 50,000
- Depreciation	30,000 30,000 30,000
= EBIT	20,000 20,000 20,000
- Taxes (35%)	7000 7000 7000
= unlevered net income	13,000 13,000 13,000
+ Depreciation	30,000 30,000 30,000
+ changes to working capital	-5000 -5000 10,000
- capital expenditures	-90,000
= Free Cash Flow	-90,000 38,000 38,000 53,000

PV of FCF (FCF/(1 + I)n 1)( ) 2)(

) 3)(

) 4)(

)

discount rate NPV = 5)( IRR = 6)(

0.12

) )

Chap 6 Bond Valuation

5) Suppose a ten-year bond with semiannual coupons has a price of $1,071.06 , a face value of 1000 and a yield to maturity of 7% (expressed as an APR with semiannual compounding). This bond's coupon rate is closest to: A) 3.5%

B) 6.0% C) 7.0% D) 8.0%

6) Which of the following statements is FALSE? A) If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. B) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. C) Coupon bonds always trade for a discount. D) At any point in time, changes in market interest rates affect a bond's yield to maturity and its price.

7) If a bond is currently trading at its face (par) value, then it must be the case that: A) the bond's yield to maturity is less than its coupon rate. B) the bond's yield to maturity is equal to its coupon rate. C) the bond's yield to maturity is greater than its coupon rate.

D) the bond is a zero-coupon bond.