i want help with Finance 306 test, attached are the questions

Test 1 - Finance 306 1) Company XYZ has the following capital structure as of 12/31/10: Debt 250,000 Equity (Common Stock) 100,000 Equity (Preferred Stock) 50,000 The company expects to maintain this capital structure in the future and any future financing will be done as they have done in the past. In '11, they are considering the purchase of as asset which would cost $75,000. The '11 information includes the impact of this asset. All changes from '10 to '11 can be attributed to the benefits of this asset. The asset would be depreciated based on 10 year MACRS. The project will be evaluated over 3 years. The company's financial situation is as follows: 12/31/2010 Revenue 1,000,000 Expenses 880,000 12/31/2011 1,094,000 935,000 Revenue is expected to increase by 4% each and every year (after year 1) ; Expenses are expected to decrease by 2% each and every year (after year 1). Company is in the 40% tax bracket Select information relative to projected stock prices, dividends and bond rates are as follows: Stock prices: Common - projected'11 Dividends Dividend Dividend Dividend Dividend - Common Common Common Common Bond - Market rates Market rate - '09 Market rate - '10 Market rate - '11 '07 '08 '09 '10 50.00 0.75 0.82 0.87 0.94 Preferred - projected'11 55.00 Dividend - Preferred '11-projected 11.0% 12.0% 10.0% Anticipated administrative cost to issue stock are as follows: Common 5% of sales price Preferred 6% of sales price Based on NPV - at Cost of Capital plus 3% - should the asset be purchased? Based on NPV - If the company elects to finance strictly via bonds - should the purchase be made? What is the IRR of this project? What is the Payback? 2) In '06 ABC Company is considering the purchase of an asset which would cost $100,000. The '06 information includes the impact of this asset. All changes from '05 to '06 can be attributed to the benefits of this asset. The asset would be depreciated based on 7 year MACRS The company's financial situation is as follows: 12/31/2005 Revenue 245,000 Expenses 200,000 12/31/2006 350,000 250,000 Revenue is expected to increase by 6% each and every year (after year 1) ; Expenses are expected to increase by 1% each and every year (after year 1). The company's cost of capital is 10%. The company's internal guidelines require that in order to be approved all projects must provide a return greater than cost of capital plus 5%. The company evaluates only the first three years of the life of a project. The company is in the 40% tax bracket. Based on NPV - should the asset be purchased? What is the IRR of this project? Provide proof 3) A company is considering, in'11, the purchase of a piece of equipment which provides the following incre economics: * Increase revenue by $15M per year, each year with growth of 5% in each of years 2 & * Decrease expenses by $15M per year - additional decreases of 1% per year in both 2 The asset has a cost of $65M and is depreciated via 5 year Macrs The company is in the 40% tax bracket Select information relative to projected stock prices, dividends and bond rates are as follows: Stock prices: Common - projected'11 Dividends Dividend Dividend Dividend Dividend - Common Common Common Common '07 '08 '09 '10 Bond - Market rates Market rate - '09 Market rate - '10 Market rate - '11 26.75 1.20 1.16 1.36 1.47 Preferred - projected'11 Dividend - Preferred '11-projected 5.0% 6.5% 8.4% Anticipated administrative cost to issue stock are as follows: Common 2% of sales price Preferred 2% of sales price Company XYZ has the following capital structure as of 12/31/10: Debt 125,000 Equity (Common Stock) 75,000 Equity (Preferred Stock) 50,000 The company expects to maintain this capital structure in the future. The company evaluate only the first three years of the life of a project. The company has the following choices of financing: a) 100% debt b) 100% Equity (Common Stock) c) Weighted average Cost of Capital Based on NPV - which financing choice(s) would permit the asset to be purchased? What is the payback? 4) A company is considering two projects which provides the following cash flows: Project A 32.00 Project B Year 1 2 3 4 Cash Flow 27,000 14,000 16,000 30,000 Year 1 2 3 4 Cash Flow 0 0 55,000 35,000 The company's cost of capital is 9%. The initial investment would be $60,000 The company internal criteria for project acceptance are: a) Payback of 4 years or less b) NPV - based on cost of capital plus 5% Which project(s) would be accepted under payback? Which project(s) would be accepted under NPV? 5) Company XYZ is considering an investment in a project. The financials associated with this project for yea Sales 60,000 Expenses (Ex Dep) 50,000 Sales & Expenses are expected to increase by 2% per year - after year 1 Fixed Asset (Investment) associated with this project are expected to cost Fixed Assets will be depreciated via the 5 year MACRS. The project will be evaluated over 3 years. The Company is in the 40% tax bracket What is the maximum acceptable hurdle rate for this product to be approved via NPV? Provide proof. What is the payback? 6) Company is considering the purchase of a piece of equipment in '12. The projected cost of the equipment is 50,000 The equipment will be depreciated via the MACRS - 5 year life This equipment is expected to generate the following economics: Revenue for first year will be Revenue will increase by 45,700 1.0% per year thereafter Expenses for first year will be Expenses will decrease by Company's Capital Structure is as follows: Bonds Preferred Stock Common Stock 29,700 1.0% per year thereafter 50,000 75,000 0 Company will finance projects based on their historic approach. Relevant financing information is as follows: Bond Market rate in year - (2012) Company Tax Rate Preferred Stock Information Sales Price Dividend Flotation Cost (Percentage) Common Stock Information Sales Price Flotation Cost (Percentage) Dividend History Year Dividend 2009 0.98 2010 1.04 2011 1.12 5% 35% 40.00 2.35 4.0% 50.00 2% Company will evaluate the first four years of cash flows only 1) 2) 3) 4) Based on Payback criteria of 3 years - should the asset be purchased Based on NPV - Hurdle rate of Cost of Capital plus 2% - should the asset be purchased At what rate is the company indifferent If the company financed solely with P/S, should the asset be purchased 7) If the NPV associated with any project is -0- , what does that mean? Would the project be accepted? If the NPV associated with any project is positive, what does that mean? Would the project be accepted? Compare the NPV & Payback methods. 8) Company XYZ is considering an investment opportunity in '11. The financials associated with this project for year 1 are: Sales 350,000 Expenses (Ex Dep) 265,000 Sales & Expenses are expected to increase by 2% per year - after year 1 Fixed Asset (Investment) associated with this project are expected to cost Fixed Assets will be depreciated via the 5 year MACRS. The project will be evaluated over 3 years. The Company's tax bracket is: 40% The company intends to finance the project similar to the way they have financed projects historically. Pertinent data is as follows: Existing Capital Structure Bonds 50,000 P/S 150,000 C/S 300,000 Bond Market rate '10 Bond Market rate '11 (projected) 6.0% 7.0% Company believes they could issue Preferred Stock at a price: The dividend associated with this would be: Flotation costs would be: 22.00 1.50 2% Company also believes they could issue Common Stock at a price: Flotation costs would be: Dividend will be based on historic growth. Dividend History is as follows: 28.00 1% Dividend History Year 2008 2009 2010 Dividend 1.50 1.55 1.59 The Company's internal criteria are: - Payback within 3 years - Hurdle rate of Cost of Capital plus 5% Does the project pass the company's criteria for: a) Payback ? Why? b) c) NPV? Why? What is the maximum hurdle rate that at which this project would be accepted? Approximate point value for problem he '11 information he benefits as follows: 2.85 15 chase be made? Approximate point value for problem 13 Approximate point value for problem 14 0,000. The '06 tributed to the benefits tal plus 5%. ides the following incremental 5% in each of years 2 & 3 f 1% per year in both 2 & 3 as follows: 2.50 Approximate point value for problem 12 Cash Flow Approximate point value for problem 11 Approximate point value for problem 13 with this project for year 1 are: 25,000 ed over 3 years. PV? Provide proof. per year thereafter per year thereafter ject be accepted? e project be accepted? Approximate point value for problem 9 Approximate point value for problem 150,000 ed over 3 years. of sales price of sales price 13