Question
Question one: A machine costs $100,000 and generates $25,000 of pre-tax operating income per year. The tax rate is 40%. The machine is in a
Question one:
A machine costs $100,000 and generates $25,000 of pre-tax operating income per year. The tax rate is 40%. The machine is in a CCA class with a 20% rate. The cost of capital is 12%. The machine is expected to last 10 years and will have no salvage value. Other assets will remain in the asset class. What is the NPV of the machine?
question two:
ABC Inc. has a debt/equity ratio of 1.2. The firm has a cost of equity of 12% and a cost of debt of 8%. What will be the cost of equity if the target debt/equity ratio increases to 2.0 and the cost of debt does not change? Ignore taxes
question three:
A candy manufacturer wishes to control risk by hedging its exposure to the price of sugar in the futures market.
a) What position should it take in the futures market?
b) Assume it takes this position in the futures market when the futures price is 72 cents per ton. How much will the manufacturer gain or lose if the futures price moves to 75 cents per ton?
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