The following information applies to the next six questions.)

Burress Beverages is considering a project where they would open a new facility in Seattle, Washington. The companys CFO has assembled the following information regarding the proposed project:

It would cost $500,000 today to construct the new facility and will be depreciated on a straight-line basis over five years.

It will need to increase its inventory by $100,000, where $70,000 of this inventory will be financed with accounts payable.

The CFO has estimated that the project will generate the following amount of revenue over the next three years:

Year 1 Revenue = $1.0 million

Year 2 Revenue = $1.2 million

Year 3 Revenue = $1.5 million

Operating costs excluding depreciation equal 70 percent of revenue.

At t = 3, the facilitys estimated selling price will be $200,000.

The projects cost of capital is 14 percent.

The companys tax rate is 40 percent.

The projects initial outlay is *

a. ($330,000)

b. ($500,000)

c. ($530,000)

d. ($600,000)

e. ($670,000)

The cash flow at year 1 is equal to *

a. $120,000

b. $220,000

c. $420,000

d. $520,000

e. $800,000

The cash flow at year 2 is equal to *

a. $504,000

b. $604,000

c. $156,000

d. $256,000

e. $456,000

The after-tax market value of the facility is *

a. $0

b. $80,000

c. $120,000

d. $200,000

e. $300,000

The cash flow at year 3 is equal to *

a. $510,000

b. $540,000

c. $460,000

d. $430,000

e. $640,000

What is the projects net present value (NPV)? *

a. $ 69,207

b. $178,946

c. $286,361

d. $170,453

e. $224,451

Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant? *

a. An increase in the corporate tax rate.

b. An increase in the personal tax rate.

c. An increase in the companys operating leverage.

d. The Federal Reserve tightens interest rates in an effort to fight inflation.

e. The company's stock price hits a new high.

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? *

a. Changes in net working capital.

b. Shipping and installation costs.

c. Cannibalization effects.

d. Opportunity costs.

e. Sunk costs that have been expensed for tax purposes.

Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero-book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the free cash flow for this project at year 1, 2, and 3? *

a. $11,220

b. $29,920

c. $38,720

d. $46,480

e. $46620

Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no longer needs these assets, so it is going to sell them today for $25,000. The assets are classified as 5-year property for MACRS. What is the after-tax market value (Terminal value) if the firm's tax rate is 30 percent?

a. $13,122.20

b. $18,576.00

c. $20,843.68

d. $23,072.80

e. $25,211.09

Texas Products Inc. has a division that makes burlap bags for the citrus industry. The division has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month. If the variable cost per bag is $2.00, what price must the division charge to break even? *

a. $2.24

b. $2.47

c. $2.82

d. $3.15

e. $2.00

Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed costs are $400,000. Martin is considering expanding into two additional states, which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit. If Martin expands, it expects to sell 270,000 units at $7.00 per unit. By how much will Martins breakeven sales dollar level change? *

a. $ 183,333

b. $ 456,500

c. $ 805,556

d. $ 910,667

e. $1,200,000

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity. The risk-free rate is 6 percent, and the market risk premium is 5 percent. Currently the companys cost of equity is 12 percent, and its tax rate is 40 percent. What would be Simons estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity? *

a. 14.35%

b. 30.00%

c. 14.72%

d. 15.60%

e. 13.64%

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,500 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,600 at the end of each of the next 4 years. Each project has a WACC of 11%. What is the equivalent annual annuity of the most profitable project? *

a. $1,345.50

b. $1,346.30

c. $1,361.52

d. $1,376.74

e. $1,411.15

Copybold Corporation is a start-up firm considering two alternative capital structures, one is conservative and the other aggressive. The conservative capital structure calls for a debt ratio = 0.25, while the aggressive strategy calls for debt ratio = 0.75. Once the firm selects its target capital structure, it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecasted EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and expected EBIT is $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share. What is the coefficient of variation of expected EPS under the aggressive capital structure? *

a. 1.00

b. 1.18

c. 2.45

d. 2.88

e. 3.76

Fotopoulos Corporation has the following information:

Assets: $5 billion

Debt: $1 billion

Common equity: 4 billion

The company estimates that its before-tax cost of debt is 7.5 percent.

The company estimates that its levered beta is 1.1.

The risk-free rate is 5 percent.

The market risk premium is 6 percent.

The companys tax rate is 40 percent.

In addition, the Fotopoulos Corporation is considering a recapitalization. The proposed plan is to issue $1 billion worth of debt and to use the money to repurchase $1 billion worth of common stock.

What is Fotopoulos current WACC (before the proposed recapitalization)? *

a. 5.92%

b. 9.88%

c. 10.18%

d. 10.78%

e. 11.38%

What is Fotopoulos current unlevered beta? *

a. 0.6213

b. 0.8962

c. 0.9565

d. 1.0041

e. 1.2700

What will be the companys new cost of common equity if it proceeds with the recapitalization? *

a. 10.74%

b. 11.62%

c. 12.27%

d. 12.62%

e. 13.03%

What is Fotopoulos new WACC after the proposed recapitalization if the before-tax cost of debt increased to 9 percent? *

a. 5.92%

b. 9.98%

c. 10.18%

d. 10.78%

e. 11.38%

MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76%