You are considering a new product launch. The project will cost $1,192,500, have a ve-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 230 units per year; price per unit will be $18,500, variable cost per unit will be $15,000, and xed costs will be $321,000 per year. The required retum on the project is 13 percent, and the relevant tax rate is 30 percent. Based on your experience, you think the unit sales, variable cost, and xed cost projections given here are probably accurate to within 110 percent. What are the best-case and worst-case values for each of the projections? (Do not round Intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Scenario Unit Sales Variable Costs Fixed Coats Base ' 230 $15,000 $321,000 Best ' 253 13500 l 288900 Worst ' 207 16500 i 353100 What are the best-ease and worst-lose OCFs and NPVs with these projections? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16.) OCF NPV Best-case s 154820l $l Worst-case S 114180} $l What are the basecase OCF and NPV? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, e.g., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) OCFbase 5 N vaase 5: What are le OCF and NPV with xed costs of$331,000 per year? (Do not round intermediate calculations. Round your OCF answer to the nearest whole number, 3.9., 32, and round your NPV answer to 2 decimal places, e.g., 32.16.) OCF NP'V What is the sensitivity of your base-case NPV to changes in xed costs? (Enter your answer as a positive value. Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) For every dollar FC increases, NPV falls by $ l . McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $739 per set and have a variable cost of $369 per set. The company has spent $159,000 for a marketing study that determined the company will sell 75,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,400 sets per year of its high-priced clubs. The high-priced clubs sell at $1,290 and have variable costs of $630. The company will also increase sales of its cheap clubs by 11,900 sets per year. The cheap clubs sell for $349 and have variable costs of $1 34 per set. The xed costs each year will be $11,290,000. The company has also spent $1,090,000 on research and development for the new clubs. The plant and equipment required will cost $25,130,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,590,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 12 percent. Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter your IRR answer as a percent.) Payback period years Net present value $ lntemal rate of return % ' Problem 10-10 Calculating Real Returns and Risk Premiums [LO 1] You've observed the following returns on Barnett Corporation's stock over the past ve years: 24.3 percent, 13.2 percent, 29.4 percent, 2.1 percent, and 21.1 percent. The average ination rate over this period was 3.21 percent and the average Tbill rate over the period was 4.3 percent. a. What was the average real return on the stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average real return % b. What was the average nominal risk premium on the stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average nominal risk premium % Consider the following table for the total annual returns for a given period of time. Average Standard Series return Deviation Large-company stocks 11.7% 20.6% Small-company stocks 16.4 33.0 Long-term corporate bonds 6.4 9.7 Long-ten'n government bonds 6.1 9.4 Intermediate-term government bonds 5.6 5.7 U.S. Treasury bills 3.6 3.1 Ination 3.1 4.2 I What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? (A negative answer should be indicated by a minus sign. Input your answers from lowest to highest to receive credit for your answers. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected range of returns % to % What about 95 percent of the time? (A negative answer should be indicated by a minus sign. Input your answers from lowest to highest to receive credit for your answers. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected range of returns You nd a certain stock that had returns of 12.6 percent, 21.3 percent, 27.3 percent, and 18.3 percent for four of the last ve years. Assume the average return of the stock over this period was 10.6 percent. What was the stock's return for the missing year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Stock's return % What is the standard deviation of the stock's returns? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation % You bought one of Rocky Mountain Manufacturing Co.'s 8.75 percent coupon bonds one year ago for $1,049.30. These bonds make annual payments and mature eight years from now. Suppose that you decide to sell your bonds today, when the required return on the bonds is 8.25 percent. If the ination rate was 4.3 percent over the past year, what would be your total real return on investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total real return on investment % Consider the following information on a portfolio of three stocks: State of Probability of Stock A Stock B Stock 0 Economy State of Economy Rate of Return Rate of Return Rate of Return Boom .15 .04 .34 .48 Normal .53 .12 .24 .22 Bust .32 .18 -.23 -.37 ' a. If your portfolio is invested 36 percent each in A and B and 28 percent in C, what is the portfolio's expected return, the variance. and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places. e.g.. 32.16161. Enter your other answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return % Variance Standard deviation % [ b. If the expected T-bill rate is 4.35 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected risk premium % Bonaime, Inc., has 7.3 million shares of common stock outstanding. The current share price is $62.30, and the book value per share is $5.30. The company also has two bond issues outstanding. The rst bond issue has a face value of $71 .3 million, a coupon rate of 7.3 percent, and sells for 91.5 percent of par. The second issue has a face value of $36.3 million, a coupon rate of 7.8 percent, and sells for 90.5 percent of par. The rst issue matures in 19 years, the second in 11 years. The most recent dividend was $3.50 and the dividend growth rate is 9 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 38 percent. What is the company's WACC'? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % Liu Industrial Machines issued 143,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.3 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent. If the company has a $45.8 million market value of equity, what weight should it use for debt when calculating the cost of capital? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Weight of debt Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $6.6 million at the end of the rst year, and these savings will grow at a rate of 3 percent per year indenitely. The rm has a target debt equity ratio of .65, a cost of equity of 13 percent, and an aftertax cost of debt of 6 percent. The cost-saving proposal is somewhat riskier than the usual project the rm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Calculate the WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC % What is the maximum cost the company would be willing to pay for this project? (Do not round intermediate calculations and round your answer to 2 decimal places. e.g., 32.16.) Present value $ Ward Corp. is expected to have an EBIT of $2,350,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $174,000, $103,000, and $124,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $17,500,000 in debt and 840,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,800,000 and the appropriate pricesales ratio is 2.9. The company's WACC is 8.9 percent and the tax rate is 35 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price $