You are considering opening a premium lemonade stand on the corner of Main and Anywhere Street in your hometown.

You have determined that you will need $1,025 to buy equipment, a table, two chairs and other sundry items to get started. Youll also need $250 in the bank to make change with customers and purchase lemonade drink mix in a variety of flavours, including traditional lemonade, strawberry, cherry and grape flavours. Each cup of lemonade that you sell will be priced at $9.99 (after all this lemonade is made from your grandmothers secret recipe).

Sales in year 1 are estimated to be 100 cups, and you predict that sales will rise by 20% annually between in years 2 and 5. Direct materials costs are estimated to be 50% of annual sales and direct labour costs 20% of annual sales.

Fixed preparation costs will be $250 annually.

You are financing the business with a single $500 par value bond issued to your parents at a price of 135. The bond has a 10% coupon rate, and a term of 5 years. You have also issued 600 common shares to other family members at a price of $1 per share.

You recently read in the Times of Anywhere (a local newspaper) that risk free investments are offering an 8% return, and that the beta on lemonade stands is .80. The expected return in the premium lemonade market is 10%.

You have also confirmed with your accounting professor that the companys tax rate will be 10%, and the depreciation rate on lemonade stands is 15%.

Finally, your research has also determined that lemonade stands are predicted to have a perpetual growth rate of 2% after the first five years of operation.

4.

A

Assuming a variable cost per unit of $6.99, your lemonade stands break-even demand in year 1 would be _____ cups and your year 1 break-even sales would be $_____.

1. 100 cups, approximately $699 in sales
2. 83 cups, approximately $830 in sales
3. 1,000 cups, approximately $9,999 in sales
4. None of the above

Answer:

B

Assuming an internal rate of return of 10%, and a WACC of 7%, by how much would interest rates have to rise for your lemonade stand to be unprofitable?

1. 17.00%
2. 3.00%
3. 7.00%
4. 15.00%

Answer:

C

To accept a project, the NPV must be ______________.

1. Lower than zero.
2. Greater than zero

Answer:

D.

Based on the IRR, to reject a project, the IRR must be __________ the WACC.

1. Greater than
2. Less than

Answer: