1. Your company is planning to purchase a crane at a capital cost of $390,000 after which it will hire an experienced operator and undertake short term contracts for cash compensation. Aside from having to pay the operator, operating costs include mainly fuel and repairs which are paid for in cash when incurred. The crane has a three-year useful life and will have no salvage value at the end of its useful life, so it needs to be fully depreciated over this period. Although the addition of the crane will not affect head office costs, it is the company's policy to allocate head office costs to all revenue generating pieces of equipment. The projected income statement for this project is presented below. (Assume all cash flows occur at the end of the year)What is the cash flow amount you would use for year 1 of a net present value analysis of this project? a. $265,000 b. $15,000 c. $145,000 d. $155,000 e. none of the above
2. You are about to take over a car leasing company with Free Cash Flow to the Firm projected to be $9 million at the end of the next year. This is expected to grow by 2% in the following year, and forever thereafter. The firm owes the bank $20 million and has just lost a lawsuit making it liable to pay the complainant $5 million. The appropriate risk adjusted annual discount rate is 10%. How much is this company worth per share if there are 2 million shares outstanding? a. $35.76 b. $41.88 c.$43.75 d.$39.03
3. Your company has issued debt with a market value of $4.2 million, preferred shares with a market value of $5.4 million and equity with a market value of $34 million. Expected returns on these financings are, respectively, 8%, 6% and 12%. The company's income tax rate is 30%. What is the company's weighted average cost of capital? a. 10.64% b.11.73% c. 12% d. 9.75%