Finance Exam II

Equivalent cost = $ Yes Equivalent cost =$ No

A forklift will last for only 3 more years. It costs $6,000 a year to maintain. For $17,000 you can buy a new lift that can last for 8 years and should require maintenance costs of only $3,000 a year. a-1. Calculate the equivalent cost of owning and operating the forklift if the discount rate is 5% per year Should you replace the forklift? b-1. Calculate the equivalent cost of owning and operating the forklift if the discount rate is 12% per year. Should you replace the forklift?

$22,637.98

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

investment opportunities with superior returns.

A positive value for PVGO suggests that the firm has:

Equivalent annual cost (EAC) = $ =asset price * discount rate / 1 - (1 + discount rate)^-number of periods =NPV/At,r At,r= 1- 1/(1+r)^t/r The equivalent annual cost method involves the following steps: Step 1 - Calculate the net present value (NPV) of cost for each potential replacement cycle. Step 2 - For each potential replacement cycle an equivalent annual cost is calculated. The decision - The replacement cycle with the lowest equivalent annual cost may then be chosen, although other factors may also have to be considered.

A precision lathe costs $12,000 and will cost $22,000 a year to operate and maintain. If the discount rate is 14% and the lathe will last for 4 years, what is the equivalent annual cost of the tool?

Payback period: Yes NPV= $ Yes NPV= $ No Yes

A project that costs $3,300 to install will provide annual cash flows of $680 for the next 6 years. The firm accepts projects with payback periods of less than 5 years. a-1. What is this project's payback period? a-2. Will the project be accepted? b-1. What is project NPV if the discount rate is 2%? b-2. Should this project be pursued? b-3. What is project NPV if the discount rate is 11%? b-4. Should this project be pursued? b-5. Will the firm's decision change as the discount rate changes?

Dividend yield= dividend/price = DIV1/P0

Dividend yield

= expected dividend yield + expected capital gain

Expected rate of return

$1.49

If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?

increasing the plowback ratio.

Other things equal, a firm's sustainable growth rate could increase as a result of:

0.139

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%?

Solution: NPV= -8000+[(2,800/1.09) +(2,800/1.09^2) + (4,800/1.09^3) + (4,800/1.09^4) = $4032.43 Profitability Index= NPV/Investment = .50

What is the profitability index of a project that costs $8,000 and provides cash flows of $2,800 in years 1 and 2 and $4,800 in years 3 and 4? The discount rate is 9%.

Payout is very high.

Which one of the following is more likely to be responsible for a firm having a low PVGO?

No, this does not invalidate the dividend discount model. The dividend discount model allows for the fact that firms may not currently pay dividends. As the market matures, and Amazon's growth opportunities moderate, investors may justifiably believe that Amazon will enjoy high future earnings and will then pay dividends. Remember: The stock price today can still reflect the present value of the expected per-share stream of dividends.

Amazon.com has never paid a dividend, but in July 2013 the market value of its stock was #139 billion. Does this invalidate the dividend discount model?

free cash flows

For a firm that repurchases its stock, the dividend discount model might best be applied to the firm's:

Exceed 5 years

If a project has a payback period of 5 years and a cost of capital of 10%, then the discounted payback will:

NPV

NPV= ∑ {After-Tax Cash Flow / (1+r)^t} - Initial Investment

the new paradigm of stock pricing is maintained. true depreciation is less than reported depreciation. the firm's dividends are growing also. *the ROE of new investments exceeds the firm's required return*

Reinvesting earnings into a firm will not increase the stock price unless:

$42.63

Suzi owns 100 shares of AB stock. She expects to receive a $238 in dividends next year. She also expects the stock to sell for $46 a share one year from now. What is the intrinsic value of this stock if the dividend payout ratio is 40% and the discount rate is 13.5%?

the discount rate increases

The value of common stock will likely decrease if:

9.26%

What is the expected constant-growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18%?

$20

What is the most likely value of the PVGO for a stock with a current price of $50, expected earnings of $6 per share, and a required return of 20%?

keep the old machine and save $580 in equivalent annual costs.

You can continue to use your less efficient machine at a cost of $8,000 annually for the next 5 years. Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance. At a cost of capital of 15%, you should: