FRL3000: MT2 Extra Credit
Houston's is considering a project that will produce incremental annual sales of $361,000 and increase cash expenses by $198,000. If the project is implemented, taxes will increase from $31,000 to $47,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?
$147,000 Increase in sales $ 361,000 Less: Increase in cash expenses$ 198,000 Increases in taxes: $ 16,000=47000-31000 Operating cash flows$ 147,000
You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?
$4305
A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?
-$11,748.69
High Breeze is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project?
-$553,000 Initial Cash flow for Expansion Project: Current Valuation of land - $357,900 Current valuation of equipment - $29,000 Modificatiion on equipment - $8,200 Other Equipment - $157,900 Initial Cash flow = $553,000
A project has cash flows of −$152,000, $60,800, $62,300 and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?
1.02 accept
Alt's is contemplating the purchase of a new $218,000 computer-based order entry system. The system will be depreciated straight-line to zero over the system's five-year life. No bonus depreciation will be taken. The system will be worth $20,000 at the end of five years. The company will save $73,500 before taxes per year in order processing costs and will reduce working capital by $18,600 on Day 1. The net working capital will return to its original level when the project ends. The tax rate is 21 percent. What is the internal rate of return for this project?
20.12% Explanation: OCF = $73,500(1 − .21) + ($218,000/5)(.21)OCF = $67,221NPV = 0 = −$218,000 + 18,600 + $67,221{[1 − 1/(1 + IRR)5]/IRR} + [$20,000(1 − .21) − $18,600]/(1 + IRR)5IRR = .2012, or 20.12%
Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?
4.78%
Jay's Bakery has a bond issue outstanding that matures in eight years. The bonds pay interest semiannually. Currently, the bonds are quoted at 97.8 percent of face value and carry a coupon rate of 5.7 percent. What is the aftertax cost of debt if the tax rate is 21 percent?
4.78% After tax cost of debt = Pretax cost of debt * (1 - Tax Rate) YTM = 6.05 6.05 x (1 - 21%) = 4.78%
What is the standard deviation of the returns on a portfolio that is invested in Stocks A, B, and C? Twenty percent of the portfolio is invested in Stock A and 35 percent is invested in Stock C.
5.65 percent
Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost?
6.80% Weighted Average Flotation Cost Flotation cost for Debt = 3.80% Flotation cost for Preferred Stock = 6.20% Flotation cost for Equity = 8.60% Weight of Debt = 35% or 0.35 Weight of Preferred Stock = 5% or 0.05 Weight of Equity = 60% or 0.60 Therefore, the Weighted Average Flotation Cost = [Flotation cost for Debt x Weight of Debt] + [Flotation Cost for Preferred Stock x Weight of Preferred Stock] + [Flotation Cost for Equity x Weight of Equity] = [3.80% x 0.35] + [6.20% x 0.05] + [8.60% x 0.60] = 1.33% + 0.31% + 5.16% = 6.80% "Therefore, the company's Weighted Average Flotation Cost will be 6.80%"
Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity?
7.83
Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.32 and sells for $41 a share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital?
8.09% Assuming face value of bond to be $1,000 Price of bond = 0.965 * 1000 = 965 Market value of bond = 6,500 * 965 = 6,272,500 Market value of preferred stock = 48,000 * 64 = 3,072,000 Market value of common stock = 75,000 * 41 = 3,075,000 Total market value = 6,272,500 + 3,072,000 + 3,075,000 = 12,419,500 Annual preferred dividend = 0.055 * 100 = 5.5 Cost of preferred stock = (Annual dividend / price) * 100 Cost of preferred stock = (5.5 / 64) * 100 Cost of preferred stock = 8.5938% Cost of equity = Risk free rate + beta (market return - risk free rate) Cost of equity = 0.022 + 1.32 (0.106 - 0.022) Cost of equity = 0.13288 or 13.288% The weighted average cost of capital = Weight of debt*after tax cost of debt + weight of preferred stock*cost of preferred stock + weight of equity*cost of equity Weighted average cost of capital = (6,272,500 / 12,419,500)*0.067*(1 - 0.21) + (3,072,000 / 12,419,500)*0.085938 + (3,075,000 / 12,419,500)*0.13288 Weighted average cost of capital = 0.02673 + 0.02126 + 0.0329 The weighted average cost of capital = 0.0809 or 8.09%
The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock?
8.67 Stated value: 100 Multiply: Dividend rate 6.85% Dividend per share: $6.85 Divide: Market price per share: $79 Cost of Preferred Stock: 8.67%
You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:
Accept project A, Reject project B
A stock has an expected return of 13.24 percent, the risk-free rate is 4.4 percent, and the market risk premium is 8.98 percent. What is the stock's beta?
Beta of the stock: (13.24%-4.40%)÷8.98% 0.98%
You just purchased $218,000 of equipment that is classified as five-year MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. What will be the book value of this equipment at the end of three years assuming no bonus depreciation is taken?
Book Value3= $218,000 ×(1 - .2 - .32 - .192) = $62,784
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:
cost of capital
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return
Pro forma statements for a proposed project should generally do all of the following except:
include interest expense
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
market risk premium and the amount of systematic risk inherent in the security.
You own the following portfolio of stocks. What is the portfolio weight of Stock C? Stock Number of Shares Price per Share A650$15.82 B320$11.09 C400$39.80 D100$7.60
portfolioweight = (stock value/Total portfolio value) x 100 (15920/30511.8) x 100 = 52.18%
Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?
reject A, accept project B
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
selling fewer hotdogs because hamburgers were added to the menu
The discount rate assigned to an individual project should be based on:
the risks associated with the use of the funds required by the project.
A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent?
unsystematic
