Intermediate Fin. Mgmt Quiz 1

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $5,400,000 and will be sold for $1,700,000 at the end of the project. If the tax rate is 22 percent, what is the aftertax salvage value of the asset?

BV4 = $5,400,000 − 5,400,000(.2000 + .3200 + .1920 + .1152) BV4 = $933,120 Aftertax salvage value = $1,700,000 + ($933,120 − 1,700,000)(.22) Aftertax salvage value = $1,531,286

Brummitt Corp., is evaluating a new 4-year project. The equipment necessary for the project will cost $2,000,000 and can be sold for $281,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 34 percent. What is the aftertax salvage value of the equipment?

Book value = $2,000,000(.1152 + .0576) Book value = $345,600 Tax refund (due) = ($345,600 − 281,000)(.34) Tax refund (due) = $21,964 Aftertax salvage value = $281,000 + 21,964 Aftertax salvage value = $302,964

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?

CF0 = −$319,000 + 8,700 − 9,500 − 5,200 CF0 = −$325,000 C04 = $109,000 + 51,600 − 8,700 + 9,500 + 5,200 C04 = $166,600 NPV = −$325,000 + $109,000{[1 − (1/1.1423)]/.142} + $166,600/1.1424 NPV = $25,162.45

At the beginning of the year, a firm has current assets of $330 and current liabilities of $234. At the end of the year, the current assets are $497 and the current liabilities are $274. What is the change in net working capital?

Change in net working capital = ($497 - 274) - ($330 - 234) = $127

Seeing Red has a new project that will require fixed assets of $907,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company has a tax rate of 35 percent. What is the depreciation tax shield for Year 3?

Depreciation tax shield = .35($907,000(.1920)) Depreciation tax shield = $60,950

The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent?

NPV = −$36,500 − 2,200 + $49,500{[1 − (1/1.1569)]/.156} + $2,200/1.1569 NPV = $193,132.81

Michael's, Inc., just paid $1.90 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.2 percent. If you require a rate of return of 8.5 percent, how much are you willing to pay today to purchase one share of the company's stock?

P0 = [$1.90 × (1 + .042)]/(.085 - .042) = $46.04

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,600, $10,600, and $16,800 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 10 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

PV = $5,600/(1 + .10) + $10,600/(1.10)2 + $16,800/(1.10)3 = $26,473.33 *calculator explanation in hw 10.12

The common stock of Eddie's Engines, Inc., sells for $37.43 a share. The stock is expected to pay a dividend of $3.40 per share next year. Eddie's has established a pattern of increasing their dividends by 5.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?

R = $3.40/$37.43 + .055 = 0.1458, or 14.58%

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? Multiple Choice An increase in the amount of the quarterly dividend A decrease in the per unit production costs An increase in the number of shares outstanding A decrease in the net working capital An increase in the market value per share

an increase in the market value per share

Consider an asset that costs $655,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $133,000. If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset?

Annual depreciation = $655,000/7 Annual depreciation = $93,571 Accumulated depreciation = 5($93,571) Accumulated depreciation = $467,857 BV5 = $655,000 − 467,857 BV5 = $187,143 Aftertax salvage value = $133,000 + ($187,143 − 133,000)(.24) Aftertax salvage value = $145,994

Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.03 million, have a 12-year life, and lower manufacturing costs by an estimated $280,000 a year. The equipment will be depreciated using straight-line depreciation over its expected life to a book value of zero. Ignore bonus depreciation. The required rate of return is 13 percent and the tax rate is 23 percent. What is the annual operating cash flow?

OCF = $280,000(1 − .23) + ($1,030,000/12)(.23) OCF = $235,341.67

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.28 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,648,000 in annual sales, with costs of $627,000. If the tax rate is 22 percent, what is the OCF for this project?

OCF = (Sales − Costs)(1 − TC) + TC(Depreciation) OCF = ($1,648,000 − 627,000)(1 − .22) + .22($2,280,000/3) OCF = $963,580

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.35 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,745,000 in annual sales, with costs of $655,000. The tax rate is 22 percent and the required return on the project is 12 percent. What is the project's NPV?

OCF = (Sales − Costs)(1 − TC) + TC(Depreciation) OCF = ($1,745,000 − 655,000)(1 − .22) + .22($2,350,000/3) OCF = $1,022,533 NPV = −$2,350,000 + $1,022,533(PVIFA12%,3) NPV = $105,952.53

Bad Company has a new 4-year project that will have annual sales of 9,000 units. The price per unit is $20.50 and the variable cost per unit is $8.25. The project will require fixed assets of $100,000, which will be depreciated on a 3-year MACRS schedule. The annual depreciation percentages are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. Fixed costs are $40,000 per year and the tax rate is 34 percent. What is the operating cash flow for Year 3?

OCF = [9,000($20.50 − 8.25) − 40,000](1 − .34) + .34(.1481)($100,000) OCF = $51,400

Bubbly Waters currently sells 510 Class A spas, 660 Class C spas, and 410 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 585 units per year. However, if the new spa is added, Class A sales are expected to decline to 330 units while the Class C sales are expected to increase to 685. The sales of the deluxe model will not be affected. Class A spas sell for an average of $16,100 each. Class C spas are priced at $8,100 and the deluxe models sell for $19,100 each. The new mid-range spa will sell for $10,100. What annual sales figure should you use in your analysis?

Sales = 585($10,100) + (330 − 510)($16,100) + (685 − 660)($8,100) Sales = $3,213,000

A firm has total debt of $1,420 and a debt-equity ratio of .27. What is the value of the total assets?

$1,420/Total equity = .27 Total equity = $5,259.26 Total assets = $1,420 + 5,259.26 = $6,679.26

Bob bought some land costing $16,390. Today, that same land is valued at $46,817. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?

$46,817 = $16,390 × 1.06t 2.85644 = 1.06t t = ln2.85644/ln1.06 t = 1.04957/0.05827 t = 18.01 years

What is the effective annual rate for an APR of 15.20 percent compounded monthly?

EAR = (1 + .1520/12)12 - 1 = .1630, or 16.30%

Your firm has net income of $371 on total sales of $1,460. Costs are $800 and depreciation is $130. The tax rate is 30 percent. The firm does not have interest expenses. What is the operating cash flow?

EBIT = $1,460 - 800 - 130 = $530 (Sales - Costs - Depreciation) Taxes = .30 × $530 = $159 (Tax rate × EBIT) OCF = $530 + 130 - 159 = $501 (EBIT + Depreciation - Taxes)

Recently, the owner of Martha's Wares encountered severe legal problems and is trying to sell her business. The company built a building at a cost of $1,220,000 that is currently appraised at $1,420,000. The equipment originally cost $700,000 and is currently valued at $447,000. The inventory is valued on the balance sheet at $390,000 but has a market value of only one-half of that amount. The owner expects to collect 97 percent of the $215,200 in accounts receivable. The firm has $10,300 in cash and owes a total of $1,420,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm?

Market value = $1,420,000 (building) + 447,000 (equipment) + (.5 × 390,000) (inventory) + (.97 × 215,200) (accounts receivable) + 10,300 cash - 1,420,000 (amount owed) Market value = $861,044

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $663,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $175,000 at the end of the project. The project requires $45,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $172,360 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 35 percent?

NPV = −$663,000 − 45,000 + $172,360(PVIFA13%,5) + [$45,000 + (1 − .35)($175,000)]/1.135 NPV = −$15,607

Teddy's Pillows had beginning net fixed assets of $458 and ending net fixed assets of $524. Assets valued at $306 were sold during the year. Depreciation was $16. What is the amount of net capital spending?

Net capital spending = $524 (ending net fixed assets) + 16 (Depreciation) - 458 (beginning net fixed assets) Net capital spending = $82

A firm has a return on equity of 15 percent. The total asset turnover is 1.4 and the profit margin is 8 percent. The total equity is $7,000. What is the net income?

Net income = .15 × $7,000 = $1,050

Ivan's, Inc., paid $500 in dividends and $595 in interest this past year. Common stock increased by $205 and retained earnings decreased by $131. What is the net income for the year?

Net income = Dividends paid + Change in retained earnings Net income = $500 + (- $131) = $369 In this case, the change in retained earnings was a negative value.

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.10 per share. What is the current value of one share of this stock if the required rate of return is 7.60 percent?

P4 = ($2.10 × 1.214 × 1.06)/(0.076 - 0.06) = $298.23 P0 = ($2.10 × 1.21)/1.076 + ($2.10 × 1.212)/1.0762 + ($2.10 × 1.213)/1.0763 + ($2.10 × 1.214)/1.0764 + $298.23/1.0764 = $233.85