FIN 3403 Traditional Quiz 3

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $50,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project?

$-16,752

Lehman & Company has $80.00 par-value preferred stock that pays an annual dividend of $14.00. The stock has a beta of 1.36, the risk-free rate is 2.40% and the market risk premium (RM - RF) is 7.50%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?

$111.11

A new security system has a price-tag of $7,000.00, but should save your company $3,450.00 each year for the next 10 years in reduced thefts. What is the NPV of the security system? Use a discount rate of 10.80%.

$13,489

A new security system has a price-tag of $9,000.00, but should save your company $3,875.00 each year for the next 10 years in reduced thefts. What is the NPV of the security system? Use a discount rate of 11.10%.

$13,725

By purchasing training software for $5,000.00, you can eliminate other training costs of $3,200.00 each year for the next 10 years. What is the NPV of the software? Use a discount rate of 10.20%.

$14,494

You have purchased a canning machine for $5,000.00. You expect the machine to save your company $3,325.00 each year for the next 10 years. What is the NPV of the machine? Use a discount rate of 10.80%.

$14,747

Pacor Industries recently paid its annual dividend ($2.00). Dividends have consistently grown at a rate of 2.20%. Analysts estimate that the stock has a beta of 1.12. The current risk-free rate is 2.40% and the market return (RM) is 10.70%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$21.52

SanData Inc. recently paid its annual dividend ($3.00). Dividends have consistently grown at a rate of 3.20%. You estimate that the stock has a required rate of 16.00%. What is the intrinsic value of this stock?

$24.19

Colonnade Corporation purchased a machine for use in the firm's manufacturing process. The original cost of the machine was $1,800,000. The machine has a class life of 15 years, but after 13 years, the firm has decided to sell the machine for $320,000. If Colonnade has a marginal tax rate of 34%, what is the tax effect associated with the decision? Assume the machine was depreciated straight-line over the 15-year life to zero salvage value.

$27,200 payment

Pacor Industries recently paid its annual dividend ($2.00). Dividends have consistently grown at a rate of 2.70%. Analysts estimate that the stock has a beta of 1.00. The current risk-free rate is 2.30% and the market return (RM) is 10.10%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$27.76

Driver Products recently paid its annual dividend ($2.00), and reported an ROE of 15%, of which 50% is paid as dividends. The stock has a beta of 1.44. The current risk-free rate is 2.50% and the market return (RM) is 11.00%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$29.70

LA Diversified Inc. recently paid its annual dividend ($3.00). Dividends have consistently grown at a rate of 3.80%. The stock has a beta of 1.29. The current risk-free rate is 2.00% and the market risk premium (RM - RF) is 8.00%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$36.55

X-Ray Inc. recently paid its annual dividend ($4.00), and reported an ROE of 15%, of which 50% is paid as dividends. Based on your analysis, you estimate that the stock has a required rate of 17.00%. What is the intrinsic value of this stock?

$45.26

LA Diversified Inc. recently paid its annual dividend ($3.00). Dividends have consistently grown at a rate of 3.80%. The stock has a beta of 0.88. The current risk-free rate is 2.40% and the market risk premium (RM - RF) is 8.50%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$51.22

Crossroad Corporation is trying to decide whether to invest to automate a production line. If the project is accepted, labor costs will decrease by $165,000 per year. However, other cash operating expenses will increase by $86,000 per year. The equipment will cost $260,000 and is depreciable over 10 years using simplified straight line to a zero salvage value. Crossroad will invest $10,000 in net working capital at installation. The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows associated with the new project.

$60,980

StoreAge Inc. recently paid its annual dividend ($3.00), and reported an ROE of 15%, of which 50% is paid as dividends. The stock has a beta of 1.28. The current risk-free rate is 2.60% and the market risk premium (RM - RF) is 7.00%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$79.43

A new transmission in your truck will cost $9,500.00. Luckily, it should reduce maintenance expense by $3,150.00 each year for the next 10 years. What is the NPV of the transmission? Use a discount rate of 10.60%.

$9,366

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project?

$9,555

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project?

$98,934

A $63,000 machine with a 7-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $75,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project?

(26,700)

A replacement computer will cost you $1,500.00, but save you $950.00 each year because of the faster processor. What is the payback period of the computer?

1.58

A capital project costing $6,000.00 will generate annual savings of $3,775.00 for the foreseeable future. What is the payback period of the project?

1.59

A rider-mower costs $594.00 and generates an annual after-tax cash flow of $330.00 for your landscaping business. What is the payback period of the mower?

1.80

Sparrow Products Industries is currently selling for $80.00. It just paid its annual dividend of $2.00 after reporting an ROE of 15%, of which 50% is paid as dividends. What is the expected return of this stock?

10.19%

Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $59. Flotation costs will be $3 per share. The recent common stock dividend was $3.15. Dividends are expected to grow at 7% in the future. What is the cost of capital if the firm uses bonds and issues new common stock?

10.4%

Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The firm's tax rate is 34%. The firm can issue the following securities to finance the investments: Bonds: Mortgage bonds can be issued at a pre-tax cost of 9 percent. Debentures can be issued at a pre-tax cost of 10.5 percent. Common Equity: Some retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $46. Flotation costs will be $3 per share. The recent common stock dividend was $3.60. Dividends are expected to grow at 6% in the future. What is the cost of capital using mortgage bonds and internal equity?

10.96%

Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The firm's tax rate is 34%. The firm can issue the following securities to finance the investments: Bonds: Mortgage bonds can be issued at a pre-tax cost of 9 percent. Debentures can be issued at a pre-tax cost of 10.5 percent. Common Equity: Some retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $46. Flotation costs will be $3 per share. The recent common stock dividend was $3.60. Dividends are expected to grow at 6% in the future. What is the cost of capital using debentures and external equity?

11.69%

A $63,000 machine with a 7-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $75,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project?

12,600

Hampton Corporation has a beta of 1.3 and a marginal tax rate of 34%. The expected return on the market is 11% and the risk-free interest rate is 6%. Estimate the firm's cost of internal equity.

12.5%

Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $59. Flotation costs will be $3 per share. The recent common stock dividend was $3.15. Dividends are expected to grow at 7% in the future. What is the cost of external equity?

13%

Hampton Corporation has a beta of 1.3 and a marginal tax rate of 34%. The expected return on the market is 11% and the risk-free interest rate is 4%. Estimate the firm's cost of internal equity.

13.1%

Hampton Corporation has a beta of 1.6 and a marginal tax rate of 34%. The expected return on the market is 11% and the risk-free interest rate is 6%. Estimate the firm's cost of internal equity.

14.0%

Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The firm's tax rate is 34%. The firm can issue the following securities to finance the investments: Bonds: Mortgage bonds can be issued at a pre-tax cost of 9 percent. Debentures can be issued at a pre-tax cost of 10.5 percent. Common Equity: Some retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $46. Flotation costs will be $3 per share. The recent common stock dividend was $3.60. Dividends are expected to grow at 6% in the future. What is the cost of external equity?

14.87%

Broden, Inc. recently issued $60.00 par-value preferred stock that pays an annual dividend of $17.00. If the stock is currently selling for $70.00, what is the expected return of this preferred stock?

24.29%

Sparrow Products Industries is currently selling for $57.00. It just paid its annual dividend of $4.00 after reporting an ROE of 15%, of which 50% is paid as dividends. What is the expected return of this stock?

15.04%

Broden, Inc. recently issued $60.00 par-value preferred stock that pays an annual dividend of $11.00. If the stock is currently selling for $64.00, what is the expected return of this preferred stock?

17.19%

Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, what is the EAA for Project B? Year Project A Project B 0 -300,000 -300,000 1 150,000 70,000 2 150,000 70,000 3 80,000 120,000 4 80,000 120,000 5 120,000 6 60,000

19,086

Your firm is selling a 3-year old machine that has a 5-year class life. The machine originally cost $580,000 and was originally depreciated straight-line to zero salvage value using the 5-year life. Your firm is selling the asset for $180,000. Your firm's marginal tax rate is 34%. What is the total cash flow, net of taxes, from selling the machine? Assume that the firm is otherwise profitable.

197,680

A new transmission in your truck will cost $7,500.00. Luckily, it should recude maintenance expense by $3,525.00 each year for the next 10 years. What is the profitability index of the transmission? Use a discount rate of 12.30%.

2.62

A new security system has a price-tag of $8,000.00, but should save your company $3,600.00 each year for the next 10 years in reduced thefts. What is the profitability index of the security system? Use a discount rate of 10.70%.

2.68

By automating its shop floor, your company expects to save $81,000.00 annually. If the automation costs $225,000.00, what is the payback period of the automation?

2.78

By purchasing training software for $7,000.00, you can eliminate other training costs of $3,450.00 each year for the next 10 years. What is the profitability index of the software? Use a discount rate of 10.40%.

2.98

Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, what is the EAA for Project A? Year Project A Project B 0 -300,000 -300,000 1 150,000 70,000 2 150,000 70,000 3 80,000 120,000 4 80,000 120,000 5 120,000 6 60,000

20,179

SanData Inc. recently paid its annual dividend ($3.00). Dividends have consistently grown at a rate of 3.00%. You estimate that the stock has a required rate of 17.00%. What is the intrinsic value of this stock?

22.07

You have purchased a canning machine for $5,000.00. You expect the machine to save your company $1,425.00 each year for the next 10 years. What is the IRR of the machine?

25.57%

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the IRR of the project?

28.2%

Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, what is the EAA for Project B? Year Project A Project B 0 -580,000 -580,000 1 290,000 130,000 2 290,000 130,000 3 150,000 230,000 4 150,000 230,000 5 230,000 6 115,000

33,652

A new transmission in your truck will cost $5,000.00. Luckily, it should recude maintenance expense by $3,725.00 each year for the next 10 years. What is the profitability index of the transmission? Use a discount rate of 11.80%.

4.24

A replacement computer will cost you $3,500.00, but save you $750.00 each year because of the faster processor. What is the payback period of the computer?

4.67

By purchasing training software for $7,000.00, you can eliminate other training costs of $3,400.00 each year for the next 10 years. What is the IRR of the software?

47.58%

Guano Industries is currently selling for $79.00. It just paid its annual dividend of $2.00, which have consistently grown at a rate of 2.60%. What is the expected return of this stock?

5.20%

Joliet Company is planning to issue $1,000 par value bonds that have a coupon rate of 9.6%. The bonds will be sold at a market price of $1,120. Flotation costs will amount to 4 percent of market value. The bonds would mature in 15 years and coupon payments would be semi-annual. Joliet's corporate tax rate is 35%. What is the firm's cost of debt financing?

5.65%

A new security system has a price-tag of $8,000.00, but should save your company $3,000.00 each year for the next 10 years in reduced thefts. What is the IRR of the security system?

5.73%

Heritage Corporation is trying to decide whether to invest in equipment to manufacture a new product. If the investment project is accepted, sales revenue will increase by $65,000 per year and materials costs will decrease by $16,000 per year. The equipment will cost $140,000 and is depreciable over 10 years using simplified straight line (zero salvage value). The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows resulting from the new project.

58,220

Suppose Hampton Corporation sells land for $8,000,000. Hampton paid $5,000,000 for the land several years ago. Assuming a marginal tax rate of 34%, calculate the after-tax cash flow resulting from the land sale.

6,980,000

St. Thomas Company is planning to issue $1,000 par value bonds. The bonds will have a coupon rate of 9.5 percent and will be sold at a market price of $980. Flotation costs will amount to 4 percent of market value. The bonds will mature in 15 years and coupon payments will be semi-annual. St. Thomas' marginal tax rate is 35%. What is the firm's cost of debt financing?

6.68%

A consultant has recommended that you modernize a production line. Costs include $650,000 in equipment, a $10,000 investment in net working capital at the time of installation, and $5,000 in delivery and installation costs. The consultant has billed the firm for $7,500 for her analysis of the project. If the project is undertaken, an employee training program costing $8,000 would be required. The old machinery has no book value but can be sold for $100,000. Your firm's marginal tax rate is 34%. What is the initial outlay associated with the project?

607,000

A new transmission in your truck will cost $5,500.00. Luckily, it should reduce maintenance expense by $3,650.00 each year for the next 10 years. What is the IRR of the transmission?

65.94%

A firm has preferred stock that pays an 8 percent dividend on a $75 par value. If a new issue is offered, flotation costs will be 3 percent of the current market price of $80. The firm's marginal tax rate is 35 percent. What is the firm's cost of preferred stock financing?

7.7%

Guano Industries is currently selling for $94.00. It just paid its annual dividend of $4.00, which have consistently grown at a rate of 3.30%. What is the expected return of this stock?

7.70%

A new transmission in your truck will cost $5,000.00. Luckily, it should recude maintenance expense by $3,600.00 each year for the next 10 years. What is the IRR of the transmission?

71.68%

Alistar Inc. recently issued $90.00 par-value preferred stock that pays a 8.25% dividend rate per year. If the stock is currently selling for $85.00, what is the expected return of this preferred stock?

8.74%

Sparrow Products Industries is currently selling for $73.00. It just paid its annual dividend of $1.00 after reporting an ROE of 15%, of which 50% is paid as dividends. What is the expected return of this stock?

8.97%

Palmetto Corporation has preferred stock that pays a 9% dividend. If the firm issues new shares, each share will be sold for the $50 par value. Flotation costs will be 3 percent of the stock price. The firm's marginal tax rate is 34 percent. What is the firm's cost of preferred stock financing?

9.3%

Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $59. Flotation costs will be $3 per share. The recent common stock dividend was $3.15. Dividends are expected to grow at 7% in the future. What is the cost of capital if the firm uses bank loans and retained earnings?

9.9%

According to the reading in Module 8, which capital budgeting technique was most often used by those surveyed?

IRR

According to the survey in Module 8, which capital budgeting technique were highly levered firms more likely to use than firms with little debt?

NPV & IRR

Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, which of the following statements is true? Year Project A Project B 0 -580,000 -580,000 1 290,000 130,000 2 290,000 130,000 3 150,000 230,000 4 150,000 230,000 5 230,000 6 115,000

Project A should be accepted because it has the highest EAA.