FIN3403 Exam 3

Consider an asset that costs $176,000 and is in a seven-year MACRS class. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $22,000. The relevant tax rate is 30 percent. What is the after-tax cash flow from the sale of this asset?

$17,754.88

Phone Home, Inc. is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.994 million. The fixed assets fall into a 5-year MACRS category, and it is expected that the assets will have no salvage value at the end of the project. The project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate is 31 percent. What is the total cash flow for this project in year 1?

$2,577,420

Windstream Corp. currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 19,740 of these campers per year at $11,280 each. An independent consultant has determined that if Windstream introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year. What is the amount that should be used as the annual sales figure when evaluating this project?

$323,839,400

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment is in a seven-year MACRS class. The equipment can be scrapped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the value of the depreciation tax shield in year 4 of the project?

$42,840.70

Hollister & Hollister is considering a new project. The project will require $622,000 for new fixed assets, $238,000 for additional inventory, and $42,000 for additional accounts receivable. Accounts payable are expected to increase by $175,000. The project has a 6-year life. The fixed assets are in the 5-year MACRS class. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $975,000 and costs of $540,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the total cash flow in year 6 of this project?

$486,385.25

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment is in a seven-year MACRS class. The equipment can be scrapped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the recovery amount attributable to net working capital at the end of the project?

$84,000

Hollister & Hollister is considering a new project. The project will require $622,000 for new fixed assets, $238,000 for additional inventory, and $42,000 for additional accounts receivable. Accounts payable are expected to increase by $175,000. The project has a 6-year life. The fixed assets are in the 5-year MACRS class. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $975,000 and costs of $540,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the project's cash flow at time zero?

-$727,000

The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted. What is the project's initial cash flow for net working capital?

-$82,250

What is the beta on this portfolio? Stock Amount Invested Security Beta A $6700 1.58 B $4900 1.23 C $8500 0.79

1.16

You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock?

1.25%

You have calculated that the β for Beam, Inc. is 1.35. If the expected return on the market is 8.5% and the risk-free rate is 2%, what is the required return on Beam, Inc. stock?

10.775%

What is the expected return on this portfolio? Stock Expected Return #Shares Stock Price A 12% 300 $28 B 7% 500 $10 C 15% 600 $13

11.92%

What is the standard deviation of the returns on a stock given the following information? Economic State Probability Rate of Return Boom 30% 15% Normal 65% 12% Recession 5% 6%

2.03%

A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over the past five years. What is the standard deviation of these returns?

22.60%

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

4.26%

What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C? Economic State Probability Rate of Return A B C Boom 5% 19% 9% 6% Normal 45% 11% 8% 13% Recession 50% -23% 5% 25%

5.93%

One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of $9.60 a share. The company pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $15.60 a share. What is your total percentage return on this investment?

63.54%

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock?

7.68%

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that cannot be accepted if another project is accepted D. $4,500 reduction in current shoe sales if a store starts selling sandals E. $1,800 increase in comic book sales if a store starts selling puzzles

B

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customers' use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers are added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather

C

Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a year to operate. The machines have a 6-year life after which they can be sold of 10% of the original cost. The equipment is in the 7 year MACRS group. What is the equivalent annual cost of one these machines if the required return is 16 percent and the company's marginal tax rate is 30%?

NPV @16% -$1,288,447.43 EAC -$349,671.58