Finance 3403 Quiz 3 Review

A new security system has a price-tag of $7,000, but should save your company $3,450 each year for the next 10 years in reduced thefts. What is the NPV of the security system? Use a discount rate of 10.8%.

$13,489

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

X-Ray Inc. recently paid its annual dividend of $3, and reported an ROE of 15%. The firm pays out 50% of earnings as dividends. Based on your analysis, you estimate that the stock has a required return of 15.5%. What is the intrinsic value of this stock?

$40.31

APEX Corporation issued $50 par value preferred stock that pays an annual dividend of $9. Based on your research, you estimate that the stock has a required return of 17%. What is the intrinsic value of this preferred stock?

$52.94

StoreAge Inc. recently paid its annual dividend of $3, and reported an ROE of 15%. The firm pays out 50% of its earnings as dividends. The stock has a beta of 1.28. The current risk-free rate is 2.6% and the market return is 9.6%. Assuming that CAPM holds, what is the intrinsic value of this stock?

$79.43

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

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

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%

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%

By automating its shop floor, your company expects to save $81,000 annually. If the automation costs $225,000, what is the payback period of the automation?

2.78

By purchasing training software for $7,000, you can eliminate other training costs of $3,450 each year for the next 10 years. What is the profitability index of the software? Use a discount rate of 10.4%.

2.98

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

By purchasing training software for $7,500, you can eliminate other training costs of $3,300 each year for the next 10 years. What is the IRR of the software?

42.75%

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%

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

Gizmo Industries is currently selling for $94. It just paid its annual dividend of $4, which have consistently grown at a rate of 3.3%. What is the expected return of this stock?

7.70%

Alistar Inc. recently issued $90 par value preferred stock that pays a 8.25% dividend rate per year. If the stock is currently selling for $85, what is the expected return of this preferred stock?

8.74%

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%