Finance Final

Six years ago, China Exporters paid cash for a new packaging machine that cost $347,000. Three years ago, the firm spent $14,300 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months. The estimated value of the machine today is $157,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

$157,500

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

$20.44 P5 = [$1.78 ×(1 + .0123)6]/(.106-.0123) = $20.44

Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?

($1.23) ×(1.08)4×(1.02)2

Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent?

*$5.01* P5 = ($.84 ×1.02)/(.144-.02) = $6.91 P0 =($.84/1.1443) + ($.84/1.1444) + [($.84 + 6.91)/1.1445] = $5.01

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?

Dividend yield + Capital gains yield

The required return on Mountain Brook stock is 13.8 percent and the dividend growth rate is 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield?

Dividend yield = .138-.0364 = .1016, or 10.16 percent

Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

Lowest expected value for fixed costs

Mittuch Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 -$ 16,000 1 7,100 2 8,300 3 7,900 4 6,700 5 -4,100 The company uses an interest rate of 10 percent on all of its projects. Calculate the MIRR of the project using all three methods. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

MIRR Discounting approach 22.66 ± 1% % Reinvestment approach 16.46 ± 1% % Combination approach 15.65 ± 1% % Explanation: The MIRR for the project with all three approaches is: Discounting approach: In the discounting approach, we find the value of all cash outflows at Time 0, while any cash inflows remain at the time at which they occur. So, discounting the cash outflows at Time 0, we find: Time 0 cash flow = -$16,000 - $4,100 / 1.105 Time 0 cash flow = -$18,545.78 So, the MIRR using the discounting approach is: 0 = -$18,545.78 + $7,100 / (1 + MIRR) + $8,300 / (1 + MIRR)2 + $7,900 / (1 + MIRR)3 + $6,700 / (1 + MIRR)4 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: MIRR = 22.66% Reinvestment approach: In the reinvestment approach, we find the future value of all cash, except the initial cash flow, at the end of the project. So, reinvesting the cash flows to Time 5, we find: Time 5 cash flow = $7,100(1.104) + $8,300(1.103) + $7,900(1.102) + $6,700(1.10) - $4,100 Time 5 cash flow = $34,271.41 So, the MIRR using the reinvestment approach is: 0 = -$16,000 + $34,271.41 / (1 + MIRR)5 $34,271.41 / $16,000 = (1 + MIRR)5 MIRR = ($34,271.41 / $16,000)1/5 - 1 MIRR = .1646, or 16.46% Combination approach: In the combination approach, we find the value of all cash outflows at Time 0, and the value of all cash inflows at the end of the project. So, the value of the cash flows is: Time 0 cash flow = -$16,000 - $4,100 / 1.105 Time 0 cash flow = -$18,545.78 Time 5 cash flow = $7,100(1.104) + $8,300(1.103) + $7,900(1.102) + $6,700(1.10) Time 5 cash flow = $38,371.41 So, the MIRR using the discounting approach is: 0 = -$18,545.78 + $38,371.41 / (1 + MIRR)5 $38,371.41 / $18,545.78 = (1 + MIRR)5 MIRR = ($38,371.41 / $18,545.78)1/5 - 1 MIRR = .1565, or 15.65%

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

P0 = ($1.62 × 1.021)/(.157-.021) = $12.16 $12.16

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Profitability index

What is the market called that facilitates the sale of shares between individual investors?

Secondary

Which one of the following refers to the option to expand into related businesses in the future?

Strategic option

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

The investment is mutually exclusive with another investment of a different size.

The payback method of analysis ignores which one of the following?

Time value of money

The reinvestment approach to the modified internal rate of return

compounds all of the cash flows, except for the initial cash flow, to the end of the project.

Forecasting risk is best defined as:

estimation risk.

Net present value involves discounting an investment's

future cash flows.

Dividends are

paid out of net income

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:

scenario analysis.

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events.

When valuing a stock using the constant-growth model, D1 represents the:

the next expected annual dividend.

The modified internal rate of return is specifically designed to address the problems associated with:

unconventional cash flows.