2019-01-29T11:57:31+00:00

# NPV of this proposed investment

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# NPV of this proposed investment

4) T. Ward and Company has been presented with an investment opportunity which will yield end-of-year cash flows of \$300,000 per year in Years 1 through 4, \$350,000 in Years 5 through 9, and \$400,000 in Year 10. This investment will cost TW & C \$1,500,000 today; its cost of capital is 10%.

Calculate the NPV of this proposed investment.

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5) Davis Industries must choose between a gas-powered and electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will only choose one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost \$22,000, whereas the gas-powered truck will cost \$17,500. The cost of capital for both is 12 %. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric truck will be \$6290 per year and for the gas truck, \$5000 per year. Annual net cash flows include depreciation. Calculate the NPV and IRR for each truck, and decide which to recommend.

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6) Alaska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project that is under consideration. This project has a cost of \$2,750,000 and is expected to provide after-tax cash flows of \$733,060 per year for 8 years. ASI`s management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital of 12% for ASI.

Calculate this project`s MIRR (modified IRR).

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7) Rollins Corporation (RC) is estimating its weighted average cost of capital (WACC). Its target capital structure is 20% debt, 20% preferred stock and 60% common equity. Its outstanding bonds have a 12% coupon rate, paid semiannually, a current maturity of 20 years, and sell in the marketplace for \$1,000. RC could sell at par, \$100 preferred stock which would pay a 12% annual dividend, but flotation costs of 5% would be incurred. RC`s beta is 1.2, the risk-free rate (Rrf) is 10%, and the required rate of return for the average stock in the marketplace (Rm) is 15%. RC is a constant-growth firm that just paid an annual dividend of \$2.00; its common stock currently sells for \$27 per share, and has a growth rate of 8%. RC`s policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find ks. RC`s marginal tax rate is 40%. Should RC sell additional common stock its flotation costs would be 10% of the per share price. RC expects its Retained Earnings to be \$5,500,000 for the period.

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a. Calculate RC`s component cost of debt.

b. Calculate RC`s cost of preferred stock.

c. Calculate RC`s cost of common equity (internal, Retained Earnings) using the CAPM method.

d. Calculate RC`s cost of common equity (internal, Retained Earnings) using the DC method.

e. Calculate RC`s cost of common equity (internal, Retained Earnings) using the bond-yield-plus-risk-premium method.

f. Calculate RC`s WACC.

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8) Apex Roofing Inc. has the following Balance Sheet:

(\$ millions)

Current Assets \$ 3.0 Accounts Payable \$ 1.2
Notes Payable 0.8
Fixed Assets 4.0 Accruals 0.3
Long-term Debt 1.2
Common Equity 1.5
____ Retained Earnings 2.0
Total Assets \$ 7.0 \$ 7.0

ARI`s sales last year were \$10 million, and it anticipates that they will increase by 44% this year. You have identified the following facts: ARI pays out 30% of annual Net Income as dividends; ARI has a profit margin of 4%; and, its Fixed Assets were used to 100% of capacity last year.
Calculate ARI`s additional funds needed (AFN) for this year.

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9) You have been provided financial information (see following page) of the Crum Company (CC). The firm expects sales to grow by 50% next year, and operating costs should increase at the same rate. Fixed assets were being operated at 40% of capacity this past year, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities (A/P and Accruals) should increase at the same rate as sales next year. CC plans to finance any Additional Funds Needed (AFN) as 35% Notes Payable (short-term debt) and 65% common stock (Common Equity). After taking financial feedbacks (refer to pages 497-505) into account, and after the 2nd pass, determine CC`s projected Return on Equity (ROE = Net Income / Common Equity) using the Percent of Sales Method.

Is the ROE:

a. 16.98%
b. 23.73%
c. 25.68%
d. 19.61%
e. 23.24%

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See following page for the format.

Crum Company Financial Information: Growth rate = 50%

INCOME STATEMENT Past Year Next Year
1st Pass Next Year
2nd Pass Next Year
Final
Sales \$ 1,000.00
Operating Costs, 80% 800.00
EBIT 200.00
Interest 16.00
EBT 184.00
Taxes, 40% 73.60
Net Income 110.40
Dividends, 60% 66.24
BALANCE SHEET
Current Assets \$ 700.00
Net Fixed Assets 300.00
Total Assets \$ 1,000.00

A/P and Accruals \$ 150.00
N/P, 8% 200.00
Common Stock 150.00
Retained Earnings 500.00
Total Liabilities & Common Equity \$ 1,000.00

AFN Past Year Next Year, 1st Pass Next Year, 2nd Pass
Profit Margin 11.04%
ROE 16.98%
Debt / Assets 35.00%
Current Ratio 2.0 times
Payout Ratio 60.00%

AFN Financing Weights Dollars Interest Expense
Notes Payable 0.3500
Common Stock 0.6500
TOTAL 1.0000

10) Kolan Inc. has annual sales of \$36,500,000 (\$100,000 a day on a 365-day year basis). On average, the company has \$12,000,000 in inventory and \$8,000,000 in A/R. The firm is looking for ways to shorten its cash conversion cycle (calculated on a 365-day basis). Kolan`s CFO has proposed new policies which would result in a 20% reduction in both average inventories and A/R. The firm anticipates that these policies will also reduce sales by 10%. A/P will remain unchanged.

What effect would these new policies have on the firm`s cash conversion cycle?

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a. 40 days shorter
b. 22 days shorter
c. 13 days shorter
d. 22 days longer
e. 40 days longer
f. 13 days longer

11) Some entries in Yale Industries` Balance Sheet change substantially during the year. (All amounts are in millions of dollars for the two months in this example.)

Peak Non-Peak
October April
Cash \$ 25 \$ 6
Marketable Securities 0 7
Accounts Receivable 18 8
Inventory 56 22
Net Fixed Assets 110 110
Total Assets \$209 \$153

Spontaneous Liabilities* \$ 28* \$ 7*
Short-term Debt 51 16
Long-term Debt 50 50
Owners` Equity 80 80
Total Capital \$209 \$153

* Accounts Payable + Accruals

Yale Industries` current asset financing policy is

a. very conservative; permanent capital > total assets.
b. conservative; permanent capital > permanent assets.
c. matching; permanent capital = permanent assets.
d. aggressive; permanent capital < permanent assets.
e. very aggressive; permanent capital < fixed assets.

Show all work, and fully discuss the reasons for your choice.

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