Finance Data Bank 39160

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61.Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.

Old WACC:

10.00%

 

New WACC:

12.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

62.Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.

Old WACC:

8.00%

 

New WACC:

8.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

63.Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

8.75%

 

 

 

Year

0

1

2

3

Cash flows

-$1,000

$450

$450

$450

 

64.Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

14.75%

 

 

 

Year

0

1

2

3

Cash flows

-$800

$350

$350

$350

65.Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

10.00%

 

 

 

 

Year

0

1

2

3

4

Cash flows

-$1,175

$300

$320

$340

$360

66.Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

13.25%

 

 

 

 

Year

0

1

2

3

4

Cash flows

-$850

$300

$320

$340

$360

67.Stern Associates is considering a project that has the following cash flow data. What is the project’s payback?

Year

0

1

2

3

4

5

Cash flows

-$750

$300

$310

$320

$330

$340

68.Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC:

10.00%

 

 

 

Year

0

1

2

3

Cash flows

-$950

$500

$500

$500

69.Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

 

WACC:

10.00%

 

 

 

 

Year

0

1

2

3

4

Cash flows

-$700

$525

$485

$445

$405

70.Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

WACC:

6.75%

 

 

 

 

 

0

1

2

3

4

CFS -$1,100

$550

$600

$100

$100

CFL

-$2,700

$650

$725

$800

$1,400

71.A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC:

7.75%

 

 

 

 

 

0

1

2

3

4

CFS -$1,025

$380

$380

$380

$380

CFL

-$2,150

$765

$765

$765

$765

72.Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.

WACC:

15.25%

 

 

 

 

 

0

1

2

3

4

CFS -$2,050

$750

$760

$770

$780

CFL

-$4,300

$1,500

$1,518

$1,536

$1,554

 

73.Moerdyk& Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

WACC:

11.50%

 

 

 

 

 

0

1

2

3

4

CFS -$1,025

$650

$450

$250

$50

CFL

-$1,025

$100

$300

$500

$700

Finance Questions

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Cost of Preferred Stock with Flotation Costs
Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $73. Burnwood must pay flotation costs of 7% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.
WACC
David Ortiz Motors has a target capital structure of 45% debt and 55% equity. The yield to maturity on the company’s outstanding bonds is 11%, and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.53%. What is the company’s cost of equity capital? Round your answer to two decimal places.
Bond Yield and After-Tax Cost of Debt
A company’s 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $678.22. The company’s federal-plus-state tax rate is 30%. What is the firm’s after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.
Cost of Equity
Radon Homes’s current EPS is $6.43. It was $3.60 5 years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $34.
1. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places.
%
2. Calculate the next expected dividend per share, D1 (Hint: D0 = 0.40($6.43) = $2.57). Assume that the past growth rate will continue. Round your answer to the nearest cent.
$
3. What is Radon’s cost of equity, rs? Round your answer to two decimal places.
%
Calculation of g and EPS
Spencer Supplies’s stock is currently selling for $60 a share. The firm is expected to earn $5.70 per share this year and to pay a year-end dividend of $2.90.
1. If investors require a 9.5% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places.
%
2. If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of return, then what will be next year’s EPS? (Hint: g = ROE × Retention ratio.) Round your answer to the nearest cent.
$

The Cost of Equity and Flotation Costs
Messman Manufacturing will issue common stock to the public for $25. The expected dividend and growth in dividends are $2.75 per share and 6%, respectively. If the flotation cost is 8% of the issue’s gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.
The Cost of Equity and Flotation Costs
Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The tax rate is 40%. If the flotation cost is 3% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.
WACC Estimation
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm’s present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt.
Debt $30,000,000
Common equity 30,000,000
Total capital $60,000,000
New bonds will have an 6% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%.
1. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000.
$
2. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.
Market Value Capital Structure
Suppose the Schoof Company has this book value balance sheet:
Current assets $30,000,000 Current liabilities $10,000,000
Fixed assets 50,000,000 Long-term debt 30,000,000
Common stock
(1 million shares) 1,000,000
Retained earnings 39,000,000
Total assets $80,000,000 Total claims $80,000,000
The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 9%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company’s permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 8%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $68 per share. Calculate the firm’s market value capital structure. Round your answers to two decimal places.
Short-term debt $
%

Long-term debt $
%

Common equity $
%

Total capital $

he Following Transactions Were Completed By The Company. A. The Company Completed Consulting Work For A Client And Immediately Collected $5,500…

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The following transactions were completed by the company.

a. The company completed consulting work for a client and immediately collected $5,500 cash earned.

b. The company completed commission work for a client and sent a bill for $4,000 to be received within 30 days.

c. The company paid an assistant $1,400 cash as wages for the period.

d. The company collected $1,000 cash as a partial payment for the amount owed by the client in transaction b.

e. The company paid $700 cash for this period’s cleaning services.

Page 305 Question 1. Calculating Payback[LO2] What Is The Payback Period For The Following Set Of Cash Flows? Year Cash Flow 0 −$7,600 1 1,900 2 2,900 3 2,300 4 1,700 Question 3. Calculating Payback[LO2] Siva, Inc., Imposes A Payback Cutoff Of Three Y

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Page 305

Question 1. Calculating Payback[LO2] What is the payback period for the following set of cash flows?

Year Cash Flow
0 −$7,600
1  1,900
2  2,900
3  2,300
4  1,700

Question 3. Calculating Payback[LO2] Siva, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?.

Year Cash Flow (A) Cash Flow (B)
0 −$45,000 −$ 55,000
1  16,000  13,000
2  21,000  15,000
3  15,000  24,000
4  9,000  255,000

 

Question 4.  Calculating Discounted Payback[LO3] An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if the initial cost is $5,400? What if it is $10,400

 

Page 306

Question6. Calculating AAR[LO4] You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,754,000, $1,820,500, $1,716,300, and $1,097,400 over these four years, what is the project’s average accounting return (AAR)?

Question 7.  Calculating IRR[LO5] A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project?

Year Cash Flow
0 −$26,000
1  11,000
2  14,000
3  10,000

Question 8. Calculating NPV[LO1] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 24 percent?

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Question 15. Calculating Profitability Index[LO7] What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?

Year Cash Flow
0 −$15,300
1  9,400
2  7,600
3  4,300

Question 16.Problems with Profitability Index[LO1,7] The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:

Year Cash Flow (I) Cash Flow (II)
0 −$51,000 −$14,400
1  24,800  7,800
2  24,800  7,800
3  24,800  7,800

1.  If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?

2.  If the company applies the NPV decision rule, which project should it take?

3.  Explain why your answers in (a) and (b) are different.

 

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Question 17.   Comparing Investment Criteria[LO1,2,3,5,7] Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)
0 −$455,000 −$65,000
1  58,000  31,000
2  85,000  28,000
3  85,000  25,000
4  572,000  19,000

Whichever project you choose, if any, you require a return of 11 percent on your investment.

1.  If you apply the payback criterion, which investment will you choose? Why?

2.  If you apply the discounted payback criterion, which investment will you choose? Why?

3.  If you apply the NPV criterion, which investment will you choose? Why?

4.  If you apply the IRR criterion, which investment will you choose? Why?

5.  If you apply the profitability index criterion, which investment will you choose? Why?

6.  Based on your answers in (a) through (e), which project will you finally choose? Why?

 

Question 19. MIRR[LO6] RAK Corp. is evaluating a project with the following cash flows:

Year  Cash Flow
0 −$41,000
1  15,700
2  19,400
3  24,300
4  18,100
5  −9,400

The company uses an interest rate of 10 percent on all of its projects. Calculate the MIRR of the project using all three methods.