6. You are looking at investing in a project that will require and upfront investment value of $6 million. It is expected to reduce costs by $1,300,000 for the next 8 years and will have a salvage value of $900,000. The asset has a CCA class of 25%. The project will be financed by debt and equity. The class A shares just paid a dividend of $3.25 which is expected to grow at 2% indefinitely and are priced at $30.14. The class B shares have a covariance with the market of 0.0045 and the variance of market returns is 0.0040898 while the expected return on the market is 10.5% and the risk free rate is 3%. The debt is in the form of 15 year bonds that have an annual coupon rate of 9% and a current price of $1050. The flotation costs on class A equity are 5%, on class B equity 5.5% and on debt 3.5%. The tax rate is 35% The market value of the class A equity is $55 million and the market value of the class B shares is $45 million. The debt to equity ratio is 1.2. Should you purchase the machine?

6. You are looking at investing in a project that will require and upfront investment value of $6 million. It is expected to reduce costs by $1,300,000 for the next 8 years and will have a salvage value of $900,000. The asset has a CCA class of 25%. The project will be financed by debt and equity. The class A shares just paid a dividend of $3.25 which is expected to grow at 2% indefinitely and are priced at $30.14. The class B shares have a covariance with the market of 0.0045 and the variance of market returns is 0.0040898 while the expected return on the market is 10.5% and the risk free rate is 3%. The debt is in the form of 15 year bonds that have an annual coupon rate of 9% and a current price of $1050. The flotation costs on class A equity are 5%, on class B equity 5.5% and on debt 3.5%. The tax rate is 35% The market value of the class A equity is $55 million and the market value of the class B shares is $45 million. The debt to equity ratio is 1.2. Should you purchase the machine?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Heedy Inc. is considering a capital investment proposal that costs $460,000 and has an estimated life of four years, and no residual value. The estimated net cash flows are as follows: Net Cash Flow $195,000 160,000 120,000 80,000 Year 1 2 3 4 The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Enter negative values as negative numbers. 5,825 X
1. What is the profitability index of a project that costs $90,000 and returns $30,000 annually for 8 years if the opportunity cost of capital is 9.6%? a.0.64 b.0.80 c.1.76 d.1.05 e.1.26 2. King Corporation is planning a 15-year project with an initial investment of $2,013,000. The project will have $563,000 cash inflows per year in years 1-2; $166,000 cash inflows in years 3-10, and $57,000 cash inflows in years 11-15. Determine the project's internal rate of return (IRR). Using financial calculator a.6.87% b.5.72% c.4.58% d.10.30% e.8.24%
12. You can purchase a office building for $1.7 million. You expect the cash flow on the building to be $95,000 next year and believe it will grow by 5% each year. You expect to hold the building for 5 years and then sell it for $2 million. What do you expect the yield 10 on the building to be? If your required rate of return is 10%, should you buy the building? If your answer is not the buy the building for $1.7 million, what price would you pay? If your answer is to buy the building, how much more could you pay?
5
6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 B$329,787 $331,197 D) $329,840 E) $290,160 7. When calculating weights for the WACC, it has become relatively common to use Net Debt. How is Net Debt calculated? A) Net Debt = Total amount of debt - Cash & Risk-Free Securities B) Net Debt = Total amount of debt + Cash & Risk-Free Securities C) Net Debt = Long-term Debt - Short-term Debt D) Net Debt Short-term Debt-Long-term Debt E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities Please use the following information to answer the next THREE questions. LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $3,400,000 if…
You have an opportunity to invest $102,000 now in return for $80,300 in one year and $29,400 in two years. If your cost of capital is 8.9%, what is the NPV of this investment? The NPV will be $. (Round to the nearest cent.)
1) Rainbow Corp. is considering an investment whereby it will invest $100 in a perpetuity that will pay the firm $30 annually forever, starting one year from now. If the firm has a payaback period of 3 years, will it do the project? a) Yes b) No 2) If Rainbow has a cost of capital of 10%, will it invest in the project when doing an NPV analysis? a) Yes b) No
9. Hard Spun Industries (HSI) has a project that it expects will produce a cash flow of $3.7 million in 13 years. To finance the project, the company needs to borrow $2.5 million today. The project will also produce intermediate cash flows of $250,000 per year that HSI can use to service coupon payments of $125,000 every six months. Based on the risk of this investment, market participants will require a 9.5% yield. If HSI wishes a maturity of 13 years (matching the arrival of the lump sum cash flow), what does the face value of the bond have to be? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis. (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.) Enter answer here
You are evaluating a project that requires an investment of $97 today and garantees a single cash flow of $115 one year from now. You decide to use 100% debt financing, that is, you will borrow $97. The risk-free rate is 6% and the tax rate is 30%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $18. a. Calculate the NPV of this investment opportunity using the APV method. b. Using your answer to part (a), calculate the WACC of the project. c. Verify that you get the same answer using the WACC method to calculate NPV. d. Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity.
A firm is considering investing in a new project with an upfront cost of $300 million. The project will generate an incremental free cash flow of $50 million in the first year and this cashflow is expected to grow at an annual rate of 5% forever. If the firm's WACC is 11%, what is the value of this project? A. $833.3 million B. $875.0 million C. $575.0 million D. $533.3 million

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