Contemporary Financial Management, Loose-leaf Version
14th Edition
ISBN: 9781337090636
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: South-Western College Pub
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Chapter 1, Problem 7QTD
Summary Introduction
To discuss: The meaning of agency costs and agency relationship.
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A small manufacturer is considering an equipment replacement
project. The new equipment would have an installed cost of
$125,000 and would replace existing equipment that was
purchased 3 years ago at an installed cost of $80,000. If the
company moves forward with the replacement, it could sell the
old equipment for $25,000. Purchasing the new equipment
would result in the company's current assets increasing by
$12,000 and current liabilities increasing by $9,000. The
company uses the 5-year MACRS table for depreciation, and is taxed at
21%.
a) What is the accumulated depreciation of the old equipment?
b) What is the current book value of the old equipment?
c) What is the amount of depreciation recapture/recovery?
d) What is the tax on the sale of the old equipment?
e) What are the after-tax proceeds from the sale of the old
equipment?
f) What is the change in Net Working Capital?
g) What is the initial investment for the project?
Last year Lewis Bank paid an annual dividend of $7 per share. The
bank expects the growth of its dividends to be stable at 2% per
year going forward.
a) If investors require an 8% return, what is the current value of
Lewis Bank's stock? (round to nearest cent)
b) If the stock currently trades at $124.55 per share, what is the
dividend growth rate investors expect? (round to nearest
percent)
A food processing company is considering replacing essential
machinery. Cost and relevant cash flow details are provided in
the table at the right. The company requires an 11% return on
its capital.
a) What is the present value of the yearly cash flows? Use a
Time Value of Money function for full credit. (round to nearest
dollar)
b) What is the net present value of the project? (round to
nearest dollar)
c) What is the internal rate of return of the project? Use a
Time Value of Money function for full credit. (round to two
decimal places)
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Contemporary Financial Management, Loose-leaf Version
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