Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5?

a. The PJX5 will cost $2.37 million fully installed and has a 10 year life. It will be depreciated to a book value of $131,746.00 and sold for that amount in year 10.

b. The Engineering Department spent $34,779.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $20,597.00.

d. The PJX5 will reduce operating costs by $345,554.00 per year.

e. CSD’s marginal tax rate is 33.00%.

f. CSD is 74.00% equity-financed.

g. CSD’s 12.00-year, semi-annual pay, 5.31% coupon bond sells for $961.00.

h. CSD’s stock currently has a market value of $20.47 and Mr. Bensen believes the market estimates that dividends will grow at 3.49% forever. Next year’s dividend is projected to be $1.46.

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $15.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.65 million per year and increased operating costs of $675,018.00 per year. Caspian Sea Drinks' marginal tax rate is 30.00%. The internal rate of return for the RGM-7000 is _____.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.08 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.48 million per year and cost $1.74 million per year over the 10-year life of the project. Marketing estimates 11.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 32.00%. The WACC is 15.00%. Find the NPV (net present value).

How would you compare the needs of working capital for an international initiative versus a domestic initiative in business and trade? What are some of the areas where it could be a benefit? a curse?

Caspian Sea Drinks' is financed with 61.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.40% coupon bonds which sell for 97.87% of par. Their stock currently has a market value of $24.17 and Mr. Bensen believes the market estimates that dividends will grow at 3.21% forever. Next year’s dividend is projected to be $2.69. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?

Problem 12-03

AFN Equation

Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

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Problem 12-02

AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $7.0 million in 2016 to $8.40 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 75%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

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#36

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $15.00 million fully installed and will be fully depreciated over a 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.47 million per year and increased operating costs of $641,571.00 per year. Caspian Sea Drinks' marginal tax rate is 22.00%. If Caspian Sea Drinks uses a 10.00% discount rate, then the net present value of the RGM-7000 is _____.

Caspian Sea Drinks' is financed with 70.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.93% coupon bonds which sell for 97.73% of par. Their stock currently has a market value of $25.66 and Mr. Bensen believes the market estimates that dividends will grow at 3.83% forever. Next year’s dividend is projected to be $2.75. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $14.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.95 million per year and increased operating costs of $655,972.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The internal rate of return for the RGM-7000 is _____.

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $14.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.95 million per year and increased operating costs of $655,972.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The internal rate of return for the RGM-7000 is _____

6. Assume you have just been hired as a business manager of Bernie’s Burgers, a regional hamburger restaurant chain. The company’s EBIT was $150 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm’s owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:

                                                   % Financed With Debt            r_d            

                                                               0%                              ---      

                                                              25                                 8.0%     

                                                              33                                 8.5      

                                                              45                                10.0      

                                                              55                               12.0      

If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Bernie’s Burgers is in the 28 percent state-plus-federal corporate tax bracket, its beta is 1.27, the risk-free rate is 6 percent, and the expected return on the market is 11 percent.

1. Calculate the leveraged beta for each capital structure.

        b.Calculate the cost of capital for each capital structure.

Consider the following mutually exclusive investments

1. Find IRRs for both projects
2. “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph.
3. Solve for the crossover rate
4. Please describe as fully as possible which project is the best and under which circumstances.

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,390,000 million. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 26 percent. You would like an option to sell the land in the next 12 months for $1,540,000. The risk-free rate of interest is 3 percent per year, compounded continuously.

What is the price of the put option?

Sales for the year just ended were 400. The firm is operating at much less than full capacity, so it will not need to increase fixed assets. Sales are expected to grow by 5% next year, the profit margin is 6%, and the dividend payout ratio is 60%. How much additional funding will be needed by the firm?