(PLEASE SHOW WORK)

Hankins Corporation has 5.4 million shares of common stock outstanding; 290,000 shares of 5.2 percent preferred stock outstanding, par value of $100; and 125,000 5.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $72 per share and has a beta of 1.13, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 103 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firm’s tax rate is 23 percent.

1. What is the firm’s market value capital structure?

2. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?

What should be Greta’s capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)

Greta, an elderly investor, has a degree of risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 7.2% per year, with a SD of 22.2%. The hedge fund risk premium is estimated at 12.2% with a SD of 37.2%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM

You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.

Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?

Problem 16-03

Cost of Trade Credit

What are the nominal and effective costs of trade credit under the credit terms of 1/10, net 30? Assume 365 days in a year for your calculations. Round your answers to two decimal places. Do not round intermediate calculations.

Nominal cost of trade credit %

Effective cost of trade credit %

NPV—Mutually exclusive projects   Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table:

The​ firm's cost of capital is 13​%.

Initial investment   $84,800   $60,100   $130,300
Year          
1   $18,500   $12,300   $50,000
2   $18,500   $13,700   $29,500
3   $18,500   $16,100   $20,500
4   $18,500   $18,300   $20,500
5   $18,500   $20,400   $20,300
6   $18,500   $25,100   $30,000
7   $18,500   $0 $40,000
8   $18,500   $0 $49,900

a.  Calculate the net present value (NPV​) of each press.

b.  Using​ NPV, evaluate the acceptability of each press.

c.  Rank the presses from best to worst using NPV.

d.  Calculate the profitability index​ (PI) for each press.

e.  Rank the presses from best to worst using PI.

NPV and IRR   Benson Designs has prepared the following estimates for a​ long-term project it is considering. The initial investment is

​$46,830​,and the project is expected to yield​ after-tax cash inflows of

​$5,000per year for 14years. The firm has a cost of capital of14​%.

a.  Determine the net present value​ (NPV) for the project.

b.  Determine the internal rate of return​ (IRR) for the project.

c.  Would you recommend that the firm accept or reject the​ project?

Suppose you want to find the nonoperating cash flow in the last year of the project. This includes the effects associated with the salvage value,cleanup and removal expenses, and working capital. The variables and values are: cash received on sale of old equipment (S) = $20,000; tax rate (T) = 0.4; book value of old equipment (B) = 5,000; before-tax cleanup and removal expenses (REX) = $15,000; and, release of net working (W) = $5,000.

What is the nonoperating cash flow in the last year of the project?

Group of answer choices

$11,000

$12,000

$10,000

$13,000

Your division is considering two projects with the following cash flows (in millions):

1. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
   Project A    $   million
   Project B    $   million

2. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

   What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations.
   Project A   %
   Project B   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)  
   -Select-Project AProject BNeither A, nor BItem 13

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)  
   -Select-Project AProject BNeither A, nor BItem 14

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)

1. Project A cost $1,000 and Project B cost $1,000, there expected net cash inflows are shown on the timeline below and there WACC is 9.00%. What is Project B's Discounted Payback?

WACC 9.00%

                      0              1              2               3              4

                        l              l               l                l                l

ProjA      -$1,000         $675       $650

ProjB   -$1,000       $1,000   $700        $50           $50

1. Project A cost $1,050 and Project B cost $1,050, there expected net cash inflows are shown on the timeline below and there WACC is 9.00%. What is the Discounted Payback for Project A?

  WACC 9.00%

                   0              1              2               3              4

                   l                l               l                l               l        

ProjA    -$1,050       $675        $650

ProjB   -$1,050    $360        $360        $360        $360

What are compensating balances of a US corporate bank account and how may they affect that corporation’s working capital?

At what WACC would there be a break-even between the two projects?

1. 7.23%
2. 8.48%
3. 7.57%
4. 7.89%
5. What is the NPV for Project A assuming the WACC is 10%?
   1. $5,653.94
   2. $10,522.64
   3. $6,219.33
   4. $11,574.90
6. What is the IRR for Project B?
   1. 11.2%
   2. 13.9%
   3. 11.6%
   4. 10.9%

3. What is the discounted payback period of Project A assuming the WACC is 10%?
   1. 4.1 years
   2. 5.5 years
   3. 5.1 years
   4. 4.9 years

Topperton Company has developed a new industrial product. An outlay of $8 million is required for equipment to produce the new product, and additional net working capital of $400,000 is required to support production and marketing. In addition, a one-time $400,000 (before-tax) expense will be incurred the year that the equipment is placed into service. The equipment will be depreciated on a straight-line basis to a zero book value over 6 years. Although the depreciable life is 6 years, the project is expected to have a productive life of 8 years, and it is estimated that the equipment can be sold for $1 million at that time. Revenues minus expenses are expected to be $3 million per year. The cost of capital for this project is 14%, and the relevant tax rate is 30%. What is the NPV of the new product?

$2,956,923

$3,326,891

$3,002,696

None of these

You are thinking of buying a machine that has a 4-year useful life, and would require an initial outlay of $240,000. The machine would be depreciated to a zero book value over 4 years on a straight-line basis, so depreciation would be $60,000 per year. The machine would generate an incremental increase in operating income of $100,000 per year in real terms before taxes, and the relevant tax rate is 40%. Inflation (i) is expected to be 8% per year, and the project's required return in real terms would be r_r = 10%. What is the net present value of this machine?

Group of answer choices

-$17,505

$13,762

-$22,944

$26,269