A company is considering a 5-year project that opens a new product line and requires an initial outlay of $84,000. The assumed selling price is $99 per unit, and the variable cost is $55 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 11% per year, what is the financial break-even point? (Answer to the nearest whole unit.)

Sideshow Bob's Circus is considering replacing its current Whack a mole machines with a new and improved model. The old machines cost $800000 6 years ago and is being depreciated to zero using 10 year straight line depreciation. These old whack a mole machines has a current salvage value of $250000. THe new machines, the wacky mole cost $1000000 tpday and would be depreciated to zero using 5 year straight line depreciation and would have a five year useful life. Revenues would rise $50000 annually and operating costs would decrease $150000 annually if the old machines are replaced. The company's marginal tax rate is 25%.

1) Refer to Sideshow Bob's circus, what is the year 2 operating cash flow for this potential replacement project if Sideshow Bob's tax rate is 25%?

A) $180000

B) $60000

C) $200000

D) $150000

***Correct answer: A

2) Refer to Sideshow Bob's Circus, what is the initial cash flow for this potential replacement project if Sideshow Bob's tax rate is 25%?

A) -$732,500

B) -$982,500

C) -$750,000

D) -$767,500

***Correct Answer: A

How do you get these two answers? Pls show all work!

GXY Corp. has a WACC of 15%, a cost of debt capital of 5%, and a market value debt-to-equity ratio of 0.10. GXY Corp. is not subject to taxation. Suppose that GXY Corp. increased it market value debt-to-equity ratio to 0.35, What will be the change in GXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

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 $1.85 million fully installed and has a 10 year life. It will be depreciated to a book value of $268,795.00 and sold for that amount in year 10.

b. The Engineering Department spent $44,639.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,644.00.

d. The PJX5 will reduce operating costs by $344,885.00 per year.

e. CSD’s marginal tax rate is 27.00%.

f. CSD is 62.00% equity-financed.

g. CSD’s 10.00-year, semi-annual pay, 6.96% coupon bond sells for $990.00.

h. CSD’s stock currently has a market value of $20.24 and Mr. Bensen believes the market estimates that dividends will grow at 4.10% forever. Next year’s dividend is projected to be $1.63.

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 $23.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.21 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.65 million per year and cost $2.37 million per year over the 10-year life of the project. Marketing estimates 20.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 15.00%. Find the IRR (internal rate of return)

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 $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.04 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.90 million per year and cost $2.32 million per year over the 10-year life of the project. Marketing estimates 14.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 35.00%. The WACC is 14.00%. Find the NPV (net present value).

Jenner’s common stock is currently selling at $ 30 per share. Dividends of $ 1 are expected to be paid at the end of the year (t = 1). The required rate-of-return on this stock is 12%.

(a) If dividends are expected to grow at a 10% rate indefinitely, find the value of the stock.

(b) If dividends are expected to grow at a 15% rate over the next 3 years, then at 11% for years 4 and 5, and 6% forever beginning in year 6:

(1) Find the dividends for years 1 through 6.

(2) Find the value of the stock at the end of year 5.

(3) Find the value of the stock at the end of year 3.

(4) Find the value of the stock now at t = 0.

(5) Does the current value of the stock change if you plan on selling it at the end of year 5? at the end of year 3? Explain.

QUESTION 121

1. A bank owns a portfolio of Treasury bonds but wants to hedge its position. Which of the following would make the most sense?

   		a. Buy call options on Treasury bonds.
   		b. Buy futures contracts on Treasury bonds.
   		c. Sell futures contracts on Treasury bonds.
   		d. Sell put options on Treasury bonds.

QUESTION 122

1. What is the primary risk to investors when hedging with futures contracts?

   		a. Basis fluctuations.
   		b. Futures prices may increase.
   		c. Futures prices may decrease.
   		d. Insufficient funds to meet margin requirements and maintain the futures position.

Explain interest rate swaps with diagrams.

Assume you are trading an at-the-money option on a non-dividend paying stock. Let the stock price be $120, the 1-year interest rate be 3% continuously compounded, the stock volatility be 20%, and the time to maturity is 1 year. The option price is?

Hero Manufacturing has 8.1 million shares of common stock outstanding. The current share price is $81 and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 6.2 percent and sells for 107.7 percent of par. The second issue has a face value of $55.8 million, a coupon rate of 7.4 percent and sells for 111.5 percent of par. The first issue matures in 10 years, the second in 24 years. Suppose the company’s stock has a beta of 1.4. The risk-free rate is 3.4 percent and the market risk premium is 7.3 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 23 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 75%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300.0 Last year's accounts payable $50.0 Sales growth rate = g 40% Last year's notes payable $15.0 Last year's total assets = A0* $500 Last year's accruals $20.0 Last year's profit margin = PM 20.0% Initial payout ratio 10.0%

Select the correct answer. a. $48.6 b. $50.6 c. $58.6 d. $52.6 e. $54.6

The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $23,000, and it is expected to generate after-tax cash flows of $6,225 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 8%.

1. What is the truck's optimal economic life? Round your answer to the nearest whole number.

   _______ year(s)

2. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?