Question

1. A firm is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV ( no decimal places)  (Hint: Cash flows from operations are constant in Years 1 to 3.)

WACC                                                                             10%

Net investment in fixed assets (depreciable basis)                     $75,000

Required net operating working capital at t=0                           $15,000

Straight-line depreciation rate                                                   33.333%

Annual sales revenues                                                                $75,000

Annual operating costs (excl. depreciation)                              $25,000

Tax rate                                                                         21.0%

2.

If your stock paying annual dividends will pay a dividend D₁ at t=1 of $1 and have a growth rate of  10.3% between t=1 and t=2, and with a constant growth rate of 5.3% thereafter into the future, what should be the value of the stock at t=0 if the expected rate of return for the stock is 8% (to two decimal places) ?

Answer 1