Question

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FIN 101

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Assignment Questions

Q1: Carrefour is expecting its new center to generate the following cash flows:

Years	0	1	2	3	4	5
Initial Investment	($35,000,000)
Net operating cash-flow		$6,000,000	$8,000,000	$16,000,000	$20,000,000	$30,000,000

a. Determine the payback for this new center. (1 mark)

b. Determine the net present value using a cost of capital of 15 percent. Should the project be accepted? (1 mark)

Answer:

Q2. What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%. (1 mark)

Answer:

Q3. A company pays annual dividends of $10.40 with no possibility of it changing in the next several years. If the firm’s stock is currently selling at $80, what is the required rate of return? (1 mark)

Answer:

Q4. Stag corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm's tax rate is 40%. (1 mark)

1. Calculate the WACC of the firm.
2. The firm is considering a project that is equally as risky as the firm's current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project ?

Answer 1

1.a Payback Period is the time within which the cost is recovered by the company.

Year	Amount Recd that year	Total Sales
1	6000000	6000000
2	8000000	14000000
3	16000000	30000000
4	20000000	50000000

As we can see that the cost recovered is somewhere between Year 3 and Year 4 because the total sales exceed total costs in Year 4.

Payback Period(in years) = Base Year + Amount left to recover/Total Amount Recovered in that Year = 3 + (35000000-30000000)/20000000 = 3 +.25 years = 3.25 years

b. Net Present Value is the present value of all cash flows depends on the intervals of time between now and cash flow. It is the Present Value of Cash Inflows minus Present Value of Cash Outflows.

NPV = Cash Inflows - Cash Outflows = 6000000/1.15+ 8000000/1.15^2 + 16000000/1.15^3 + 20000000/1.15^4 + 30000000/1.15^5-35,000,000

=5217391 + 6049149 + 10520260 +11435065 +14915302 - 35000000

= $48137167-$35000000

= $13137167