Question

PLEASE SHOW WORK FOR ALL, IF YOU'RE ONLY GOING TO DO ONE OF THESE AND NOT ALL, DONT ANSWER

12. P. Rose, Inc. is considering a new four-year expansion project that requires an initial fixed asset investment of $1,950,000. The asset will be depreciated straight-line to zero over its six-year tax life, after which time it will be worthless. The project is estimated to generate $2,145,000 in annual sales, with costs of $1,205,000. The fixed asset will have a market value of $250,000 at the end of the project. Assuming a 34% tax rate, what is the IRR for this project? If the required rate of return is 14%, should they accept this project?

13. A stock had the following year-end prices and dividends:

Year	Price	Dividend
1	$58.27	-
2	$58.78	$1.10
3	$55.00	$1.05
4	$58.65	$1.45
5	$60.97	$1.60

What is the arithmetic return for the stock?

a. 4.52%

b. 3.38%

c. 3.52%

d. 7%

e. 2.9%

14. Bear Tracks, Inc. has inventory of $2,010, net fixed assets of $9,800, current liabilities of $2,640, long term debt of $4,490. If the firm has $13,000 in total assets, how much must they have in cash and stockholders’ equity?

a. Cash= $2,500; SE= $5,000

b. Cash= $1,190; SE= $5,870

c. Cash= $1,000; SE= $1,000

d. Cash= $1,145; SE= $5,800

e. Cash= $3,200; SE=$8,510

15. Suppose you buy a 7% coupon, 20-year semi-annual bond today when it’s first issued for $1,000. What can we assume about this bond?

a. The yield to maturity is 7%

b. The selling price is going to decrease by 2% next year

c. There are 40 coupon payments remaining

d. Both a and c

e. None of the above

16. Assuming the following ratios are constant, what is the sustainable growth rate?

Total asset turnover	2.8
Profit margin	5.70%
Debt-to-equity ratio	.47
Payout ratio	55%

a. 4.13%

b. 10.56%

c. 12.90%

d. Not enough information provided

e. None of the above

Answer 1

12)

CALCULATION OF INTERNAL RATE OF RETURN

a)Net investment made = 1950000-250000=1700000

b) annual depreciation rate = 1950000/6 = 325000

c) annual cash inflow

gross reciept 2145000

less:- expenses (1205000)

-------------

9,40,000

less:- depreciation (325000)

--------------

615000

less :- tax @ 34% (209100)

------------------

4,05,900

add:- depreciation 3,25,000

----------------

annual cash flow 7,30,900

--------------

d) irr calculation

annuity factor at 25% for 4 years = 2.3616

annuity factor at 26% for 4 years = 2.32018

25% + (2.3616*730900)-1700000

----------------------------------- = 25.86%

(2.3616*730900)-(2.32018*730900)   

(e) decision

since return from this project is 25.86% which is more than 14% required return project can be acceptable.

QUESTION 13

ARETHEMETIC RETURN OPTION C

ie 3.52%

QUESTION 14

OPTION B

cash 1190 and shareholder equity 5870

QUESTION 15

OPTION C there are 40 coupon payment remaining

QUESTION 16

OPTION E NON OF THE ABOVE