Reference no: EM133072752
NO explanation is needed.
1. You own an asset that had a total return last year of 13.2%. If the inflation rate last year was 5%, what was your real return? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).
2. We are evaluating a project that costs $839,850, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 60,408 units per year. Price per unit is $38, variable cost per unit is $19, and fixed costs are $421,811 per year. The tax rate is 35%, and we require a return of 19% on this project.
Calculate the Accounting Break-Even Point. (Round answer to 0 decimal places. Do not round intermediate calculations)
3. We are evaluating a project that costs $837,514, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 57,526 units per year. Price per unit is $37, variable cost per unit is $17, and fixed costs are $422,425 per year. The tax rate is 35%, and we require a return of 22% on this project.
In dollar terms, what is the sensitivity of NPV to changes in the units sold projection? (Round answer to 2 decimal places. Do not round intermediate calculations)
4. We are evaluating a project that costs $844,869, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 61,818 units per year. Price per unit is $38, variable cost per unit is $18, and fixed costs are $415,866 per year. The tax rate is 35%, and we require a return of 18% on this project.
In percentage terms, what is the sensitivity of OCF to changes in the variable cost per unit projection? (Round answer to 2 decimal places. Do not round intermediate calculations)
5. We are evaluating a project that costs $678,200, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 44,374 units per year. Price per unit is $49, variable cost per unit is $21, and fixed costs are $520,433 per year. The tax rate is 30%, and we require a return of 20% on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.
What is the Best Case NPV? (Round answer to 2 decimal places. Do not round intermediate calculations)
6. Garnet, Inc., has a target debt-equity ratio of 0.53. Its WACC is 12.5 %, and the tax rate is 37 %
If you know that the after-tax cost of debt is 6%, what is the cost of equity? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).
7. Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $330,260 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 13%.
What is the NPV if the company purchases the machine today? (Round answer to 2 decimal places. Do not round intermediate calculations)
8. Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $325,592 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 16%.
What is the NPV if the company decides to wait 2 years to purchases the machine? (Round answer to 2 decimal places. Do not round intermediate calculations)
9. Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $30 million. If the HD DVD fails, the present value of the payoff is $9.6 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.46 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%.
What is the NPV of going directly to market? (Round answer to 2 decimal places. Do not round intermediate calculations)
10. Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $27.4 million. If the HD DVD fails, the present value of the payoff is $9.4 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.17 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%.
What is the NPV of test-marketing before going to market? (Round answer to 2 decimal places. Do not round intermediate calculations)
11. Tarrasa Mining Corporation has 8.5 million shares of common stock outstanding and 200,000 7.5% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.20. The bonds have 15 years to maturity and sell for 93% of par. The market risk premium is 7%, T-bills are yielding 5%, and Tarrasa Mining's tax rate is 35%.
(Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)
a. What is the firm's market value weight of equity?
b. What is the firm's market value weight of debt?
c. What is the firm's cost of equity?
d. What is the firm's cost of debt?
e. If Tarrasa Mining 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?