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A bicycle manufacturer currently produces 351,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.40 per chain. The necessary machinery would cost $268,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $24,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $20,100. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? -Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is $_____ (Round to the nearest dollar. Enter a free cash outflow as a negative number.) -Compute the NPV of buying the chains from the FCF. The NPV of buying the chains from the FCF is $ _____(Round to the nearest dollar. Enter a negative NPV as a negative number.) -Compute the initial FCF of producing the chains. The initial FCF of producing the chains is $_____. (Round to the nearest dollar. Enter a free cash outflow as a negative number.) -Compute the FCF in years 1 through 9 of producing the chains. The FCF in years 1 through 9 of producing the chains is $_____(Round to the nearest dollar. Enter a free cash outflow as a negative number.) -Compute the FCF in year 10 of producing the chains. The FCF in year 10 of producing the chains is $____(Round to the nearest dollar. Enter a free cash outflow as a negative number.) -Compute the NPV of producing the chains from the FCF. The NPV of producing the chains from the FCF is $_____(Round to the nearest dollar. Enter a negative NPV as a negative number.) -Compute the difference between the net present values found above. The net present value of producing the chains in house instead of purchasing them from the supplier is $_____. (Round to the nearest dollar.)
Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 25 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The f..
What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The required rate of return is 12.5 percent.
You are setting up your IRA. You have decided that you can afford to put $640 per month (end of each month) for 22 years into the account that is paying 9.4% compounded monthly. How many years into retirement before the retirement savings would run o..
An employee contributes 9 percent of his salary to his 401(k) plan and the employer matches with 40 percent of the first 6 percent of the employee's salary. The employee earns $90,000 and is in a 28 percent tax bracket. If the employee earns 10 perce..
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Erie Health Care common stock offers an expected total return. What is the dividend yield?
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How much common stock will the firm have to issue?
Assume that security returns are normally distributed. - Compare portfolios A and B, using both first- and second-order stochastic dominance:
Suppose that you purchased Vista, Inc. stock for $75. You paid a $5 commission. Also, you received a dividend of $2.75. The stock has increased to $82. What is your rate of return? (Enter your answer in percentage form and round off to two decimal pl..
Tall Trees, Inc. is using the modified internal rate of return (MIRR) when evaluating projects.
What is the future value in the account after seven? years?
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