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Better Mousetraps has developed a new trap. The company has already conducted a feasibility study at a cost of $100,000 to ensure that the new trap would work, and it has indicated no problem. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 5 years to a book value of zero. The firm estimates variable costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. The fixed costs are $300,000 per year. Financing costs for the project are $250,000 per year. Sales are expected to be 1 million traps per year. The project will come to an end in 5 years, when the equipment is expected to have a market value of $1 million. The project requires an immediate increase in inventory of $500,000, an increase in accounts receivable of $300,000, and an increase in accounts payable of $600,000. This investment in net working capital will be recovered at the end of the five years. The firm's tax bracket is 35%, and the cost of capital on the project is 12%. Please calculate the project's NPV and IRR. Conduct the scenario analysis of NPV to variable costs and unit sales, letting variable cost vary from $1.2 to $1.9 per trap in increments of $0.1 per trap and letting unit sales vary from 800,000 to 1,200,000 per year in increments of 100,000 units at the same time. At least how many traps need to be sold if the project breaks even on the NPV basis? In other words, at least how many traps need to be sold that makes the NPV of the project turns positive?
Harley Motors has $25 million in assets, which were financed with $10 million of debt and $15 million of equity. Harley's tax rate is 40%. If Harley's unlevered beta is 0.8, what is Harley's current (levered) beta? Show your work.
in a three- to five-page paper not including title and reference pages select a service organization to use as an
Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%. In light of the apparent inferiority of gold with respect to both mean return and volatility, wo..
You have observed the following returns over time: Year Stock X Stock Y Market 2009 12% 11% 10% 2010 19 5 9 2011 -15 -8 -12 2012 5 1 1 2013 20 13 13. What is the beta of Stock Y? What is the required rate of return on Stock Y? What is the required ra..
You own a stock portfolio invested 30 percent in Stock Q, 25 percent in Stock R, 10 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are 1.47, 0.85, 0.63, and 1.14, respectively. What is the portfolio beta?
The Poseidon Swim company produces swim trunks. The average selling price for one of their swim trunks is $69.14. The variable cost per unit is $25.90, Poseidon Swim has average fixed costs per year of $6,839. Assume that current level sales is 367 u..
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk p..
A couple will retire in 50 years; they plan to spend about $22,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement savings. But now assume that the inflation rate over the next 50 year..
Now assume that Wendt does not receive the interest income but does receive an Additional $1 million as dividends on some stock it owns. What is the tax on this dividend income?
The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2014. The yield to maturity is 10 percent, so the bonds now sell below par. What is the current market value of the firm's debt?
You take out a 3-year, $6,000 loan at 7% interest with monthly payments. The lender charges you a $100 fee that can be paid off, interest free, in equal monthly installments over the life of the loan. Thinking of the fee as additional interest, what ..
Which of the following statements regarding arbitrage and security prices is incorrect?
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