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Danny zuko is thinking of opening a garage shop. The initial cost of the garage is $75K. If the garage is successful, it will generate annual free cash flows of $30K into perpetuity. If not, Danny will only be able to generate $5K of annual free cash flows.
1. If the probability of success is 40% and the required rate of return is 20%, should Danny invest in the car garage?
2. In researching it further, Danny finds that if the garage doesn't succeed he can sell the equipment in a secondary market. He figures he can sell the assets for $40K after taxes on the first year. Should Danny invest in the garage project? Why? Assume he doesn't get that $5K in the first year.
The market value of the equity of Thompson, Inc., is $599,000. The balance sheet shows $38,000 in cash and $209,000 in debt, while the income statement has EBIT of $110,000 and a total of $154,000 in depreciation and amortization. What is the enterpr..
Martin Becker, age 64, owns and manages a commercial print shop in Maine. Martin plans to retire this year and has recently accepted an offer to sell this company for 1.8 million. Both children are married and currently employed. Dave has one son age..
Consider an American put option on a stock. The stock price is $5, the strike price is $10, the risk-free rate is 4% per annum, u = 1.05, d = 0.9524, p = 0.5912, and the time to maturity is three months. What are stock prices and the option prices on..
Michaely Inc. is an all-equity firm with 100,000 shares outstanding. It has $500,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS).
In what ways is corporate governance more difficult for US multinational companies than for US domestic corporations? Define corporate governance.
Pembroke Co. wants to issue new 17-year bonds for some much-needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,050, make semiannual payments, and mature in 17 years. What coupon rate should the..
Machine A costs $17000 and has annual operating costs of $4500. Machine B costs $14000 and has an annual operating cost of $4800. Each machine has an economic life of 10 years. If the minimum required rate of return is 10 percent, compare the advanta..
With your understanding of the commercial lending processes, discuss your comfort level in participating in the financing efforts of a new business. Explain the lending processes in order from most comfortable to least. As an entrepreneur would you f..
Crazee Enterprises Corporation just paid a dividend and it expects that dividend to grow by 10 percent for the next three years. After that, the dividend is expected to grow at a constant rate of 5 percent in perpetuity. If the company's stock is cur..
If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest paid over the life of the loan?
How much would you have to invest today to receive?
Louise Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. The relevant carrying cost per switch assembly is $6.00, and the fixed order cost is $850. What are the current carrying costs? (Do not round intermediate cal..
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