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The irrigation system that a farmer uses cost $10,000 eight years ago. It will last another 25 years without additional investment. With that system, the farmer produces crops valued at $3,000 per year at a cost of $1,000 per year. A new system could be installed at an immediate cost of $15,000 and it would increase production to $7,000 per year. Operating cost would be $4,500 per year. The revenue and operating cost of both systems do not change over the 25-year investment horizon. The farmer would have to refurbish the new system 12 years after installation at a cost of $5,000. Assume a 6-percent discount rate. The farmer can sell the old system at today's value of the system's original price. However, the price of the system has increased at the same 6-percent rate but the total depreciation is 40 percent off the final price. Furthermore, the salvage value of the new system will be $2,500 and the salvage price of the old system will be $1,500 at the end of 25 years. Should the farmer replace his existing system?
The expected EBIT after the new financing is $7 million, with a standard deviation of $3 million. Which method of financing will maximize its EPS? What is the probability that you have made the right choice?
Calculating the Number of Periods
You have accumulated data on three stocks (see below). You have decided to use the information on these stocks to form an index. You want to find the average earned rate of return for 2011 on your index.
What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009 and would you base your estimate of XYZ's equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c)..
Today's closing stock price was $20. What is the floor value of this bond?
Interest cost Fixed cost financing $ Variable short-term financing $ (b) Which plan is less costly? Short-term plan Fixed cost plan.
ABC needs to increase $50 Million by issuing common stock in an IPO. ABC will use the proceeds to pay down 8 percent coupon debt. ABC right now has 20 million shares outstanding representing a book equity interest of 200 million.
Let's say a firm with a 34% marginal tax rate considers an investment that is expected to reduce the cost of labor from $10,000 to $9,000 in Year One. What is the firm's Yr 1 incremental after-tax cash flow from this reduction in labor costs?
analyze the various ways to determine the cost of capital and determine which is the most difficult to get right.
Verify your answer using the risk-neutral approach-do not just say that you have the same answer; you will need to show the work that the two approaches give the same answer.
The before tax lease payments per year would be $90,000. The tax rate is 35%. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it? Show your work.
suppose a firm is considering two mutually exclusive projects. one has a life of 6 years and the other a life of 10
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