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Unequal Lives
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $8 million but realizes after-tax inflows of $4.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 13%.
Using the replacement chain approach to project analysis, by how much would the value of the company increase if it accepted the better machine? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
A firm has Net Income of $600,000, capital expenditures of $500,000, and a target debt ratio of 60%. If the firm follows a residual dividend policy, then what is their payout ratio? when the firm buys back a set number of shares on a set date for a s..
Sarfraz Inc. currently has a stock price of $20 a share. The stock’s year-end dividend is expected to be $2 a share (i.e., D1 = $2.00). The stock’s required rate of return is 15% and the stock’s dividend is expected to grow at the same constant rate ..
Your firm needs a machine which costs $250,000, and requires $40,000 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35% ..
What is the yield to maturity on a Treasury STRIPS with 11 years to maturity and a quoted price of 63.695?
Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend, of $3.75, will be paid in year 3. If the required..
Discuss the role currently filled by these institutions or financial vehicles and what do you think of their long-term viability?
BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? Knight, Inc. has ..
Isaac Díez Peris lives in Rio de Janeiro. While attending school in Spain he meets Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to visit Juan Carlos in Guatemala City for a couple of weeks. What is the Brazilian real/Guat..
You are considering an annuity which costs $72,600 today. The annuity pays $5,100 a year. The rate of return is 4 percent. What is the length of the annuity time period?
You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 3% and a risky portfolio, P, constructed with two risky securities, X and Y.
The income each firm has available to pay its debt holders and stock holders (the firms asset funders)
The Diversified Growth Co. has three different divisions. Its low-risk division accounts for $5 million of its assets and has a beta of 0.8. Its middle-risk division accounts for $10 million of its assets and has a beta of 1.1, while its high-risk di..
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