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You are considering the purchase of a new zippy fabricating machine for your firm, Cherry Enterprises, Inc. CEI makes novelty items for wholesale to retail outlets located in tourist traps. The purchase of the zippy will allow CEI to market a new product, a walking stick with built-in bear repellant. In order to analyze the decisions to manufacture and sell the walking sticks and to lease the zippy, you have collected the following data, some of which may be relevant (all dollars in 2017 prices): Cost of zippy = $5,000,000 Useful (and depreciable) life of zippy = 10 years Salvage value (market and depreciation) of zippy = $0 Expected walking stick sales volume (in lots of 1000) = 2000/year Wholesale price per 1000 lot of walking sticks = $899 Annual zippy maintenance contract costs = $110,000 (the only fixed cash cost) Average variable cost per lot of walking sticks = $500 Additional working capital (supplies) required at beginning of year 1 only = $300,000 Current equity = $60,000,000 Current debt = $40,000,000 Marginal tax rate for CEI = 30% Inflation rate = .03 Zippy can be financed in several ways. The following data pertain to financing options: Required return on equity (real) = .05 Bank loan interest rate available, given current capital structure = .055 Lease contract with payments made in 10 equal annual installments, beginning at start of lease period. Lease contract includes maintenance costs. Payment = $700,000 Evaluate the zippy as a business opportunity for CEI. Evaluate the lease financing option for the zippy as well. Although CEI is a tax-paying entity and could benefit from the use of MACRS depreciation, please use straight-line depreciation expense recognition.
You own some shares of Microsoft worth $1,000. Beta of Microsoft is 2. Microsoft currently has no debt. Microsoft decides to issue debt and buy back some of its stock in open market. Specifically, Microsoft decides to buy back 20% of its stock using ..
Your task involves an analysis of general economic conditions or systematic risk, i.e., the risk that affects all industries and companies, in the U.S. macroeco
The right to abandon is a valuable option used to manage risk. Where in business do you see the right to abandon? Decision trees force managers to conduct contingency planning, why is this important in measuring and managing risk?
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..
Larvey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What..
Tom purchased 100 shares of Dalia Co. stock at a price of $127.37 four months ago. He sold all stocks today for $123.29. During the year the stock paid dividends of $7.26 per share. What is Tom’s effective annual rate?
Using a PW approach determine the maximum amount Fabco should be willing to pay for the valves and how many days/year must the truck's services be needed such that the two alternatives are equally costly?
How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay?
During the year, he received dividend checks amounting to $150. Joel recently sold the stock for $32 per share. What was Joel's return on the stock?
Draiman, Inc., has sales of $590,000, costs of $268,000, depreciation expense of $68,500, interest expense of $35,500, and a tax rate of 40 percent. The firm paid out $38,500 in cash dividends and has 45,000 shares of common stock outstanding. find e..
What is the underlying conflict of interest between holders of bonds and stocks in a firm?
A firm borrows $30,000 at 0.925% monthly interest rate in June. In which section of the cash budget should the interest payment be listed? Forty percent of a firm's sales are collected during the first month after the sale; 35% are collected during ..
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