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The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also, assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34% marginal tax rate, and a required rate of return of 15%. a. What is the initial outlay associated with this project? b. What are the annual after-tax cash flows associated with this project for years 1 through 9? c. What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project)? d. Should this machine be purchased?
Under the concept of an efficient market, a random walk in stock prices means that:
How can you explain the concept of cost of capital? Do you believe that a firm should use the same cost of capital for all of its projects? Why or why not? What is the impact of financial leverage on wealth creation? What is the relationship between ..
Barns Brother's capital structure is 100% equity and 0% debt. Currently there are 100,000 shares of common stock outstanding. Barns has decided to change its capital structure by buying back shares of common stock in a recapitalization effort. How mu..
The Smith family was traveling on their summer vacation from Massachusetts to Wyoming. Along the way, the family was involved in an accident when they proceeded to drive through an intersection; Is Mr. Smith correct? Where could he sue Mr. Jones? Ex..
You are the assistant to the CEO of a major company. Your CEO keeps an eye on the competition, and asks you to do the following. Using ratio analysis, compare two major competitors in the same industry. What can you tell from your analysis? What are ..
A company's 8% coupon rate, semi-annual payment, $1,000 par value bond that matures in 25 years sells at a price of $558.92. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calcula..
Rip Van Winkle made a $1,000 deposit in a bank that offered to pay 9% interest compounded annually as long as he left it there. He then went into a deep sleep. When he woke up, his balance was $1,411.58. How many years did he sleep?
In its most recent financial statements, Newhouse Inc. reported $25 million of net income and $300 million of retained earnings. The previous retained earnings were $285 million. How much in dividends were paid to shareholders during the year? Assume..
Consider the following spot interest rates for maturities of one, two, three, and four years. r1 = 6.5% r2 = 7.0% r3 = 7.7% r4 = 8.5% What are the following forward rates, where f1, k refers to a forward rate for the period beginning in one year and ..
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.87 percent per quarter on any funds actually borrowed. Maintain a 1 percent compensating balance on any funds actually borrowed. what is t..
Ratios that focus on the proportion of total assets financed by a firm’s creditors is referred to as: The U.S. tax structure influences a firm’s willingness to finance with debt. The tax structure____________ more debt
Explain why there are so many different regulatory agencies. Devise a regulatory structure that would improve the existing system.
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