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The Queensland Land and Cattle Company (QL&CC) is one of the largest cattle-buyers in the country. It has buyers at all the major cattle auctions throughout eastern Australia who buy on the company's behalf and then have cattle shipped to Longreach, Queensland, where they are shorted by weight and type before being shipped off to feed lots in Queensland. The company has been considering the replacement of its trucks with a newer, more fuel-efficient fleet for some time, and a local Peterbilt dealer has approached the company with a proposal. The proposal would call for the purchase of 10 new trucks at a cost of $100,000 each. Each new vehicle would be depreciated toward a salvage value of $40,000 over a period of five years. If QL&CC purchases the trucks, it will sell its existing fleet of 10 trucks to the Peterbilt dealer for their current book value of $25,000 per unit. The existing fleet will be fully depreciated in one more year but is expected to be serviceable for five more years, at which time the vehicles would be worth only $5,000 per unit as scrap. The new fleet is much more fuel-efficient and will require only $200,000 in fuel costs compared to $300,000 for the existing fleet. In addition, the new fleet will require minimal maintenance over the next five years, equal to an estimated $150,000 compared to the almost $400,000 that is currently being spent to keep the older fleet running. a. What are the differential operating cash flow savings per year during years 1 to 5 for the new fleet? The firm pays tax at a 30% marginal tax rate. b. What is the initial cash outlay required to replace the existing fleet with new trucks? c. Draw a timeline for the replacement project cash flows for years 0 to 5. d. If QL&CC requires a 15% discount rate for new investments, should the fleet be replaced?
The Graber Corporation’s common stock has a beta of 1.2. If the risk-free rate is 4.3 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital?
What features of interest rate swaps make them more or less attractive than financial futures as a risk management tool?
Assume tax rates are the same for dividends and capital gains, and that stockholders have exactly the same information as the managers who make the financial decisions of the firm. If the managers always make rational investment decisions—that is, th..
What effect did the increased Federal fund rate have on the Adjustable Rate Mortgage interest rates? Do mortgage home rates track more closely with LIBOR? How does each affect mortgage rates?
Assume that you are setting up your retirement plan by considering two investment plans together. (Your retirement in 30 years). You want to earn a total of $1,000,000 after 30 years from the following two investment plans together. You currently hav..
Charleston Industrial revised its dividend policy and decided that it wants to maintain a retained earnings account of $1 million. The company's retained earnings account at the end of 2011 was $750,000, and it had earnings Available to common stockh..
Valuation with price/earnings multiples For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/ earnings (P/E) multiples.
One-year Treasury bills currently earn 3.25 percent. You expected that one year from now, one-year Treasury bill rates will increase to 3.45 percent and that two years from now, one-year Treasury bill rates will increase to 3.95 percent. The liquidit..
What factors affect a firm's degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that would reduce transaction exposure.
Osbourne Corporation has bonds on the market with 16.5 years to maturity, a YTM of 10.6 percent, and a current price of $942. The bonds make semi-annual payments. What must the coupon rate be on the bonds?
Suppose you bought a bond with a coupon rate of 7.6 percent one year ago for $899. The bond sells for $930 today. Required: (a) Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? what was your total..
You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $23,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.03 annually. If you use ..
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