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Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW’s main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 15% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 12%.
1. What are the IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest the project should be undertaken? Explain.
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $3 million and net plant and equipment equals $2.7 million. It has notes payable of $150,000, long-term debt of $750,000, a..
Suppose you know that a company’s stock currently sells for $65 per share and the required return on the stock is 15 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it..
Calculate the SMM and prepayment for month 20 for a 30-year loan if the prepayment rate is 100 PSA, the beginning mortgage balance for the month is $87,000 and the scheduled principal payment is $900.
Lo Corp. is comparing two different capital structures. Plan I would result in 8,000 shares of stock and $80,000 in debt. Plan II would result in 6,000 shares of stock and $120,000 in debt. What is the price per share of equity under Plan I?
An election is being held to fill four seats on the board of directors of a firm in which you hold stock. The company has 8,700 shares outstanding. If the election is conducted under cumulative voting and you own 480 shares, how many more shares must..
Discuss three main organizational forms used in forming a business. Explain what a firm's goal is from both a shareholder and stakeholder approach. Discuss why cash flows are important in finance.
Ward Corp. is expected to have an EBIT of $1,950,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $166,000, $87,000, and $116,000, respectively. All are expected to grow at 15 percent per year ..
We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −.3. If the interest rate on Treasury bills is 7% and..
TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1,500,000 and there are 135,000 shares outstanding. If the benchmark price-sales ratio for the company is 5.5. What is the current stock price? If the ben..
Why can some taxes that appear to be regressive in terms of current income be thought of as progressive from a lifetime tax incidence perspective?
KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $100,000 on a machine to produce the new game. The firm has a tax rate of 39 percent, an opportunity cost of capital of 13 percent, and it expect..
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