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Consider a project to supply 113 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $2,030,000 five years ago; if the land were sold today, it would net you $2,230,000 aftertax. The land can be sold for $2,430,000 after taxes in five years. You will need to install $5.53 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $630,000 at the end of the project. You will also need $730,000 in initial net working capital for the project, and an additional investment of $63,000 in every year thereafter. Your production costs are .63 cents per stamp, and you have fixed costs of $1,550,000 per year. If your tax rate is 35 percent and your required return on this project is 11 percent, what bid price should you submit on the contract?
An accident victim has received a structured settlement. According to the terms of the agreement, the victim will receive $10,000 per year at the end of each year for the next 15 years. Additionally, the victim will receive $20,000 in 10 years. What ..
Risk return theory states that the higher the risk, the higher the required return. The present value of $50,000 to be received 10 years from now at 8% interest is about $23,160. The current share price is $25, most recent dividend is $1.25, so divid..
Williamson, Inc., has a debt–equity ratio of 2.45. The company's weighted average cost of capital is 10 percent, and its pretax cost of debt is 6 percent. The corporate tax rate is 35 percent. What is the company's cost of equity capital? What is the..
How would you use Capital Asset Pricing Model to identify undervalued and overvalued shares? Wealth Bank stock β is 0.80 and market return is 10%. If the government bond rate is 4% what is the expected return from an investment in Wealth Bank?
You purchase 100 shares of stock for $50 a share. The stock pays a $4 per share dividend at year-end. What is the rate of return on your investment if the end-of-year stock price is (i) $46; (ii) $50; (iii) $55? What is your real (inflation-adjusted)..
Goodwin Technologies, a relatively new company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. Goodwin's required rate of return is 11.60%. Find Go..
The cost of the truck is $18,000 and he is approved for an 8% loan but can choose to finance the loan for either 48 or 60 months. What will be the additional cost if he chooses the 60 month term instead of 48 months? You can assume that he can afford..
You have been asked to consider a project with the following characteristics: Internal rate of return: 11.63% Profitability ratio: 1.04 Net present value: $987 Payback period: 2.98 years Which of the following statements is correct given this informa..
Storico Co. just paid a dividend of $1.45 per share. The company will increase its dividend by 24 percent next year and will then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent divid..
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18.5 years old, and you have just made a payment. If the..
The common stock of Jensen Shipping has an expected return of 9.96 percent. The return on the market is 8 percent and the risk-free rate of return is 4.5. What is the beta of this stock?
Alpha partnership has 8 partners who have entered into a binding buy/sell agreement that requires any surviving partners to purchase the partnership interest of any partner to die. The partnership uses an entity approach to fund this arrangement. How..
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