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Flemish Corp. is looking to invest in a new project that requires an initial investment of $100,000 in equipment. This equipment falls in the 3-year MACRS class for depreciation purposes. In addition to the initial investment, Flemish expects an initial increase in its net working capital of $5,000 and annually recurring net working capital need of $900, which will all be recovered at the end of the project. The project is expected to generate incremental net revenues of $150,000 per year, but it will also impose a cannibalization cost on expertise used in another project to the tune of $15,000. These revenues are net of all costs except depreciation, interest, and taxes. The firm expects to sell the project at the end of two years at a salvage value of $25,000. The cost of capital for the project is 12%, and the tax rate for the firm is 40%. Should Flemish invest in the project?
An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 5.5%, Asset U with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard deviation o..
Explain why limited leverage is good for business. Show the profitability of the project so that Stephanie can convince her father to purchase the truck by borrowing money.
Explain with examples how the cost of capital is determined. Calculate the differences in cost and risk. Explain why the costs and risks of external financing are important for the organization to understand.
Great Lakes Clinic reported net income for 2014 of $3.6 million on total revenues of $55 million. Depreciation expenses totaled $3 million. What were the total expenses? What were the total cash expenses? What was the clinic's cash flow?
Payback comparisons: Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. Determine the payback period for each machine. Comment on the accep..
Y3K, Inc., has sales of $6,279, total assets of $2,895, and a debt–equity ratio of 1.90. If its return on equity is 13 percent, what is its net income?
A 8.7 percent coupon bond with 19 years left to maturity is priced to offer a 6.85 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.5 percent. What would be the total return of the bond in dollars? What would b..
What is the "Cash is King" principle? What does it mean and why do entrepreneurs believe in this mantra? A Portfolio has a required return 12%, the risk-free rate is 5%, and the market required rate of return is 14%. what is the portfolio's beta? Ann..
Explain the meaning of the debt capacity calculation at row 62 and explain how the EBIT Chart works (inputs determining the outputs-the two lines on the chart and the indifference point.
Use risk-neutral valuation to calculate the price of the security at time t in terms of the stock price, S, at time t.- Confirm that your price satisfies the differential equation.
Johnson Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1.1%. Suppose a bank charges .7% to ar..
What does Lowenstein mean by "individual responsibility"? Connect the idea of individual responsibility to the concept of moral hazard.
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