NCC 556 Midterm Solutions

NCC 556 Midterm Solutions - Solutions to NCO-565 Midterm...

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Unformatted text preview: Solutions to NCO-565 Midterm Examination, Fall 2006 1.. Financing the New Pick-Up Iruck (a) Monthly Payment for Option A: Borrowing/months = (20,000-5,000)/(5x12) = 250 (b) Present Cost to Purchaser = Downpayment + PV of Morrthly Payments = 5,000 + 9,845 = 14,845 where PMI = 250, N = 60, R = 1.5, FV = 0 9 PV = -9,845 is PV of monthly payments (0) Monthly Payment for Option B: PV = --18,000; R = 0 4; N = 48; FV = 0 9 PMI' = 412 .90 ((1) Present Cost to Purchaser = Downpayment + PV of'Monthly Payments = 2,000 +14,056 = 16,056 where PMI‘ : 41290, N = 48, R = 1 5, FV = 0 9 PV = -14,056 is PV of‘monthly payments. (e) Option A has lower present cost to purchaser with 1 5% monthly IVM; the PV ofthe lower first 48 monthly payment savings offsets higher down-payment and PV oflast 12 months’ payments 2. Salomon Smith Barney Offer (a) R= 5; FV = 100,000; PMI = 0; N = 20 9 PV 2 «3 7,689 (b) Total Invested -» Zero Purchase = Stock Purchase = 100,000 ~— 37,689 = 62,311 Ifcommon stocks earn 9% per year for 20 years, will accumulate to PV = -68,820, I/YR = 9, N = 20, PMY = 0 9 EV = 349,216 (0) Expected Ending Wealth = Debt Value + Stock Value = 100,000 + 349,216 = $449,216 WithPV— — -100 0,00 N= 20 and FV= 449, 216 9 IIYR— e 7 8% (d) SSB’s “risk—free’.’ is not loose investment; if stock portion earns below 5%, portfolio return is below risk—free return 3 Cleaning Up RadWaste Remove PV Cost : $1,000,000 Maintain PV Cost = 200,000 + C1/(R-g) = 200,000 + 20,000/(05- 03) = 1,000,000 Prefer Remove -~ less risky and makes land available for other use 4.. Schwan’s New Trucks Buy versus Lease Per Truck Year 0 Yearl Year'2 Year3 Year'4 Year 5 Year 6 Year ‘7 Year'8 Lease Saving 15 15 15 15 15 15 15 15 0 Depreciation 0 20 32 19.2 11.52 11 52 5.76 0 0 Taxable Inc 15 (5) (17) (4 .2) 3 .48 3 .48 9 .24 15 0 Income Tax _6 (2) (6.8) (1.68) LELEQ' 1.39; 3.696 __6, 0 Net Income 9 (3) (9 2) (2 32) 2.088 2.088 5 544 9 Add: Deprec 0 20 32.0 19.2 11.52 11.52 5 76 Investment (100) AT'CF (91) 17 21.8 16.68 13.608 13. 608 11304 90 PV @ 7% of AT CF — «9. 2345 9 lease (switching to buy has negative NPV) Shortcut Method. Tax Savings from Depreciation: 33 .26 Buy Net Cost— — 100.. 33. 26= 66, 738 PV Lease Payments after -:tax PMT = 15, 000 x (1- 04)= 9, 000, N= 8, FV= 0; R= 7%; “Begin” = 57,504 per truck Iherefore, lease rs best— has a' loWer present cost. 5. Skylight Business Iakeover (a) Value = $130,000/ .10 = $1.3 million" maximum price to take over the business (1)) Year Year 1. Year 2 Year 3 Operating Income $(3 0,000) $50,000 $200,000 IncOme Taxes (35%) (10,500) 17,500 70,000 Net Income $09,500) $32,500 $140,000 (c) Incremental after-tax cash flows associated with building business versus buying business: Year 1 Year 2 (A) Buy Business 130,000 130,000 (B) Build Business 119,500! 7 ‘ 32 500 (C) = (A) — (B) Incremental AI Savings 149,500 97,500 PV of Incremental AI Savings @ 10% a 149,500;' 1.11 + 97,-500/(11)2 = $216,487 6 mus/FALSE (a) FALSE Fewer shares outstanding results in higher price per share going forward , (b) FALSE Double shares outstanding results in halving of share price (0) TRUE Within a few dollars - (d) ??? Some people stretched the truth (e) FALSE Depreciation is not a cash flow ~ only a tax shield Statistics: Median 83 0 Mean 77 ‘5 Std Deviation 15 ‘5...
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