1) What is the yield to maturity of a bond that pays an 11% coupon rate with annual coupon payments, has a par value of $1000, matures in 9 years, and is currently selling for $897?
2) Ajax company paid a dividend today of $4 per share. The dividend is expected to grow at a constant rate of 5% per year. If Ajax company stock is selling for $56 per share, what the stockholders expected rate of return is?
3) QPT paid a $3 per share dividend yesterday. The dividend is expected to grow at 7% per year for the foreseeable future. QPT has a beta of 1.6, a standard deviation of returns of 28%, and a required return of 19%. What is the value of a share of QPT common stock?
4) Z. Corp. is considering two mutually exclusive projects, A & B. Project A costs $50,000 and is expected to generate $38,000 n year one and $30,000 in year two. Project B costs $70,000 and is expected to generate $24,000 in year one, $32,000 in year two, $23,000 in year three, and $29,000 in year four. Z. Corp.'s required rate of return for these projects is 12%. Which project would you recommend using the replacement chain method to evaluate the projects with different lives?
5) Given the following annual net cash flow, determine the internal rate of return of a project with an initial outlay of $750,000
1 - $500,000; 2 - $150,000; 3 - $250,000
6) Hitchcock industries is considering a project with the following cash flows:
Initial Outlay = $2,500,000
After-tax operating cash flows for years 1-4 = $650,000 per year
Additional after-tax terminal cash flow at end of year 4 = $200,000
Compute the net present value of this project if the company’s discount rate is 12%.
7) Consider a project with the following cash flows:
1 $799 $750
2 150 1,000
3 200 1,200
The initial outlay of the project is $1,500.
Compute the profitability index if the company's discount rate is 10%.
8) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. Since you are not an expert on industrial vehicles, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of a model CP8 truck. The truck's basic price is $40,000, and it will cost another $10,000 to modify it for special use by your firm. The truck will be depreciated using IRS guidelines that require depreciation expense equal to 33% of the initial depreciable value in year one, 45% of the initial depreciable value in year two, and 15% of the initial depreciable value in year three. The company expects to sell the new truck after three years for $20,000. Use of the truck will require an increase in the company's net working capital of $2,000, but this $2,000 may be recovered at the end of year three. The truck will have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40%. What is the initial outlay required to fund this project?
9) Your company is considering the replacement of an old machine with a new one that is more efficient. The old machine cost $50,000 when it was purchased 9 years ago. The old machine is being depreciated using a simplified straight-line method over a useful life of 10 years. The old machine could be sold today for $4,000. The new machine has an invoice price of $75,000, and it will cost $5,000 for shipping and $20,000 to modify and install machine. Cost savings from use of new machine are expected to be $25,000 per year for 5 years, at which time the machine will be worn out and sold for its estimated scrap value of $5,000. The new machine will be depreciated using the simplified straight-line method over its 5 years useful life, resulting in depreciation expense of $20,000 per year. The company's tax rate is 35%. Working capital is expected to increase be $10,000 at the inception of the project, but this amount will be recaptured at the end of year 5. What is the incremental free cash flow for year 1?
10) Corp. is investing in a major capital budgeting project that will require the expenditure of $10 million. The money will be raised by issuing $3 million of bonds, $1 million of preferred stock, and $6 million of new common stock. The company estimates is after-tax cost of debt to be 6%, its cost of preferred stock to be 8%, the cost of retained earnings to be 12%, and the cost of new common stock to be 15%. What is the weighted average cost of capital for this project?
11) A financial analist expects L. Corp. to pay a dividend of $2 per share in year one, a dividend of $2.50 per share in year two, and estimates the value of the stock at the end of year two to be $30. If your required return on L. stock is 10%, what is the most you would be willing to pay for the stock today?
12) Consider the following projects, A, B, and C:
Year Project A Project B Project C
0 -$3,600 -$6,000 -$3,500
1 0 $4,000 $2,000
2 0 3,000 0
3 0 2,000 2,000
4 0 0 2,000
5 $7,000 0 2,000
If cost of capital is 12%, what decision should be made regarding the projects above?
13) The K. Corp. projects that next year its fixed costs will total $240,000. Its only product sells for $34 per unit, of which $18 is a variable cost. The management of K. is considering the purchase of a new machine that will lower the variable cost per unit to $14. The new machine will add to a fixed costs through an increase in depreciation expense. How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?
14) Assume that W. has an issue of 15-year $1000 par value bonds that pay 6% interest, semi-annually. Further assume that today’s required rate of return on these bonds is 9%. How much would these bonds sell for today?
15) You are considering the purchase of Z. Company stock. You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year. You believe that you can sell the stock for $20.00 per share two years from now. If your required rate of return is 10%, what is the maximum price that you would pay for a share of Z. Company stock?
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