Chapter 9&10

1. Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project

a. 43,480

b. 46,480

2. Consider assets that costs $176,000 and is depreciated straight-line to zero over its 11-year tax life. The assets are to be used in a 7-year project; at the end of the project, the assets can be sold for $22,000. The relevant tax rate is 30 percent. What is the after-tax cash flow from the sale of this assest?

a. $34,600

b. 33,300

3. Gateway communication is considering a project with initial fixed assets of 2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require inventor which will be recouped when the project ends. Should this project be implemented if the firm requires project be implemented if the firm requires a 14% rate of return? Why or why not?

a. Yes, the NPV is $466, 940.57

b. No, the NPV is $87,820. 48

4. Kelly’s corner Bakery purchased a lot of Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on the site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for the project

a. 1,850,000

b. $1,875,000

5. A project that provides annual cash flows of $12,600 for 12 years costs $65,000 today. At what rate would you be indifferent between accepting the project and rejecting it?

a. 16.72

b. 15.28

Chapter 7&8

1. Assume Tyler Co. has just paid a dividend of $3.00. You expect Tyler Co.’s growth rate to be 9% over the next 2 years before returning to its long-term growth of 3% forever thereafter. If you receive 9% return from Tyler Co., what is the stock worth today?

a. $57.48

2. Seller Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after will decrease by 1.5% annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14% rate of return?

a. $11.29

3. How Canning Products common stock sells for $41.00 a share and has a market rate of return of 12.8%. The company just paid an annual dividend of $1.15 per share. What is the dividend growth rate?

a. 9.72

4. Roy’s Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases 3% annually. The market rate of return on this stock is 8.20%. What is the amount of the last dividend paid?

a. $1.92

5. Kaiser Industries has bonds on the market making annual payments, wit 14 years to maturity, and selling for $1,382.01. At this price, the bond yield 7.5%. What is the coupon rate?

a. 12%

6. Upper Crust Bakers just paid an annual dividend of $3.10 a share and is expect to increase the amount by 4% per year. If you are planning to buy 1,000 shares of the stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 12% at the time you purchase?

a. $41.91

7. Tangle enterprises pay a constant dividend of $0.85 a share. The company announced today that it will continue to pay the dividend for another 2 years after which time all dividends will cease. What is on share of this stock worth today if the required rate of return in 16.5%?

a. $1.36

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