6. You are looking at investing in a project that will require and upfront investment value of $6 million. It is expected to reduce costs by $1,300,000 for the next 8 years and will have a salvage value of $900,000. The asset has a CCA class of 25%. The project will be financed by debt and equity. The class A shares just paid a dividend of $3.25 which is expected to grow at 2% indefinitely and are priced at $30.14. The class B shares have a covariance with the market of 0.0045 and the variance of market returns is 0.0040898 while the expected return on the market is 10.5% and the risk free rate is 3%. The debt is in the form of 15 year bonds that have an annual coupon rate of 9% and a current price of $1050. The flotation costs on class A equity are 5%, on class B equity 5.5% and on debt 3.5%. The tax rate is 35% The market value of the class A equity is $55 million and the market value of the class B shares is $45 million. The debt to equity ratio is 1.2. Should you purchase the machine?

6. You are looking at investing in a project that will require and upfront investment value of $6 million. It is expected to reduce costs by $1,300,000 for the next 8 years and will have a salvage value of $900,000. The asset has a CCA class of 25%. The project will be financed by debt and equity. The class A shares just paid a dividend of $3.25 which is expected to grow at 2% indefinitely and are priced at $30.14. The class B shares have a covariance with the market of 0.0045 and the variance of market returns is 0.0040898 while the expected return on the market is 10.5% and the risk free rate is 3%. The debt is in the form of 15 year bonds that have an annual coupon rate of 9% and a current price of $1050. The flotation costs on class A equity are 5%, on class B equity 5.5% and on debt 3.5%. The tax rate is 35% The market value of the class A equity is $55 million and the market value of the class B shares is $45 million. The debt to equity ratio is 1.2. Should you purchase the machine?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(1)Find the required rate of return on Oakfield stocks? (ii)What is the beta of the company's existing portfolio of assets? 4. Kangaroo and Kimiti Co.Ltd is attempting to evaluate the feasibility of investing tshs 95 million in a piece of equipment with a five year lifespan. The company has estimated the profits after taxes and cash inflows associated with the project as follows: Year Profit after Cash flow("000") taxes("000") 1 انه ای 2 3 4 5 5000 3000 9000 14000 19000 The company has 12% cost of capital. 6/17/2021 8:05:06 PM 20000 25000 30000 35000 40000 Page 1 of 2
1. What is the profitability index of a project that costs $90,000 and returns $30,000 annually for 8 years if the opportunity cost of capital is 9.6%? a.0.64 b.0.80 c.1.76 d.1.05 e.1.26 2. King Corporation is planning a 15-year project with an initial investment of $2,013,000. The project will have $563,000 cash inflows per year in years 1-2; $166,000 cash inflows in years 3-10, and $57,000 cash inflows in years 11-15. Determine the project's internal rate of return (IRR). Using financial calculator a.6.87% b.5.72% c.4.58% d.10.30% e.8.24%
21. You purchased a property for $4,000,000 using 50% LTV. If net cash flow is $200,000, what is the equity dividend rate? 22. You plan to purchase a property which has an expected NOI of $200,000. You plan to borrow $1,500,000 at a 5% annual rate for 30 years. What is the DCR for this investment? 23. If the property above is being purchased at an 8% cap rate, assuming the same loan information what is the LTV for this purchase?
4. A company is considering investing in a project that requires a capital investment of $40,726 and is expected to generate cash inflows of $11,072 for each year for 6 years. The company has a minimum required rate of return 8%. State the net present value of the project rounded to the nearest one dollar. If the NPV is negative, put a "-" before your number.
1) ABC Inc. is looking at investing in a 3-year project that will create cash inflows of $7,000 in the first year, $8,000 in the second year, and $9,000 in the third year. The cost of this project is $18,000, and the required return is 12%. Should the company invest in this project based on the profitability index criterion? Multiple Choice 1.14 1.45 1.38 0.94 1.06 2) ABC Inc., a wedge manufacturer, is deciding between two machines used for making wedges. Machine A will cost $70,000 and Machine B will cost $120,000. The annual before-tax operating costs for Machine A and B are $7,500 and $6,000, respectively. Machine A will last for 2 years before it has to be replaced, whereas Machine B will last for 3 years before it must be replaced. The machines are subject to CCA rate of 30%, and the company's marginal tax rate is 35%. If the required return for ABC is 16%, which machine should ABC choose? Assume that salvage is zero. Multiple Choice Choose Machine A as its EAC is…
At the present time, t = 0, your company has assets-in-place and $200m in cash. One period from now, t=1, assets-in-place will have a value of $600m, with probability 1/2, and $200m, with probability 1/2. The beta of these assets is zero. Your company also has an outstanding debt with face value $400m, due at t=1. The company has an investment project; that requires at t=0 an investment of $160m and will have a certain payoff of $200m at t=1. The risk-free rate is zero, and there are no taxes. a) Should your company take the project? b) Discuss how your answer would change if you finance this project with secured debt.
You are considering a project that will cost $50,000 to set up, and will pay out $18,000 1,2,3 and 4 years from today. The unlevered beta for this project is 1.2, the risk free rate is 6.5%, and the expected return on the S&P 500 is 15%. Corporate taxes are 25%. a. What is the unlevered cost of equity for this project? b. What is the NPV of this project if you finance with all equity? c. You are considering borrowing $30,000 to finance this project, with repayment in 4 years. You could normally borrow at 7.5%. The Nebraska state government has offered to lend you the money at 6%. What is the adjusted present value of this project if you take the subsidized loan?
igital Organics (DO) has the opportunity to invest $1.03 million now (t = 0) and expects after 2. The project will last for two years = - tax returns of $630,000 in t = 1 and $730,000 in t only. The appropriate cost of capital is 11% with all - equity financing, the borrowing rate is 7%, and DO will borrow $330,000 against the project. This debt must be repaid in two equal installments of $165,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project's APV.
9. You are considering investing in a start-up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. The IRR for this project is closest to: A) 15.60%. B) 18.95%. C) 20.00%. D) 25.85%.
6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 B$329,787 $331,197 D) $329,840 E) $290,160 7. When calculating weights for the WACC, it has become relatively common to use Net Debt. How is Net Debt calculated? A) Net Debt = Total amount of debt - Cash & Risk-Free Securities B) Net Debt = Total amount of debt + Cash & Risk-Free Securities C) Net Debt = Long-term Debt - Short-term Debt D) Net Debt Short-term Debt-Long-term Debt E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities Please use the following information to answer the next THREE questions. LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $3,400,000 if…
Consider a project with an initial investment (today, t = 0) of $225,000. This project will generate cash flows of $68,750 per year for the next 6 years. The company will pay $50,000 to another for clean-up and disposal in Year 6. What is the Profitability Index (PI) of the project if shareholders demand 8.25% return? Answer in whole numbers, rounded to three decimal places.
A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a beta of 1.4; the risk free rate is 5%, and the equity risk premium is 6.5%. The project would be 90% equity funded. This would require an investment of K700 000 at the end of year 5 and this would produce a stream of cash flows with a present value of K650 000 at the end year 5. The volatility of the cash flows is 35%.The Company considers this project to be a real option. Assume WACC is 13.25%. Find the value of this real option.

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