Business Finance Week 4 Assignment

Submit one Excel spreadsheet per week, on one tab (no multiple tabs). Number each problem and leave a color highlighted space in between each problem.

--------------------------------------------------------------------------------

Chapter 10 Problems: 
•EP 10-2 (p. 328)
• IP 10-9 (p. 329)
• CP 10-12 (p. 330)

Chapter 11 Problems: 
•EP 11-1 (p. 359)
• EP 11-2 (p. 359)
• IP 11-7 (p. 359)

Chapter 12 Problems: 
•EP 12-1 (p. 389)
• EP 12-2 (p. 389)
• IP 12-7 (p. 390)

Submit one Excel spreadsheet per week, on one tab (no multiple tabs). Number each problem and leave a color highlighted space in between each problem.

--------------------------------------------------------------------------------

Chapter 10 Problems: 
•EP 10-2 (p. 328)

10-2 COST OF PREFERRED STOCK Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. What is the company's cost of preferred stock, rp?


• IP 10-9 (p. 329)

10-9 WACC The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Patrick's WACC using market value weights.

Assets

Liabilities and Equity

Cash

$ 120

 

 

Accounts receivable

240

 

 

Inventories

360

Long-term debt

$1,152

Plant and equipment, net

2,160

Common equity

1,728

Total assets

$2,880

Total liabilities and equity

$2,880



• CP 10-12 (p. 330)

Chapter 11 Problems: 
•EP 11-1 (p. 359)

11-1 NPV Project K costs $52,125, its expected cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project's NPV?

• EP 11-2 (p. 359)


11-2 IRR Refer to Problem 11-1. What is the project's IRR?


• IP 11-7 (p. 359)
11-7 CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

 a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.

b. Assuming the projects are independent, which one(s) would you recommend?

c. If the projects are mutually exclusive, which would you recommend?

d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?



Chapter 12 Problems: 
•EP 12-1 (p. 389)

12-1 REQUIRED INVESTMENT Truman Industries is considering an expansion. The necessary equipment would be purchased for $9 million, and the expansion would require an additional $3 million investment in net operating working capital. The tax rate is 40%.

a. What is the initial investment outlay?

b. The company spent and expensed $50,000 on research related to the project last year. Would this change your answer? Explain.

c. The company plans to use a building that it owns to house the project. The building could be sold for $1 million after taxes and real estate commissions. How would that fact affect your answer?

• EP 12-2 (p. 389)


12-2 PROJECT CASH FLOW Eisenhower Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

Sales revenues

$10 million

Operating costs (excluding depreciation)

7 million

Depreciation

2 million

Interest expense

2 million

The company has a 40% tax rate, and its WACC is 10%.

a. What is the project's cash flow for the first year (t = 1)?

b. If this project would cannibalize other projects by $1 million of cash flow before taxes per year, how would this change your answer to Part a?

c. Ignore Part b. If the tax rate dropped to 30%, how would that change your answer to Part a?


• IP 12-7 (p. 390)

12-7 NEW PROJECT ANALYSIS You must evaluate a proposed spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $50,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%.

a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?

b. What are the project's annual cash flows in Years 1, 2, and 3?

c. If the WACC is 12%, should the spectrometer be purchased? Explain.