1. Louie the Lumberjack has taken over as manager of the NAU Bookstore. He wants to make the bookstore more profitable by investing in new projects that help to grow the store. In order to consider the projects he needs to determine NAU's cost of capital. He starts by looking at the debt of NAU. Three years ago, NAU sold a 10-year noncallable bond with a semi-annual coupon rate of 6.5% and a par value of $1,000. Today, that bond is trading at a price of 97.5. If NAU's effective tax rate is 25%, what is the cost of debt Louie should use in his WACC calcuation?
6.88%
6.92%
9.17%
9.23%
2.Louie calculated his pre-tax cost of debt to = 6.2% and his cost of equity to = 9.8%. The NAU Bookstore has 25 bonds outstanding trading at a price of 98. It also has 2,500 shares of common stock that is currently priced at $19.50. The Bookstore does not have any preferred stock. Based on this data, what is the WACC Luie should use when considering investment projects? NAU is in a 25% tax bracket.
6.87%
7.27%
8.08%
8.60%
3.Louie the Lumberjack has taken over as manager of the NAU Bookstore. He is interested in making the bookstore more efficient by integrating a new automated sales system. The system has a three year life and will cost $100,000 to purchase. Louie estimates that the machine will produce incremental free cash flows of $25,000 in the first year, $50,000 in year two and $55,000 in year three. If Louie's cost of financing is 14%, should Louie purchase the machine?
Yes
No
4.Having made dramatic improvement to the NAU Bookstore, Louie is looking to sell the Bookstore to an outside management company. In order to name a price, Louie needs to determine the value of the Bookstore with his improvements. His analysis shows that FCF will be $100,000 next year, and Louie expects that to grow at 10% for each of the following two years due to his improvements. After year three, Louie forecasts that the FCF will grow at a constant rate of 3% forever. Under Louie's management the bookstore paid off all their debt. What is the value of the Bookstore assuming the investor's cost of capital is 12%?
342,307
1,028,838
1,143,154
1,314,627
5. Having successfully sold the bookstore, Louie is now interested in other investment projects. He is considering investing in a lease on a set of timber properties where his lumberjack skills could be put to good use. The lease would require an upfront investment of $250,000 and Louie anticipates that he could then harvest enough timber to generate the following cash flows during the term of the 3-year lease: year 1 - $75,000; year 2 - $125,000; year 3 $200,000. If the appropriate discount rate is 12%, what is the modified internal rate of return (MIRR) that Louie would earn?
17.57%
20.19%
31.77%
36.53%
6.Having successfully sold the bookstore, Louie is now interested in other investment projects. He is considering investing in a lease on a set of timber properties where his lumberjack skills could be put to good use. The lease would require an upfront investment of $250,000 and Louie anticipates that he could then harvest enough timber to generate the following cash flows during the terms of the 3-year lease: year 1 - $75,000; year 2 - $125,000; year 3 $200,000. What is Louie's payback period for this investment?
1.25
1.75
2.25
2.75
7. Louie has found a compeling chainsaw company he would like to invest in. The firm paid a dividend of $2.25 last year, and Louie's research shows the start-up company should be able to grow that dividend by 10% for the next 2 years at which point it would slow to a constant rate of 3%. How much would Louie be willing to pay for the stock today if his required return is 11%?
32.89
35.14
39.49
45.30
8. Louie is considering investing in a lumber mill to process all the wood he has harvested. The mill does not pay any dividends, so Louie knows he will need to use a corporate valuation model to value the firm. Last year the firm generated free cash flows of $52,000, and based on his analysis, Louie expects those cash flows to grow by 5% next year with the infusion of Louie's lumber. After that, the firm's will grow at a constant 2% annual rate. The firm has 50 bonds outstanding that are trading at a price of 102, and 5,000 shares of preferred stock trading for $5/share. If the firm has 10,000 shares of stock outstanding, what is most Louie should pay for a share of stock if he requires an 9% return on his investment?
66.88
70.40
77.42
90.59
9. Louie is forecasting his financial statements for next year. He is finished with his income statement, but needs your help on his balance sheet. Based on the following information, how much additional financing (borrowing) or excess financing should Louie plan on for his business in 2017? Louie does not anticipate selling any stock in 2017.
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Income Statement
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Pro-Forma 2017
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Balance Sheet
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2016
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Pro-Forma 2017
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Sales
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100,000
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|
Current Assets
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5,000
|
6,000
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Less: COGS
|
80,000
|
|
Net Fixed Assets
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6,000
|
5,500
|
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Gross Profit
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20,000
|
|
Total Assets
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11,000
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11,500
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Less: Operating Expenses
|
5,000
|
|
|
|
|
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EBT
|
15,000
|
|
Current Liab
|
8,000
|
7,500
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Less: Taxes @40%
|
6,000
|
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Owner's Eq
|
3,000
|
|
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Net Profit After Tax:
|
9,000
|
|
Total Liab & Owner's Eq
|
11,000
|
|
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Dividends Paid
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6,000
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|
|
|
|
| |
2,000 Excess
|
| |
2,000 Borrowing Needed
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| |
1,000 Excess
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1,000 Borrowing Needed
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