1 You're trying to save to buy a new $200,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?
2 Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, a sculpture was sold at auction for a price of $10,302,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of $12,370,500. What was his annual rate of return on this sculpture?
3 You have just won the lottery and will receive $580,000 in one year. You will receive payments for 24 years, which will increase 5 percent per year. The appropriate discount rate is 11 percent.
4 Big Dom's Pawn Shop charges an interest rate of 20 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers.
5 Staind, Inc., has 7 percent coupon bonds on the market that have 15 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 10 percent, what is the current bond price?
5 Say you own an asset that had a total return last year of 16 percent. If the inflation rate last year was 3 percent, what was your real return?
6 E-Eyes.com Bank just issued some new preferred stock. The issue will pay a $16 annual dividend in perpetuity, beginning 6 years from now.
Required :
If the market requires a 10 percent return on this investment, how much does a share of preferred stock cost today?
7 Thirsty Cactus Corp. just paid a dividend of $1.40 per share. The dividends are expected to grow at 35 percent for the next 9 years and then l evel off to a 6 percent growth rate indefinitely.
Required :
If the required return is 14 percent, what is the price of the stock today?
8 An investment project has annual cash inflows of $6,600, $7,700, $8,500, and $9,800, and a discount rate of 11 percent.
Required:
What is the discounted payback period for these cash flows if the initial cost is $9,500?
9 Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of $4.266 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $3,792,000 in annual sales, with costs of $1,516,800.
Required:
If the tax rate is 32 percent, what is the OCF for this project?
10 Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 12 years ago for $4 million in anticipation of using it as a warehouse and distribution site, but the
company has since decided to rent these facilities from a competitor instead.
If the land were sold today, the company would net $10 million.
The company wants to build its new manufacturing plant on this land; the plant will cost $12.2 million to build, and the site requires $1,100,000 worth of grading before it is suitable for construction.
Required :
What is the proper cash flow amount to use as the initial investment in fixed
assets when evaluating this project?
11 Consider a 4-year project with the following information: initial fixed asset investment = $450,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $28; variable costs = $18; fixed costs = $180,000; quantity sold = 88,200 units; tax rate = 33 percent. How sensitive is OCF to changes in quantity sold?
12 You have $30,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 6 percent.
Required:
(a) If your goal is to create a portfolio with an expected return of 10.4 percent, how much money will you invest in Stock X?
(b) If your goal is to create a portfolio with an expected return of 10.4 percent, how much money will you invest in Stock Y?
13 Fama's Llamas has a weighted average cost of capital of 12.5 percent. The company's cost of equity is 16 percent, and its pretax cost of debt is 9 percent. The tax rate is 35 percent. What is the company's target debt-equity ratio?
14 Jungle, Inc., has a target debt-equity ratio of 0.87. Its WACC is 11.5 percent, and the tax rate is 32 percent.
Required:
a) If Jungle's cost of equity is 15 percent, what is the pretax cost of debt?
b) If instead you know that the aftertax cost of debt is 7.2 percent, what is the cost of equity?