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    Finance questions

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    Problems:

    1. A company is analyzing two mutually exclusive projects, A and B, whose cash
    flows are shown below:
    Years o r= 10% 1
    I
    A -3,200 1,500
    B -3,200 700
    2 3
    1700 1,500
    o 4,700
    The company's cost of capital is 10 percent, and it can get an unlimited amount of
    capital at that cost. What is the IRR of the better project, i.e., the project which
    the company should choose if it wants to maximize its stock price?
    Project _ ~-----------------

    2. You have been asked by the president of your company to evaluate the proposed
    acquisition of a new special-purpose truck. The truck's basic price is $320,000,
    and it will cost another $30,000 to modify it for special use by your firm. The
    truck falls into the MACRS. three-year class, and it will be sold after three years
    for $40,000. Use of the truck will require an increase in net operating working
    capital (spare parts inventory) of $25,000. The truck will have no effect on
    revenues, but it is expected to save the firm $130,000 per year in before-tax
    operating costs, mainly labor. The firm's cost of capital is 9% and the marginal
    tax rate is 40 percent. Should the company accept/reject the project?
    NPV IRR MIRR Decision _

    3. ABC Bottling's December 31st balance sheet is given below:
    Cash
    Accounts receivable
    Inventory
    Net fixed assets
    $20
    25
    60
    75
    Accounts payable
    Notes payable
    Accrued wages and taxes
    Long-term debt
    Common equity
    Total liabilities
    and equity
    $40
    20
    15
    35
    70
    Total assets

    Sales during the past year were $360, and they are expected to rise by 50 percent
    to $540 during next year. Also, during last year fixed assets were being utilized
    to only 65 percent of capacity, so ABC could have supported $360 of sales with
    fixed assets that were only 65 percent of last year's actual fixed assets. Assume
    that ABC's profit margin will remain constant at 6 percent and that the company
    will continue to payout 40 percent of its earnings as dividends. To the nearest
    whole dollar, what amount of non-spontaneous, additional funds (AFN) will be
    needed during the next year (use pro-forma method)?
    ..----~---------------------------------------
    Additional Funds Needed: -------

    4. A group of graduate students has decided to form a small Internet Service
    Company in Brevard County. The company will service Brevard County home
    users and need $200 million to start the company. Two financing plans have
    been proposed by the investment banking firms. Plan A is an all commonequity
    alternative. Under this agreement, 2 million common shares will be
    sold to net the firm $100 per share. Plan B involves the use of financial
    leverage (debt and equity). A debt issue with a 20-year maturity period will
    be privately placed. The debt issue will carry an interest rate of 10 percent,
    and the principal borrowed will amount to $80 million. The corporate tax
    rate is 40 percent. If the detailed financial analysis projects that there is a
    30% chance that EBITwill be $6.0 million, 40% chance that it will be $8.0
    million, and 30% chance that it will be $10 million annually, which plan will
    maximize the wealth ofthe stockholders? (note: the problem is based on the
    understanding of financial statement and financial leverage)

    Plan _

    5. ABC is considering a leasing arrangement to finance some special
    manufacturing tools that is needed for production during the next four years.
    A planned change in the firm's production technology will make the tool
    obsolete after 4 years. The firm will depreciate the cost of the tools on a
    straight-line basis. The firm can borrow $4,000,000, the purchase price, at
    10% to buy the tools or make four equal end of the year lease payments of
    $1,200,000. The firm's tax rate is 34% and the firm's before-tax cost of debt
    is 10%. Annual maintenance costs associated with ownership are estimated
    at $200,000. Should the firm lease or buy?

    Decision: _

    © BrainMass Inc. brainmass.com June 3, 2020, 10:56 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/finance-questions-257348

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    Solution Summary

    The solution explains various finance questions relating to mutually exclusive projects, IRR, NPV, MIRR, AFN, leverage and lease

    $2.19

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