Financial Analysis Word Problems
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1. Company is purchasing new equipment for $120,000. You estimate the life of this equipment is 6 years and you will depreciate it in a straight line over 5 years to be conservative and assume no terminal value. The administration, maintenance and insurance cost for the equipment to be estimated to be $8,000 per year. If your cost of borrowing is 8% and your tax rate is 32%, what is the break even annual income made in advance at the beginning of the year?
2. You have two offers for an office photocopier. Copier A cost $700, will cost $100 a year to run and will last four years. Copier B costs $600, costs $120 a year to run and will last for three years. Your cost of capital is 12%. Which is better deal?
3. KLM Ltd has the following structure:$100,000,000 three year bonds with a coupon of 7% trading at 95% and 2.5 million shares trading at $4.55. The market risk premium is 8% and the risk free rate of return is 4%. KLM has a beta of 1.3 and pays tax at 35%. Calculate the WACC of KLM?
4. There is a US treasury bond with coupon 4.5% and maturing in mid March 2015. Interest rates are flat at 3%. What's the price of the bond (ignoring transaction costs and other distortions)?
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Four financial analysis word problems are examined.
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FINANCE
1-Company is purchasing new equipment for 120,000$. You estimate the life of this equipment 6years and you will depreciate it in a straight line over 5years to be conservative and assume no terminal value. You Administration and maintenance and insurance cost for the equipment to be estimated to be 8,000$ per year. If your cost of borrowing is 8% and your tax rate is 32% what is the breakeven annual income made in advance at the beginning of the year?
Year 1 2 3 4 5 6
Income 21,760 21,760 21,760 21,760 21,760 21,760
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- M. Sc., London South Bank University
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