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NPV, Shares, Income

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1) Chapter 3 (Brealey) Practice Question 4 (page 53)
A machine costs $380,000 and is expected to produce the following cash flows:

Year 1 2 3 4 5 6 7 8 9 10
Cash flow 50 57 75 80 85 92 92 80 68 50
($000s)

If the cost of capital is 12 percent, what is the machine's NPV ?

2) Chapter 3 (Brealey) Practice Question 7 (page 53)
Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After
15 years, the ship is expexted to be sold for scrap at $1.5 million. If the dicsount rate is 8 percent, what is the ship's NPV?

3) Chapter 14 (Breasley) Practice Question 1 (page 380)
In 2003, Pfizer had 12,000 million shares of common stock authorized, 8,702 million in issue, and 7,629 million outstanding
(figures rounded to the nearest million). Its equity account was as follows:

Common stock $435
Additional paid-in capital $64,693
Retained earnings $29,382
Treasury shares $29,352

Currency translation adjustment and contributions to an employee benefit trust have been deducted from retained earnings?
a. What was the par value of each share?
b. What was the average price at which shares were sold?
c. How many shares have been repurchased?
d. What was the average price at which the shares were repurchased?
e. What is the value of the net common equity?

4) Chapter 32 (Breasley) Practice Question 3 (page 902)
3. Respond to the following comments.
a. "Our cost of debt is too darn high, but our banks won't reduce interest rates as long as we're stuck in this volatile widget-trading business. We've got to acquire other companies with safer income streams."

b. "Merge with Fledgling Electronics? No way! Their P/E's too high. That deal would knock 20 percent off our earnings per share."

c. "Our stock's at an all-time high. It's time to make our offer for Digital Organics. Sure, we'll have to offer a hefty premium to Digital stockholders, but we don't have to pay in cash. We'll give them new shares of our stock."

5) Chapter 2 (Ross) Problem 2.6 page 33
During 1998, the Senbet Discount Tire Company had gross sales of $1 million. The firm's cost of goods sold and selling expenses were $300,000 and $200,000, respectively. These figures do not include depreciation. Senber also had notes payable of $1 million. These notes carried an interest rate of 10 percent. Depreciation was $100,000. Senbet's tax rate in 1998 was 35 percent.
a. What was Senbet's net operating income?
b. What were the firm's earnings before taxes?
c. What was Senbet's net income?
d. What was Senbet's operating cash flow?

6) Chapter 7 (Ross) pages 208-298
Jimmy's Hot Dog Stands
Jimmy Levitin owns a popular hot dog stand on a trendy section of Melrose Boulevard. Following the success of his first hot dog stand, "Jimmy's," which has been in operations for five years, Jimmy is now considering opening a second hot dog stand in another trendy location, on Sunset Boulevard in the Silver Lake area. Jimmy's market research shows that the clientele in both areas is similar: young professionals, typically without children, who like the traditional aspect of eating hot dogs, but also relish his gourmet, specially manufactured low-fat dogs and the healthy side dishes his stand also sells. Jimmy's overall plan is to get the second stand up and running for five years, and then sell both stands off to a new owner and retire to Santa Barbara.
Jimmy estimates that the cost of starting up a second stand will be as follows:

Purchase of real estate (retail food outlet) $400,000
Installation of specialized kitchen equipment $40,000
Furniture and fittings $25,000

Jimmy estimates that net working capital will increase by $20,000 for the first year for the new outlet. He also estimates that yearly operating costs of the new location would be almost identical to those of his current stand:

Labor costs, inclusive of all overhead costs:
Kitchen and service staff (4 persons) $96,000
Raw materials:
Hot dogs: 200 per day x 7 days x 52 weeks $54,600
Drinks $18,400
Other food supplies $72,800
Nonfood supplies $22,200
Total raw materials $168,000

The revenues at his current location are as follows:
Sales of hot dogs and other food items $418,000
Drinks $92,000
Total revenues $510,000

In addition to contributing profits, Jimmy expects that opening a second stand will decrease the cost of purchasing gourmet hot dogs from 75 cents to 60 cents in both locations. This is due to economies of scale, since the new outlet would double output over the current level of demand. Jimmy also expects that he will be able to manage both locations himself, avoiding hiring a second manager for the new location.

Assume that:
? The marginal tax rate is 34 percent.
? The required rate of return is 10 percent.
? Depreciate over five years using the straight-line method.
What is the NPV of this investment?

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Complete the Problem Sets - Attached, in excel sheet format, are the questions that I need help with. The class is "Maximizing Shareholder Wealth". University of Phoenix MBA 540

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Solution Summary

Answers to 6 questions
1) NPV calculations for a series of cash flows from a machine.
2) Halcyon Lines: calculates ship's NPV
3) Pfizer: calculates the par value, price of shares
4) Respond to the following comments: Response to a series of statements on P/E, stock price etc.
5) Senbet Discount Tire Company: calculation of net operating income, earnings before taxes etc.
6) Jimmy's Hot Dog Stands: calculates NPV of investment.

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Corporate Finance Multiple Choice Questions

Can you help me get started on these problems?

3) A $120,000.00 investment will pay $34,883.50 year one, $43,604.37 year two, $34,883.50 year three, $17,441.75 year four, and $8,720.87 year five, what is the IRR ?
[a] 6.25%
[b] 6.50%
[c] 6.75%
[d] 7.00%
[e] 7.25%

Hint: The necessary formula is
IRR = the interest rate that discounts the cash flows equal the initial investment (NPV = 0)
There is an example of calculating IRR the text student website chapter 9
http://wps.aw.com/aw_gitman_pmfbrief_4/0,10397,1970895-00.html

8) Ponderosa Co. bonds sell for $846.04. The coupon rate is 8 percent and the bonds mature in 25 years. Interest is paid semi-annually and the firm's tax rate is 34 percent. What is the aftertax cost of debt?
[a] 3.18 percent
[b] 4.99 percent
[c] 6.36 percent
[d] 9.34 percent
[e ] 9.64 percent

14) Jorge, Inc., has 200,000 shares of stock outstanding. The firm has an EBIT of $1 million and interest paid of $100,000. The tax rate is 34 percent. What is Jorge's earnings per share?
[a] $0.20
[b] $1.65
[c] $2.97
[d] $3.30
[e] $5.00

19) What is the present value of $1,969.88 to be received in 10 years if the discount rate is 4% per year?
[a] $1,642.66
[b] $1,560.86
[c] $1,458.60
[d] $1,330.78
[e] $1,064.62

Hint: The necessary formula is PV = FV / (1 + r)t

21) How much must be deposited at 8% each of the next 16 years to have $5,685.80 ?
[a] $187.50
[b] $221.00
[c] $248.00
[d] $269.50
[e] $286.50

Hint: The necessary formula is FV = C X [(1 + r)t - 1]/r This is an annuity

25) What is the annual rate of return on $7,000.00 invested for 4 years with an ending value of $18,790.48?
[a] 1.75%
[b] 3.50%
[c] 7.00%
[d] 14.00%
[e] 28.00%

30) A firm had year end 2004 and 2005 retained earnings balance of $670,000 and $560,000, respectively. The firm reported net profits after taxes of $100,000 in 2005. The firm paid dividends in 2005 of _________.
(a) $10,000
(b) $100,000
(c) $110,000
(d) $210,000

33) A firm had the following accounts and financial data for 2005:
Sales revenue $3,060 Cost of goods sold $1,800
Accounts receivable 500 Preferred stock dividends 18
Interest expense 126 Tax rate 40%
Total operating expenses 600 Number of common shares 1,000
Accounts payable 240   outstanding

The firm's earnings per share, rounded to the nearest cent, for 2005 was ______.
(a) $0.53
(b) $0.51
(c) $0.32
(d) $0.30

Be careful on the arithmetic. Rounding the wrong way gives you the wrong answer. Round numbers ending in 5 or more up.

41) What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?
(a) $3.33
(b) $3.60
(c) $4.00
(d) $5.00

43. In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had
(a) an excess cash balance of $50,000.
(b) an excess cash balance of $75,000.
(c) required total financing of $15,000.
(d) required total financing of $5,000.

44. A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January
(a) are $700.
(b) are $2,100.
(c) are $1,900.
(d) cannot be determined with the information provided.

49. A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.

Table 9.2
Project Initial Investment IRR NPV
1 $200,000 19% $100,000
2 400,000 17 20,000
3 250,000 16 60,000
4 200,000 12 -5,000
5 150,000 20 50,000
6 400,000 15 150,000
Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 9.2)
(a) 1, 2, 3, 4, and 5
(b) 1, 2, 3, and 5
(c) 2, 3, 4, and 6
(d) 1, 3, 4, and 6

50. Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 9.2)
(a) 1, 2, 3, 4, and 5
(b) 1, 2, 3, 5, and 6
(c) 2, 3, 4, and 5
(d) 1, 3, 5, and 6

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