NPV of this proposed investment

4) T. Ward and Company has been presented with an investment opportunity which will yield end-of-year cash flows of $300,000 per year in Years 1 through 4, $350,000 in Years 5 through 9, and $400,000 in Year 10. This investment will cost TW & C $1,500,000 today; its cost of capital is 10%.

Calculate the NPV of this proposed investment.

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5) Davis Industries must choose between a gas-powered and electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will only choose one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital for both is 12 %. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric truck will be $6290 per year and for the gas truck, $5000 per year. Annual net cash flows include depreciation. Calculate the NPV and IRR for each truck, and decide which to recommend.

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6) Alaska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project that is under consideration. This project has a cost of $2,750,000 and is expected to provide after-tax cash flows of $733,060 per year for 8 years. ASI's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital of 12% for ASI.

Calculate this project's MIRR (modified IRR).

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7) Rollins Corporation (RC) is estimating its weighted average cost of capital (WACC). Its target capital structure is 20% debt, 20% preferred stock and 60% common equity. Its outstanding bonds have a 12% coupon rate, paid semiannually, a current maturity of 20 years, and sell in the marketplace for $1,000. RC could sell at par, $100 preferred stock which would pay a 12% annual dividend, but flotation costs of 5% would be incurred. RC's beta is 1.2, the risk-free rate (Rrf) is 10%, and the required rate of return for the average stock in the marketplace (Rm) is 15%. RC is a constant-growth firm that just paid an annual dividend of $2.00; its common stock currently sells for $27 per share, and has a growth rate of 8%. RC's policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find ks. RC's marginal tax rate is 40%. Should RC sell additional common stock its flotation costs would be 10% of the per share price. RC expects its Retained Earnings to be $5,500,000 for the period.

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a. Calculate RC's component cost of debt.

b. Calculate RC's cost of preferred stock.

c. Calculate RC's cost of common equity (internal, Retained Earnings) using the CAPM method.

d. Calculate RC's cost of common equity (internal, Retained Earnings) using the DC method.

e. Calculate RC's cost of common equity (internal, Retained Earnings) using the bond yield-plus-risk-premium method.

f. Calculate RC's WACC.

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8) Apex Roofing Inc. has the following Balance Sheet:

($ millions)

Current Assets $ 3.0 Accounts Payable $ 1.2
Notes Payable 0.8
Fixed Assets 4.0 Accruals 0.3
Long-term Debt 1.2
Common Equity 1.5
____ Retained Earnings 2.0
Total Assets $ 7.0 $ 7.0

ARI's sales last year were $10 million, and it anticipates that they will increase by 44% this year. You have identified the following facts: ARI pays out 30% of annual Net Income as dividends; ARI has a profit margin of 4%; and, its Fixed Assets were used to 100% of capacity last year.
Calculate ARI's additional funds needed (AFN) for this year.

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9) You have been provided financial information (see following page) of the Crum Company (CC). The firm expects sales to grow by 50% next year, and operating costs should increase at the same rate. Fixed assets were being operated at 40% of capacity this past year, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities (A/P and Accruals) should increase at the same rate as sales next year. CC plans to finance any Additional Funds Needed (AFN) as 35% Notes Payable (short-term debt) and 65% common stock (Common Equity). After taking financial feedbacks (refer to pages 497-505) into account, and after the 2nd pass, determine CC's projected Return on Equity (ROE = Net Income / Common Equity) using the Percent of Sales Method.

Is the ROE:

a. 16.98%
b. 23.73%
c. 25.68%
d. 19.61%
e. 23.24%

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See following page for the format.

Crum Company Financial Information: Growth rate = 50%

INCOME STATEMENT Past Year Next Year
1st Pass Next Year
2nd Pass Next Year
Final
Sales $ 1,000.00
Operating Costs, 80% 800.00
EBIT 200.00
Interest 16.00
EBT 184.00
Taxes, 40% 73.60
Net Income 110.40
Dividends, 60% 66.24
Addition to Retained Earnings 44.16
BALANCE SHEET
Current Assets $ 700.00
Net Fixed Assets 300.00
Total Assets $ 1,000.00

A/P and Accruals $ 150.00
N/P, 8% 200.00
Common Stock 150.00
Retained Earnings 500.00
Total Liabilities & Common Equity $ 1,000.00

AFN Past Year Next Year, 1st Pass Next Year, 2nd Pass
Profit Margin 11.04%
ROE 16.98%
Debt / Assets 35.00%
Current Ratio 2.0 times
Payout Ratio 60.00%

AFN Financing Weights Dollars Interest Expense
Notes Payable 0.3500
Common Stock 0.6500
TOTAL 1.0000

10) Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day year basis). On average, the company has $12,000,000 in inventory and $8,000,000 in A/R. The firm is looking for ways to shorten its cash conversion cycle (calculated on a 365-day basis). Kolan's CFO has proposed new policies which would result in a 20% reduction in both average inventories and A/R. The firm anticipates that these policies will also reduce sales by 10%. A/P will remain unchanged.

What effect would these new policies have on the firm's cash conversion cycle?

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a. 40 days shorter
b. 22 days shorter
c. 13 days shorter
d. 22 days longer
e. 40 days longer
f. 13 days longer

11) Some entries in Yale Industries' Balance Sheet change substantially during the year. (All amounts are in millions of dollars for the two months in this example.)

Peak Non-Peak
October April
Cash $ 25 $ 6
Marketable Securities 0 7
Accounts Receivable 18 8
Inventory 56 22
Net Fixed Assets 110 110
Total Assets $209 $153

Spontaneous Liabilities* $ 28* $ 7*
Short-term Debt 51 16
Long-term Debt 50 50
Owners' Equity 80 80
Total Capital $209 $153

* Accounts Payable + Accruals

Yale Industries' current asset financing policy is

a. very conservative; permanent capital > total assets.
b. conservative; permanent capital > permanent assets.
c. matching; permanent capital = permanent assets.
d. aggressive; permanent capital < permanent assets.
e. very aggressive; permanent capital < fixed assets.

Show all work, and fully discuss the reasons for your choice.