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LEE Corporation intends to purchase equipment for $1,000,000.

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LEE Corporation intends to purchase equipment for $1,000,000. The equipment has a 5 year useful life;and will be depreciated on a straight-line basis to a salvage value of $250,000. LEE?s marginal tax rate is 30%.;Use of the equipment is expected to change the company?s reported EBIT by $300,000 in year one, $350,000 in;year two, $350,000 in year three, $200,000 in year four, and $150,000 in year five. Net working capital;associated with the new machine is equal to 10% of EBIT.;1) The free cash flow in year 1 is;A) $395,000 B) $305,000 C) $330,000 D) $390,000;2) The free cash flow in year 2 is;A) $395,000 B) $305,000 C) $330,000 D) $390,000;3) The free cash flow in year 3 is;A) $395,000 B) $305,000 C) $330,000 D) $390,000;4) The free cash flow in year 4 is;A) $395,000 B) $305,000 C) $330,000 D) $390,000;5) The terminal cash flow in year 5 is;A) $255,000 B) $260,000 C) $510,000 D) $495,000;6) If the risk-adjusted discount rate for this project is 12%, calculate the projects net present value.;A) $355,672 B) $369,922 C) $372,634 D) $381,782;7) The risk free rate of return is 2% and the market risk premium is 10%. Twindle Industries has a;beta of 1.5 and a standard deviation of returns of 18%. Twindle?s marginal tax rate is 35%.;Analyst?s expect Twindle?s dividends to grow by at least 5% per year for the next 5 years. Using;the capital asset pricing model, what is Twindle?s cost of retained earnings?;A) 17% B) 13% C) 12% D) 14%;8) Keys Manufacturing Company paid a dividend yesterday of $1.50 per share (D0 = $1.50). The;dividend is expected to grow at a constant rate of 7% per year. The price of Keys? common stock;today is $19 per share. If Keys decides to issue new common stock, flotation costs will equal;$1.00 per share. Keys? marginal tax rate is 35%. The cost of new common stock is;A) 11.75% B) 15.92% C) 15.33% D) 8.99%;9) Heston Mfg. has five possible investment projects for the coming year. Each project is indivisible.;They are;Project Investment (million) IRR;A $ 8 22%;B $10 18%;C $ 4 15%;D $ 4 13%;E $ 2 10%;Heston?s weighted marginal cost of capital schedule is 12 percent for up to $23 million of;investment, beyond $23 million the weighted cost of capital is 14 percent. The optimal capital;budget is;A) $18 million. B) $22 million. C) $26 million. D) $23 million.;10) Which of the following would be a method of improving a firm?s economic profit? Assume all;else equal.;A) Identify and improve operating efficiencies.;B) Increase sales.;C) Recapitalize the firm to reduce its cost of capital.;D) All of the above.;11) Acme Manufacturing Company reported that its sales increased by 5%, but its net income;increased by 20%. The much larger change in net income could be the result of;A) a high degree of financial leverage.;B) a high degree of operating leverage.;C) a low degree of operating and financial leverage.;D) either A or B, or both.;12) A plant may remain operating when sales are depressed;A) to help the local economy.;B) unless variable costs are zero when production is zero.;C) in an effort to cover at least some of the variable cost.;D) if the selling price per unit exceeds the variable cost per unit.;13) Potential applications of the break-even model include;A) replacement for time-adjusted capital budgeting techniques.;B) optimizing the cash-marketable securities position of a firm.;C) pricing policy.;D) all of the above.;14) Based on the data contained in Table A, what is the break-even point in units produced and;sold?;Table A;Avg. selling price per unit $12.00;Variable cost per unit $9.00;Units sold 150,000;Fixed costs $300,000;Interest expense $ 50,000;A) 100,000 B) 18,182 C) 50,000 D) 116,666;15) Based on the data contained in 9? Table A, what is the contribution margin per unit?;A) $27.00;B) $3.00;C) $4.00;D) none of the above;16) Based on the data contained in 9?Table A, what is the degree of operating leverage?;A) 3.00 times B) 1.50 times C) 4.00 times D) 1.33 times;17) Based on the data contained in 31?Table A, what is the degree of financial leverage?;A) 4.50 B) 1.87 C) 1.50 D) 6.67;18) Based on the data contained in 31?Table A, what is the degree of combined leverage?;A) 4.50 B) 1.87 C) 1.50 D) 4.67;19) Which one of the following is not a limitation of break-even analysis?;A) The total revenue curve (sales curve) is presumed to increase linearly with the volume of;output.;B) The break-even chart and the break-even computations are static forms of analysis.;C) Cost-volume-profit relationship is assumed to be linear.;D) Break-even analysis assumes a constant capital structure.;Attachment Preview;corporate finance hw wk 13.docx;LEE Corporation intends to purchase equipment for $1,000,000. The equipment has a 5 year;useful...;Additional Requirements;Min Pages: 3;Level of Detail: Show all work;Other Requirements: class is Introduction to Corporate Finance, text is Foundations of Finance: The Logic and Practice of Financial Management (Keown) 7th ed. HW from chapters 9-12.

 

Paper#21662 | Written in 18-Jul-2015

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