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Question;105. Heer Enterprises needs someone to supply it with;225,000 cartons of machine screws per year to support its manufacturing needs;over the next 7 years, and you've decided to bid on the contract. It will cost;you $1,170,000 to install the equipment necessary to start production, you'll;depreciate this cost straight-line to zero over the project's life. You;estimate that in 7 years, this equipment can be salvaged for $75,000. Your;fixed production costs will be $360,000 per year, and your variable production;costs should be $12.75 per carton. You also need an initial investment in net;working capital of $112,500, all of which will be recovered when the project;ends. Your tax rate is 32 percent and you require a 13 percent return on your;investment. What bid price per carton should you submit?;A. $17.04;B. $16.56;C. $15.79;D. $15.03;E. $14.81;106. Chapman Machine Shop is considering a 4-year;project to improve its production efficiency. Buying a new machine press for;$576,000 is estimated to result in $192,000 in annual pretax cost savings. The;press falls in the MACRS 5-year class, and it will have a salvage value at the;end of the project of $84,000. The press also requires an initial investment in;spare parts inventory of $24,000, along with an additional $3,600 in inventory;for each succeeding year of the project. The inventory will return to its;original level when the project ends. The shop's tax rate is 35 percent and its;discount rate is 11 percent. Should the firm buy and install the machine press?;Why or why not?;A. no, The net present value is -$7,489.;B. no, The net present value is -$667.;C. yes, The net present value is $211.;D. yes, The net present value is $4,319.;E. yes, The net present value is $8,364..;107. Eads Industrial Systems Company (EISC) is trying;to decide between two different conveyor belt systems. System A costs $427,000;has a 6-year life, and requires $112,000 in pretax annual operating costs.;System B costs $517,000, has an 8-year life, and requires $79,000 in pretax;annual operating costs. Both systems are to be depreciated straight-line to;zero over their lives and will have a zero salvage value. Whichever system is;chosen, it will not be replaced when it wears out. The tax rate is 33 percent;and the discount rate is 24 percent. Which system should the firm choose and;why?;A. A, The net present value is $211,516.;B. A, The net present value is -$582,720.;C. A, The net present value is -$314,216.;D. B, The net present value is $308,222.;E. B: The net present value is -$625,123.;108. Consider a project to supply 60,800,000 postage;stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel;of land available that cost $760,000 five years ago, if the land were sold;today, it would net you $912,000, aftertax. The land can be sold for $1,500,000;after taxes in 5 years. You will need to install $2,356,000 in new;manufacturing plant and equipment to actually produce the stamps, this plant;and equipment will be depreciated straight-line to zero over the project's;5-year life. The equipment can be sold for $456,000 at the end of the project.;You will also need $469,000 in initial net working capital for the project, and;an additional investment of $38,000 in every year thereafter. All net working;capital will be recovered when the project ends. Your production costs are 0.38;cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate;is 31 percent and your required return on this project is 11 percent. What bid;price per stamp should you submit?;A. $0.018;B. $0.020;C. $0.023;D. $0.026;E. $0.029;40. Chelsea Fashions is expected to pay an annual;dividend of $0.80 a share next year. The market price of the stock is $22.40;and the growth rate is 5 percent. What is the firm's cost of equity?;A. 7.58 percent;B. 7.91 percent;C. 8.24 percent;D. 8.57 percent;E. 9.00 percent;41. The Shoe Outlet has paid annual dividends of;$0.65, $0.70, $0.72, and $0.75 per share over the last four years;respectively. The stock is currently selling for $26 a share. What is this;firm's cost of equity?;A. 7.56 percent;B. 7.93 percent;C. 10.38 percent;D. 10.53 percent;E. 11.79 percent;42. Sweet Treats common stock is currently priced at;$19.06 a share. The company just paid $1.15 per share as its annual dividend.;The dividends have been increasing by 2.5 percent annually and are expected to;continue doing the same. What is this firm's cost of equity?;A. 6.03 percent;B. 6.18 percent;C. 8.47 percent;D. 8.68 percent;E. 8.82 percent;43. The common stock of Metal Molds has a negative;growth rate of 1.5 percent and a required return of 18 percent. The current;stock price is $11.40. What was the amount of the last dividend paid?;A. $2.07;B. $2.11;C. $2.19;D. $2.22;E. $2.26;44. Highway Express has paid annual dividends of;$1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively.;What is the average dividend growth rate?;A. -4.51 percent;B. -3.60 percent;C. 2.28 percent;D. 2.47 percent;E. 4.39 percent;45. Southern Home Cookin' just paid its annual;dividend of $0.65 a share. The stock has a market price of $13 and a beta of;1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk;premium is 6.8 percent. What is the cost of equity?;A. 9.98 percent;B. 10.04 percent;C. 10.12 percent;D. 10.37 percent;E. 10.45 percent;46. National Home Rentals has a beta of 1.38, a stock;price of $19, and recently paid an annual dividend of $0.94 a share. The;dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of;return and a risk premium of 7.5 percent. What is the firm's cost of;equity?;A. 7.05 percent;B. 8.67 percent;C. 9.13 percent;D. 10.30 percent;E. 11.56 percent;47. Henessey Markets has a growth rate of 4.8 percent;and is equally as risky as the market. The stock is currently selling for $17 a;share. The overall stock market has a 10.6 percent rate of return and a risk;premium of 8.7 percent. What is the expected rate of return on this;stock?;A. 8.7 percent;B. 9.2 percent;C. 10.6 percent;D. 11.3 percent;E. 11.7 percent;48. Tidewater Fishing has a current beta of 1.48. The;market risk premium is 8.9 percent and the risk-free rate of return is 3.2;percent. By how much will the cost of equity increase if the company expands;its operations such that the company beta rises to 1.60?;A. 0.88 percent;B. 1.07 percent;C. 1.50 percent;D. 2.10 percent;E. 2.26 percent;49. Wind Power Systems has 20-year, semi-annual bonds;outstanding with a 5 percent coupon. The face amount of each bond is $1,000.;These bonds are currently selling for 114 percent of face value. What is the;company's pre-tax cost of debt?;A. 3.98 percent;B. 4.42 percent;C. 4.71 percent;D. 5.36 percent;E. 5.55 percent;50. Boulder Furniture has bonds outstanding that;mature in 13 years, have a 6 percent coupon, and pay interest annually. These;bonds have a face value of $1,000 and a current market price of $1,040. What is;the company's aftertax cost of debt if its tax rate is 32 percent?;A. 2.97 percent;B. 3.24 percent;C. 3.78 percent;D. 5.21 percent;E. 5.53 percent;51. Handy Man, Inc. has zero coupon bonds outstanding;that mature in 8 years. The bonds have a face value of $1,000 and a current;market price of $640. What is the company's pre-tax cost of debt?;A. 2.55 percent;B. 5.09 percent;C. 5.66 percent;D. 7.31 percent;E. 7.48 percent;52. Dog Gone Good Engines has a bond issue outstanding;with 17 years to maturity. These bonds have a $1,000 face value, a 9 percent;coupon, and pay interest semi-annually. The bonds are currently quoted at 87;percent of face value. What is the company's pre-tax cost of debt if the tax;rate is 38 percent?;A. 4.10 percent;B. 4.42 percent;C. 6.61 percent;D. 8.90 percent;E. 10.67 percent;53. The Corner Bakery has a bond issue outstanding;that matures in 7 years. The bonds pay interest semi-annually. Currently, the;bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon.;What is the firm's aftertax cost of debt if the tax rate is 30 percent?;A. 4.88 percent;B. 5.36 percent;C. 5.45 percent;D. 6.11 percent;E. 8.74 percent;54. The outstanding bonds of Tech Express are priced;at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay;interest annually. The firm's tax rate is 39 percent. What is the firm's;aftertax cost of debt?;A. 3.01 percent;B. 3.22 percent;C. 3.35 percent;D. 3.77 percent;E. 4.41 percent;55. Simple Foods has a zero coupon bond issue;outstanding that matures in 9 years. The bonds are selling at 42 percent of par;value. What is the company's aftertax cost of debt if the tax rate is 38;percent?;A. 5.48 percent;B. 5.73 percent;C. 6.12 percent;D. 7.73 percent;E. 9.88 percent;56. Grill Works and More has 8 percent preferred stock;outstanding that is currently selling for $49 a share. The market rate of;return is 14 percent and the firm's tax rate is 37 percent. What is the firm's;cost of preferred stock?;A. 14.77 percent;B. 15.29 percent;C. 15.67 percent;D. 16.33 percent;E. 16.54 percent;57. Samuelson Plastics has 7.5 percent preferred stock;outstanding. Currently, this stock has a market value per share of $52 and a;book value per share of $38. What is the cost of preferred stock?;A. 7.50 percent;B. 13.88 percent;C. 14.42 percent;D. 19.29 percent;E. 19.74 percent;58. New York Deli's has 7 percent preferred stock;outstanding that sells for $36 a share. This stock was originally issued at $50;per share. What is the cost of preferred stock?;A. 13.68 percent;B. 14.00 percent;C. 14.29 percent;D. 19.44 percent;E. 19.80 percent;59. Nelson's Landscaping has 1,200 bonds outstanding;that are selling for $990 each. The company also has 2,500 shares of preferred;stock at a market price of $28 a share. The common stock is priced at $37 a;share and there are 28,000 shares outstanding. What is the weight of the common;stock as it relates to the firm's weighted average cost of capital?;A. 43.08 percent;B. 45.16 percent;C. 47.11 percent;D. 54.00 percent;E. 55.45 percent;60. Mangrove Fruit Farms has a $200,000 bond issue;outstanding that is selling at 92 percent of face value. The firm also has;1,500 shares of preferred stock and 15,000 shares of common stock outstanding.;The preferred stock has a market price of $35 a share compared to a price of;$24 a share for the common stock. What is the weight of the preferred stock as;it relates to the firm's weighted average cost of capital?;A. 6.75 percent;B. 7.20 percent;C. 7.75 percent;D. 8.30 percent;E. 8.80 percent;61. Electronics Galore has 950,000 shares of common;stock outstanding at a market price of $38 a share. The company also has 40,000;bonds outstanding that are quoted at 106 percent of face value. What weight;should be given to the debt when the firm computes its weighted average cost of;capital?;A. 42 percent;B. 46 percent;C. 50 percent;D. 54 percent;E. 58 percent


Paper#51104 | Written in 18-Jul-2015

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