Question 1 Wrigley Company is considering an investment project that generates a
ID: 2618537 • Letter: Q
Question
Question 1
Wrigley Company is considering an investment project that generates a cash flow of $13,000 next year if the economy is favorable but generates only $6,000 if the economy is unfavorable. The probability of favorable economy is 70% and of unfavorable economy is 30%. The project will last only one year and be closed after that. The cost of investment is $10,000 and Star Ventures plans to finance the project with $2,000 of equity and $8,000 of debt. Assuming the discount rates of both equity and debt are 0%. What is the expected cash flow to Star Ventures' shareholders if the company invests in the project?
$0
$2,900
$3,500
$4,200
$7,500
10 points
Question 2
Marcy Distribution has total sales of $105,000, costs are $76,000, and depreciation is $8,500. The tax rate is 25 percent. The interest expense is $1,500. What is the operating cash flow?
$24,250
$19,356
$22,780
$25,311
$23,864
10 points
Question 3
Hewitt company had beginning net fixed assets of $210,000 and ending net fixed assets of $235,000. Assets valued at $17,000 were sold during the year. Depreciation was $19,000. What is the amount of net capital spending?
$239,000
$44,000
$58,000
$25,000
$216,000
10 points
Question 4
Johnson Plumbing and Heating Company has net income of $284,000. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $61,000 worth of common stock. What is the cash flow to stockholders?
$52,600
$54,370
$57,400
$61,200
$65,400
10 points
Question 5
What is the cash flow of the firm, or CF(A), for 2017?
CASA Rubber, Inc.
2017 Income Statement
Net sales
28,000.00
Cost of goods sold
16,500.00
Selling, general, and administrative expenses
1,030.00
Depreciation
1,100.00
Earnings before interest and taxes
9,370.00
Interest
320.00
Pretax income
9,050.00
Taxes
3077.00
Net income
5,973.00
Casa Rubber, Inc.
2016 and 2017 Balance Sheets
2016
2017
2016
2017
Cash
298
306
Accounts payable
6,219
6,384
Accounts receivable
3,006
3,422
Accrued expenses
1,880
1,625
Inventory
5,310
5,950
Total
8,099
8,009
Total
8,614
9,678
Long-term debt
17,536
20,291
Net fixed assets
32,365
34,600
Owners' equity
15,344
15,978
Total assets
40,979
44,278
Total liabilities and equity
40,979
44,278
$2,512
-$1,724
$1,724
-$890
$2,904
10 points
Question 6
What is the cash flow to the creditors for 2017?
CASA Rubber, Inc.
2017 Income Statement
Net sales
28,000.00
Cost of goods sold
16,500.00
Selling, general, and administrative expenses
1,030.00
Depreciation
1,100.00
Earnings before interest and taxes
9,370.00
Interest
320.00
Pretax income
9,050.00
Taxes
3077.00
Net income
5,973.00
Casa Rubber, Inc.
2016 and 2017 Balance Sheets
2016
2017
2016
2017
Cash
298
306
Accounts payable
6,219
6,384
Accounts receivable
3,006
3,422
Accrued expenses
1,880
1,625
Inventory
5,310
5,950
Total
8,099
8,009
Total
8,614
9,678
Long-term debt
17,536
20,291
Net fixed assets
32,365
34,600
Owners' equity
15,344
15,978
Total assets
40,979
44,278
Total liabilities and equity
40,979
44,278
$2,680
-$2,376
-$2,643
-$2,435
$2,917
10 points
Question 7
Nidec company made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $1.70 a share. Secondly, the company announced that all future dividends will increase by 5% annually. What is the maximum amount you should pay to purchase a share of Nidec's stock if your goal is to earn a 16% rate of return?
$14.76
$15.45
$13.64
$16.07
$12.44
10 points
Question 8
The common stock of BMA company sells for $31.26 a share. The stock is expected to pay $1.20 per share next year when the annual dividend is distributed. BMA company has established a pattern of increasing its dividends by 6% annually and expects to continue doing so. What is the market rate of return on this stock?
10.75%
11.36%
10.21%
9.27%
9.84%
10 points
Question 9
Christie Company earned $1.42 million for the fiscal year ending yesterday. The firm also paid out 35 percent of its earnings as dividends yesterday. The firm will continue to pay out 35 percent of its earnings as annual, end-of-year dividends. The remaining 65 percent of earnings is retained by the company for use in projects. The company has 4 million shares of common stock outstanding. The current stock price is $28. The historical return on equity (ROE) of 14 percent is expected to continue in the future. What is the required rate of return on the stock? (Hint: use the retention ratio and ROE to estimate the growth rate)
9.72%
9.96%
9.58%
8.75%
8.47%
10 points
Question 10
Given the following information for Agritech, find the WACC. Assume the company s tax rate is 25 percent. Debt: 20,000 bonds outstanding, 6 percent coupon, $1,000 par value, 10 years to maturity, selling for 98 percent of par; the bonds make semiannual coupon payments. Common stock: 280,000 shares outstanding, selling for $30 per share; the beta is 1.60. Market: 7 percent market risk premium and 4.0 percent risk-free rate.
7.55%
8.36%
8.04%
7.85%
7.37%
10 points
Question 11
Weston Company has 500,000 shares of common stock outstanding at a market price of $54 a share. Last month, Weston paid an annual dividend in the amount of $1.10 per share. The dividend growth rate is 5%. Weston also has 15,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 5% coupon, pay interest annually, and mature in 15 years. The bonds are selling at 102% of face value. The company's tax rate is 25%. What is Weston's weighted average cost of capital?
5.86%
6.06%
6.26%
6.46%
6.66%
10 points
Question 12
BW Construction Materials purchased a machine six years ago at a cost of $810,000. The machine is being depreciated using the straight-line method over ten years. The tax rate is 25 percent and the discount rate is 10 percent. If the machine is sold today for $375,000, what will the aftertax salvage value be?
$350,040
$321,460
$384,500
$362,250
$294,570
10 points
Question 13
Albert Manufacturing is evaluating a project that will increase sales by $930,000 and costs by $571,000. The project will initially cost $2,240,000 for fixed assets that will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 25 percent. What is the annual operating cash flow for this project?
$304,500
$311,350
$325,250
$332,250
$342,750
10 points
Question 14
Victory, Inc. purchased some fixed assets four years ago at a cost of $780,000. It no longer needs these assets, so it is going to sell them today at a price of $250,000. The assets are classified as 5-year property for MACRS. The MACRS table values .2000, .3200, .1920, .1152, .1152, and .0576 for Years 1 to 6, respectively. What is the current book value of these assets?
$149,275
$134,784
$126,471
$142,218
$137,648
10 points
Question 15
A project will produce an operating cash flow of $276,000 a year for three years. The initial cash outlay for equipment will be $592,000. The net aftertax salvage value of $105,000 will be received at the end of the project. The project requires $64,000 of net working capital that will be fully recovered. What is the net present value of the project if the required rate of return is 14 percent?
$98,841
$84,215
$104,644
$112,513
$89,912
10 points
Question 16
Assume a machine costs $74,000 and lasts six years before it is replaced. The operating cost is $13,500 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 10 percent? (Hint: the EAC should account for both initial investment and annual operating costs)
$35,247.56
$41,816.24
$47,129.33
$39,112.79
$30,490.95
10 points
Question 17
Seattle Mariners, Inc. had a current share price of $83, and the firm had 1,000,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $15,000,000 investment but will produce a stream of cash flow of $8,500,000 each year over the next 4 years then close. There is no salvage value. If Seattle Mariners invests in the project, what would the new share price be? Seattle Mariners' cost of capital is 14%. (Hint: consider how the project NPV affects the stock price)
$83.84
$92.77
$87.15
$95.43
$101.20
10 points
Question 18
CK Precisions is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 14 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $710,000, annual operating costs of $55,000, and a 8-year life. Machine B costs $340,000, has annual operating costs of $112,000, and a 5-year life. The firm currently pays no taxes. Which machine should be purchased and why?
Machine A; because it will save the company about $7,451 a year
Machine A; because it will save the company about $2,982 a year
Machine B; because it will save the company about $10,126 a year
Machine B; because it will save the company about $4,384 a year
Machine B; because it will save the company about $6,219 a year
10 points
Question 19
Bobby M. has compiled this information related to a new project: Initial investment: $1,500,000; Fixed costs: $340,000; Variable costs: $8.50 per unit; Selling price: $30.20 per unit; Discount rate: 15 percent; Project life: 6 years; Tax rate: 25 percent. Fixed assets are depreciated using straight-line depreciation over the project's life. What is the financial break-even point?
38,216
31,953
33,277
36,182
39,516
10 points
Question 20
Consider a five-year project with the following information: initial fixed asset investment = $301,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $28/unit; variable costs = $14.30/unit; fixed costs = $140,000 per year; quantity sold = 100,000 units per year; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., how much does OCF change given an increase of one unit sold in a year)?
$11.16
$10.27
$9.44
$8.87
$7.96
$0
$2,900
$3,500
$4,200
$7,500
Explanation / Answer
Ans 1) Expected cashflow to shareholders = 70% of 13000 + 30% of 6000 - $8000
= $2900
Ans 2) Net income = (105000 - 76000 - 1500 - 8500) - 25% of (105000 - 76000 - 1500 - 8500)
= $14250
Operaing cash flow = Net income + depriciation + interest expense = $24250
Ans 3) Net capital spending = ending fixed asset - begining fixed asset + depriciation = $44000
Ans 4) Cashflow to stockholder = 40% of 284000 - 61000 = $52,600
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