1. Datta Computer Systems is considering a project that has the following cash f
ID: 2649450 • Letter: 1
Question
1.
Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
0
1
2
3
?$1,100
$450
$470
$490
11.98%
14.64%
9.70%
10.78%
13.31%
2.
Money markets are markets for
Short-term debt securities such as Treasury bills and commercial paper.
Common stocks.
Consumer automobile loans.
Long-term bonds.
e. Foreign currencies.
3. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?
$17,690
$20,633
$16,806
$19,601
$18,621
4.
A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?
30.63%
29.17%
33.76%
32.16%
27.78%
5.
Appalachian Airlines began operating in 2009. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT) for its first five years is listed below. Each year the company's corporate tax rate has been 40%.
Year
Taxable Income
2009
?$4,000,000
2010
$1,000,000
2011
$2,000,000
2012
$3,000,000
2013
$5,000,000
Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2009. How much did the company pay in taxes in 2012?
$ 800,000
$ 688,500
$1,023,000
$ 765,000
$ 930,000
Year0
1
2
3
Cash flows?$1,100
$450
$470
$490
Explanation / Answer
1. Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Solution-
e. 13.31%
2. Money markets are markets for
Solution-
a. Short-term debt securities such as Treasury bills and commercial paper.
(The money market specializes in very short-term debt securities debt that matures in less than one year).
3. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%
Solution-
b. $20,633
Calculation on Excel:
N=5
I/YR = 4.5%
PMT =$4,700
FV = $0.00
PV = $20,633
4. A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds
Solution-
e. 27.78%
EBT(1-t) = EAT
t = (EBT/EBT)
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