72) Your company is considering the replacement of an old delivery van with a ne

Question

72) Your company is considering the replacement of an old delivery van with a
new one that is more effi cient. The old van cost $30,000 when it was
purchased 5 years ago. The old van is being depreciated using the simplifi
ed straight-line method over a useful life of 10 years. The old van could be
sold today for $5,000. The new van has an invoice price of $75,000, and it
will cost $5,000 to modify the van to carry the company’s products. Cost
savings from use of the new van are expected to be $22,000 per year for
5 years, at which time the van will be sold for its estimated salvage value
of $15,000. The new van will be depreciated using the simplifi ed straightline
method over its 5-year useful life. The company’s tax rate is 35%. Working
capital is expected to increase by $3,000 at the inception of the project,
but this amount will be recaptured at the end of year fi ve. What is the incremental
free cash fl ow for year one?
a. $22,250
b. $18,850
c. $21,305
d. $19,900

85) Which of the following would be considered the fi rm’s optimal capital structure?
a. Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17%
b. Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18%
c. Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15%
d. Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%

90) While Captive, Inc. has been in business for over 50 years, newly developed
products pushed the fi rm’s year-over-year growth rate to 35% during the latest
three years. The fi rm is proud of its history of paying dividends, but the
vigorous recent growth of the fi rm has left it cash challenged. Which of the
following policies/procedures would you consider best under the circumstances?
a. Substitute a stock dividend for the current cash dividend.
b. Borrow long-term to pay the current dividend.
c. Enter into a long-term stock repurchase program.
d. Look seriously for a merger partner.

95) All of the following are found in the cash budget except
a. accounts receivable.
b. new fi nancing needed.
c. cash disbursements.
d. a net change in cash for the period.

Explanation / Answer

72. a. $22,250 85. a. Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17% we try to keep the ratio around 2 90. b. Borrow long-term to pay the current dividend. best thing to do at this situation . others will either not help or increase trouble. 95. d. a net change in cash for the period. please rate appreciated

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.