1. Terry Malloy is trying to decide whether his shipping company should invest i
ID: 2723036 • Letter: 1
Question
1. Terry Malloy is trying to decide whether his shipping company should invest in a new boat. The new boat will cost $200,000 and it will be fully-depreciated on a straight-line basis over its 10-year useful life. The new boat will have no salvage value. The new boat is expected to increase EBITDA by $50,000 per year for 10 years. What is the NPV of this investment if the corporate income tax rate is 50 percent and the cost of capital is 10 percent?
2. Zapata Corporation will pay dividends of $5.00, $6.00, and $7.00 in the next three years. Thereafter, the company expects its dividend growth rate to be a constant 10 percent. If the required rate of return is 15 percent, what is the current market price of Zapata stock?
3. Ben Tallmadge invests a one-time payment of $5,000 in a retirement account that will earn 15 percent annually. How much money will Ben have in the account at the end of 30 years if the interest is continuously compounded?
$450,086
$550,068
$912,334
$2,173,726
4. If you just purchased one share of Facebook stock on a the NASDAQ stock exchange, you participated in __________.
a primary market transaction
a futures market transaction
a commodity market transaction
a secondary market transaction
$450,086
$550,068
$912,334
$2,173,726
Explanation / Answer
1. Terry Malloy is trying to decide whether his shipping company should invest in a new boat. The new boat will cost $200,000 and it will be fully-depreciated on a straight-line basis over its 10-year useful life. The new boat will have no salvage value. The new boat is expected to increase EBITDA by $50,000 per year for 10 years. What is the NPV of this investment if the corporate income tax rate is 50 percent and the cost of capital is 10 percent?
Let us first Calculate freee cash flow
Depreciation each year=200000/10= $20000
Net income after tax= Ebitda-depreciation- tax
=50000-20000-50%*(50000-20000)
Net income after tax=15000
Free cash Flow= Net income after tax+depreciation
=15000+20000
Free cash Flow=35000
Using Excel Function For NPV as follows
=NPV(10%,10cells with value 35000)- Inital cost of boat
=215059.85-200000
NPV=$15059.85
3. Ben Tallmadge invests a one-time payment of $5,000 in a retirement account that will earn 15 percent annually. How much money will Ben have in the account at the end of 30 years if the interest is continuously compounded?
A = Pe rt
P=$5000,r=0.15,t=30 years, e=2.7183
=5000*2.7183(0.15*30)
Amount at the end of 30 years=450086
4. If you just purchased one share of Facebook stock on a the NASDAQ stock exchange, you participated in a secondary market transaction
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