Ex 1 A 4- year project has the following annual sales: Year 1 2 3 4 Sales ($) 10
ID: 2803770 • Letter: E
Question
Ex 1
A 4- year project has the following annual sales:
Year 1 2 3 4
Sales ($) 100,000 120,000 150,000 60,000
If NWC amounts to 10% of the current year’s (same year) sales, calculate:
a)NWC in every year
b)Delta NWC or the resulting cash flow in every year (be careful with sign of cash flow)
Ex 2
P&G stock has a Beta of 0.8 and IBM stock has a Beta of 1.4.
a) If you want to create a portfolio (P) by investing in both stocks, what should be the proportion or the weight ?
b) If the expected return for the coming year is 10% for P&G and 15% for IBM, what will be the expected return of your portfolio?
Ex 3
GM stock has a Beta of 1.2 and an expected return of 15%. Ford Stock has a Beta of 1.5 and an expected return of 17%.
a)If the risk-free rate is 5%, which stock would you buy?
b)What would the risk-free rate have to be for the 2 stocks to be correctly priced?
c)Draw the Security Market Line (Graph should show GM, Ford Stocks as well as the Market and the new Risk-free rate found in part b) )
Ex 4
Given the following information related to every year of a 4-year project:
Sales volume = 100 units ;
Unit Selling Price = $9,000 ;
Unit variable cost = $5,000 ;
Cash fixed cost = $100,000 ;
Additional information:
Cost of investment (Capital Spending) = $5,000,000; Depreciation rates are 40% in year 1, 30% in year 2 , 20% in year 3 & 10% in year 4.
a)Calculate the net income in year 3 (Tax rate = 20%)
b)Calculate the OCF in year 3
Ex 5
A Co. is looking at a new system with an installed cost (Capital spending) of $312,000 that can save the firm $96,000 per year during 3 years. This investment will be subject to a 3-year straight line depreciation. At the end of this period, the system can be scrapped (sold) for $48,000. Finally, the system requires an initial investment in net working capital of $22,400. If the tax rate is 30 % and the RRR is 13 %:
a) What is the after-tax salvage value of this system at the end of year 3?
b) What is the annual OCF?
c) Using NPV rule, should the Co. install this new system?
Explanation / Answer
Example 1
Ex 2
The proportion should be 0.8 to 1.4 i.e 4 : 7
Expected return4*10/11+7*15/11 i.e 13.18%
EX 3
Re : RF +(Rm - Rf )beta Re : RF +(Rm - Rf )beta
15: 5+(Rm -5)1.2 17: 5+(Rm - Rf ) 1.5
Rm : 13.33% Rm : 13%
hence in GM Stock it should invest
EX 4
COMPUTATION OF NET INCOME
(b) OCF COMPUTED ABOVE 300000.00
EX 5
(a)
COST 312000
DEP IN 3 YRS 312000
WDV 0
SALE AS SCRAP 48000
PROFIT 48000
LESS: TAX @ 30% 14400
VALUE AFTER TAX 33600
(b)
ANNUAL OCF $ 96000* .70 i.e $ 67200.00
(c)
31200*2.3612
year 1 2 3 4 NWC 10000.00 12000.00 15000.00 6000.00 DELTA NWC 10000.00 2000.00 3000.00 -9000.00
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.