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Your company, Home Maintenance, Inc., has decided to expand into lawn care. The expansion will involve the purchase of a truck, trailer, mowers, edgers and other miscellaneous equipment costing approximately $70,000. This equipment will have no salvage value at the end of three years. They will be depreciated on a straight-line basis over 3 years. The average price per lawn is $50, and you expect to be able to do 300 lawns per week, for 20 weeks of the year. You expect to do the same number of lawns each year. You will have three employees whom you will have to pay $9 each, or $27 total, per lawn. The cost of gas and oil is approximately $4 per lawn. You will spend some of your own additional time managing the business, and value this time at $16,000 per year. You estimate that you will need approximately $2,500 in working capital immediately, which you will get back at the end of the project. You paid $3,000 last year for a business plan and permit for the lawn service. Your company is financed entirely with equity. Assume the appropriate cost of capital for the project is 15%.
Prepare pro-forma income statements for the three years.
Determine whether you should you open this business.
For the given cash flows below, assume the cash flow is the same in the next 2 years. Compute the NPV for each project, and compute the incremental IRR. Compare and explain why NPV always gives the correct decision. What is the best way to select a p..
This question is a variant of the Sport Hotel example that was presented in class, in the class notes, and in the Real Option chapter. Suppose that the value of the hotel is not $8 million but instead is $9.5 million if the city is successful in obta..
You have found an asset with a 13.60 percent arithmetic average return and a 10.44 percent geometric return. Your observation period is 30 years. What is your best estimate of the return of the asset over the next 5 years? 10 years? 20 years?
Briefly define the common stock valuations: book value, liquidation value and price/earnings multiples. List the characteristics of preferred stock and preferred stockholders. Basic rights of preferred stockholders.
Baller Financial is a banking services company that offers many different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to their various types of checking accounts. Calculate the overhead c..
If a Japanese investor had purchased a mutual fund that imitated the Nikkei-225, what would her annual rates of return.
An issue of preferred stock pays a $2.57 dividend each quarter, and is currently trading at $79 per share. The nominal cost of preferred equity, Rp, from this source of funding is %.
The Blue Moon is considering a 4-year project that requires an investment of $2.8 million for new equipment. This equipment will be depreciated straight-line to zero over the life of the project and will be worthless thereafter. Management uses the s..
The order came in the right after the first of the year, lowering your planned revenue numbers and the bonuses of your very deserving employees. It doesn't seem fair. What should you do?
To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semi annually, sells at a price of $1,075, and has a par value of $1,000..
Will her broker put in a margin call to her, asking her to put up more funds? - If so, how much more? What if the price falls to $50? In each case, if so, how much more?
Real Risk-Free Rate You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
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