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You have paid $50,000 to a consulting firm to examine the purchase of Slippery Slope Ski Resort. The consultant’s report provides the following information: (a) The selling price of Slippery Slope Ski Resort is $4,000,000. For tax purposes, the entire cost of the resort will be depreciated over a 10-year period using the straight line method (i.e., depreciation will be $400,000 each year for 10 years). (b) At the end of 10 years, you will sell the resort for $1,000,000. Since the Ski Resort will be fully-depreciated at this point, the $1,000,000 will be taxable income. (c) Annual expected revenues are $1,200,000 and annual expected operating costs are $300,000. (d) You expect accounts receivable to equal $100,000 after one year and stay at this level for the life of this project. After 10 years, when the resort is sold, the accounts receivable will be retrieved. (e) Tax rate is 30%. (f) The cost of capital for this project is 12%. What is the net present value of the project? Should you go ahead with the project?
TeleMedia is a technology firm that reported an operating loss of $15 million in the most recent year (just ended), after R&D expenses of $100 million. If R&D has a 3--year life and the company’s R&D expenses in the last three years have been $30 mi..
The Imaginary Products Co. currently has $300 million of market value debt outstanding. The 9 percent coupon bonds (semi-annual) have a maturity of 15 years and are currently priced at $1,440.03 per bond. If Imaginary is subject to a 40 percent margi..
You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. If the appropriate interest rate is 6 percent, what is the present value of the cash flow stream that the company ..
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 13 percent and 16 percent, respectively. The standard deviations of the assets are 39 percent and 47 percent, respectively. What is the smalle..
Sarah Kavenna's luxurious home in Georgetown, a neighbourhood in Washington dc, was recently gutted in a fire. Her living and dining rooms were destroyed completely, and the damaged personal property had a replacement price of $27,000. What is the ma..
Daily enterprises is purchasing a 9.8 million machine. It will cost $47,000 to transport and install the machine. This machine has a depreciable life of five years using straight-line depreciation and will have no salvage value.
Stock in Cheezy-Poofs Manufacturing is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $2.50. Compare the percentage gains and losses from a $12,500 investment in the stock versus the option in ..
A bond investor is considering two 10 year maturity bonds both rated AAA: the municipal bond is yielding 1.79% and the corporate bond is yielding 2.84%. At what marginal tax rate would the bond investor be indifferent between the two bonds?
A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15 percent rate for the next 3 years. Afterwards, a more stable 6 percent growth rate can be assumed. If a 10 percent discount rate is ..
Unlike common stocks, preferred stocks pay a fixed dividend. Suppose a share of preferred stock pays a fixed dividend of $4 a year forever. If it sells for $80, what must be the discount rate?
Describe at least 5 bond provisions and discuss whether they make bonds more or less risky. Exercise: Consider two bonds, everything else the same except the provision. Would Bond A with the provision be more or less risky than Bond B without the pro..
Mc Donalds corp. preferred stock pays an annual dividend of $5 per share. Calculate the value of one share to an investor who requires a rate of return of : Calculate the yield of the Mc Donalds corp preferred stock of problem 13 if its market price ..
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