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Firm A is considering producing and selling a new product for 5 years. Sales initially are expected to be 350,000 units and the selling price per unit is $50. Sales areexpected to grow by 5% per year for the first 3 years and then 4% per year for the last 2 years. The fixed operating costs are expected to increase by $2 million a year over their current level and the variable cost is expected to be 20% of sales. The project is also expected to increase sales of another product the firm sells by $400,000 per year. Test marketing costs incurred by this project were $60,000 last year. Firm A will need to invest in land for $2 million and in machinery that costs $10 million and has a salvage value of $1 million at the end of 5 years. Depreciation is straight line. I will be using this machine to replace old equipment that has a bookvalue of $2 million and a market value of $0.5 million. Tis machinery has remaining depreciation of $200,000 per year for the next 3 years and zero after. Firm A has a debt to equity ratio of 0.33. it plans to raise the $15 million that it needs in total for land and equipment by barrowing 25% of this total at 10% before tax and selling equity for the remainder. The firms beta is 1.2 and its tax rate is 40%. However because this project is in a different risk class, it is using a proxy company P with a debt to equit ratio of 0.7 and a beta of 0.9. The rate of return on 90 day T Bills is 1% and the expected return on the S&P 500 is 8%. a) Create a data table in excel b) Set up a spreadsheet to calculate the expected cash flows as well as the NPV,IRR and Profitabiity Index.
How does preferred stock accurately compare to common stock?
An analyst thinks the following three scenarios are possible for Stock A: What is the expected rate of return for Stock A?
You find a bond with 26 years until maturity that has a coupon rate of 10 percent and a yield to maturity of 12 percent. What is the Macaulay duration? The modified duration?
A global manufacturer of electrical switching equipment? (ESE) is considering outsourcing the manufacturing of an electrical breaker used in the manufacturing of switch boards. How many breakers would the electrical switching equipment company need p..
Consider a four-year project with the following information: initial fixed asset investment = $500,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $35; variable costs = $26; fixed costs = $200,000; quantit..
Ben owns 1,000 shares of stock that is selling for $40 per share. He wants to defer selling the stock until next January for tax reasons. He wants to find a strategy that guarantees he will have at least $40,000 in value next January. Which strategy ..
Mitts Cosmetics Co.'s stock price is $50.30, and it recently paid a $2.25 dividend. This dividend is expected to grow by 25% for the next 3 years, then grow forever at a constant rate, g; and rs = 13%. At what constant rate is the stock expected to g..
A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of $5 billion with 100 million shares outstanding. What is the value of the company, the number of shares outstanding, and p..
Explain the distinction between the firm’s weighted average cost of capital (WACC) and its weighted marginal cost of capital (WMCC)? Are the calculations of the WACC and the WMCC different? Explain.
Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $24 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amou..
Which of the following is not necessarily to be estimated for a "optimal replacement life for equipment" decision?
Pangboume Whitchurch has preferred stock outstanding. The stock pays dividend of $6 per share and sells for $30. What is percentage cost of the preferred stock
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