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ELC Electrical Services is considering the construction of a plant to manufacture a new energy saving device for small offices. The company recently commissioned a $100,000, two-year study to assess the market demand for the proposed product. It estimated that 30,000 units of its new product could be sold annually over the next 10 years at a price of $10,000 each. Subcontractors would install each device at a cost of $6,200 per installation. The project involves an initial outlay of $60 million to build production facilities and $4 million in land. The $60 million facility will be depreciated using the prime cost method over the project’s life (fully depreciated at the end of the project). Fixed costs of $12 million per annum will be incurred. The facilities, including the land will be sold for an estimated value of $15 million at the end of the project. The land value is assumed to stay constant throughout the lifespan of the project. The company is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 15% per year discount rate on the new project. Using the NPV approach, determine whether the project should be undertaken (use the relevant tax rate in your analysis).
An investment of $20,000 now is projected to return $5,000 in one year, $6,000 in two years, $7,000 in three years and $10,000 in four years. What is the net present values of these cash flows at i = 10%? Using the table of investment year rates on s..
Messman Manufacturing will issue common stock to the public for $25. The expected dividend and growth in dividends are $3.50 per share and 6%, respectively. If the flotation cost is 9% of the issue's gross proceeds, what is the cost of external equit..
The IRS is revaluating the asset life categories used for ACRS depreciation. The trucks that JK Industries use are currently classified by the IRS as having an asset life of 7 years. Because these trucks actually last for 10 years, the firm’s manager..
Given the following information on State A and State B: State A has no state income tax but a high state sales tax. State B has a medium state income tax and a medium state sales tax. Both States receive the same tax revenue per capita. Does one stat..
Little Miss Matched has a 6.4% after-tax profit margin and a 20% dividend payout ratio. The debt-equity ratio is 0.65 and the total asset turnover is 1.8. What is the sustainable rate of growth?
Under certain conditions, dividend policy is irrelevant. What is it that they are specifically claiming to be irrelevant? Explain with the following example. Now the firm can choose whether to pay out a 50% dividend that will require the issuance of..
Specify the terms of the planned issue, determine the theoretical ex-rights price and the expected value of a right and demonstrate that in principle a shareholder holding 100 shares will be equally well off by subscribing to the shares or by sellin..
Zachary Porter of Highland Heights, Kentucky, is contemplating borrowing $10,000 from his bank. The bank could use add-on rates of 6.5 percent for 3 years, 7 percent for 4 years, and 8 percent for 5 years. Use Equation 7.1 to calculate the finance ch..
If the economy booms, RTF, Inc. stock is expected to return 12 percent. If the economy goes into a recessionary period, then RTF is expected to only return 5 percent. The probability of a boom is 79 percent while the probability of a recession is 21 ..
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. What is the yield to maturity of the bond? What is the current..
Suppose 2-year Treasury bonds yield 5.9%, while 1-year bonds yield 6.8%. r* is 1.75%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, one year from now? Calculate the yield using a geometric a..
The economic, socio cultural and/or environmental benefits that tourism can achieve for the host community far outweigh any negative impacts brought about by tourism.
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