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Fairfax Pizza sells pizza in Northern Virginia and is evaluating the stadium project, which would involve selling pizza in the baseball stadium for 2 years, starting today. Based on the following information, what is the net present value of the stadium project? The project would involve an initial investment in equipment of 145,000 dollars today. Cash flows from capital spending would be 0 dollars in year 1 and 10,000 dollars in year 2. To finance the project, Fairfax Pizza would borrow 145,000 dollars. The firm would receive 145,000 dollars from the bank today and would pay the bank 163,850 dollars in 2 years (consisting of an interest payment of 18,850 dollars and a principal payment of 145,000 dollars). There would be no loan payments in 1 year. Operating cash flows are expected to be 78,300 dollars in year 1 and 82,650 dollars in year 2. The tax rate is 30 percent. The cost of capital is 10.87 percent.
A firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of 0.8. Suppose the firm only issues one bond. The information is as follows: the face value of bond is 1,000. Coupon rate is 6%, paid semiannually. ..
What factors may contribute to the decline in usefulness of operating assets? Should the choice of depreciation method be related to these factors? Must a company choose just one method of depreciation for all assets? Explain
Consider three bonds with 5.2% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has matur..
Suppose a stock had an initial price of $62 per share, paid a dividend of $2.50 per share during the year, and had an ending share price of $49. Compute the percentage total return. also what was the dividend yield and the capital gains yield?
Suppose you are facing the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000, 35% tax rate, $45,000 additional revenues for first year, and it is growing a..
You find a zero coupon bond with a par value of $10,0000 and 17 years to maturity. If the yield to maturity on this bond is 4.9%, what is the price of the bond? Assume semiannual compounding periods.
Look again at the project cash flows in Problem 10 below. C0 C1 C2 C3 -3,000 3,500 4,000 -4,000 Calculate the modified IRR as defined in Footnote 4 in section 5-3. Assume the cost of capital is 12%. Which is more meaningful? If you can’t decide, what..
The stock of Business Adventures sells for $60 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Dividend Stock price Boom $2.00 $73 Normal economy 1.50 63 Recession .70 59..
Due to a recession, expected inflation this year is only 3%. However, the inflation rate in year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectation theory holds and the real risk free rate (r*) is 2%. If t..
If a stock's Beta is 1.25, and the average market return for the stock is 12%, and the interest yield on 10-year US Treasury Bonds is 4%, what is the required or expected rate of return?
You are given the following information concerning Parrothead Enterprises: Debt: 10,900 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually. Common stock: 320,000 shares ..
Jason Argo, 35, works for Inter-Mac Transportation Corp. His normal job of loading trucks paid $12.00 per hour. While working, he suffered a back injury and was declared 50 percent disabled. Discuss the inverse relationship between bond prices and in..
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