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Danny zuko is thinking of opening a garage shop. The initial cost of the garage is $75K. If the garage is successful, it will generate annual free cash flows of $30K into perpetuity. If not, Danny will only be able to generate $5K of annual free cash flows.
1. If the probability of success is 40% and the required rate of return is 20%, should Danny invest in the car garage?
2. In researching it further, Danny finds that if the garage doesn't succeed he can sell the equipment in a secondary market. He figures he can sell the assets for $40K after taxes on the first year. Should Danny invest in the garage project? Why? Assume he doesn't get that $5K in the first year.
Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. What is the flaw in this decision, if it is assumed fixed costs would not be materially affected by the discontinuance?
A company currently pays a dividend of $3.5 per share (D0 = $3.5). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, then at a constant rate of 8% thereafter. The company's stock has a beta of 2, th..
What is the future value of an ordinary annuity with equal payments of $450 being deposited into a money market account at the end of every year for three years if the interest rate is 7% and compounds once per year?
Atlantis Fisheries issues zero coupon bonds on the market at a price of $483 per bond. These are callable in 9 years at a call price of $600. Using semiannual compounding, what is the yield to call for these bonds?
An increase in a firm's financial leverage will: Assume a firm is financed with 30% debt on which it pays 9%. What is the expected return on equity if the expected return on assets is 14%? The trade-off theory of capital structure describes the optim..
Sinking-Fund Provision : Explain the use of a sinking-fund provision. - How can it reduce the investor's risk?
Assume an investor purchases a 10-year, $1,000 bond with a coupon rate of 12 percent. The market rate almost immediately falls to 9 percent. What would be the percentage return on the investment if the buyer borrowed part of the funds with a 25 perce..
Your boss makes you an offer: He will give you $3000 at the end of each year for the next six years,, if you agree to pay him back $2500 at the end of each of the following ten years. Should you accept if cost of funds is 2% compounding annually?
A bank wants to lock in the 3-month interest rate starting on June 20, 2017. Currently, 6/2017 Eurodollar futures price is 94.51 and 9/2017 Eurodollar futures price is 97.55. What is the lock in 3-month interest rate between 6/2017 and 9/2017? (margi..
What challenges or difficulties you might face when estimating future cash flows for an investment project in reality and what you can do to overcome the obstacles?
EAC Approach You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance costs. Machine B costs $150 initially, has a life of ..
Your firm has a credit rating of A. You notice that the credit spread for five year maturity A debt is 85 basis points (0.85%). Your firm's five year debt has a coupon rate of 6%. You see that new five year treasury notes are being issued at par with..
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