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This year your company is considering an investment to enhance manufacturing. The incremental earnings before interest and taxes (EBIT) will be $175,000 in year 1 and grow by 6.5% per year for each of the next 5 years. The projects initial investment cost is $600,000 that will be depreciated completely via straight line method over 5 years to 0$.
Despite the investment being fully depreciated (0$ book value) assume that the investment will have a market salvage value of $125,000 after the 5 years. To support manufacturing the project will require working capital of 22% of EBIT per year. Additionally the firm pays an effective tax rate of 35%.
a) Show Project Cash Flow for the next five years of the project
b) Assuming a discount rate of 15% would you recommend the project, why/why not?
c) Would your recommendation be the same if the project's initial cost was doubled to $1,200,000?
You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many contracts do you need if the delta of the call opti..
Eagle Products’ EBIT is $440, its tax rate is 40%, depreciation is $20, capital expenditures are $60, and the planned increase in net working capital is $26. What is the free cash flow to the firm? Free cash flow $
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Risky Co has 10-year bonds outstanding with a coupon rate of 12% and face value of $1000. Interest is paid semi-annually and the investor's required rate of return is 18% per year (due to the company's high risk of default). What is the value of a Ri..
What is the standard deviation of the rate of return on this investment?
Why should we include any change in working capital in the original cost of a capital investment since we recovcr all of the change in working capital when the investment ends?
Calculate riversides financial ratios for 2010, assume that riverside had $1,000,000 in lease payments and 1,400,000 in debt principal repayments in 2010. Interpret the ratios. Use both trend and comparative analyses. For the comparative analysis ass..
Two firms, U and L, are identical except for their capital structure. Both own a single perpetual asset that will have annual after tax-free cash flows of $25million in a boom and $5million in a slump. What is the value of firm U in $millions? What i..
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.10 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12.60 per..
Growth Enterprises believes its latest project, which will cost $82,000 to install, will generate a perpetual growing stream of cash flows.
Calculate your daily losses/ profits from daily marking-to-market. Calculate balance of the performance bond account after the third day.
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