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Buster's Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. If the borrow and purchase option is used, the cash flows would be the following: (Year 1) -2,400; (Year 2) -3,800; (Year 3) -1,400; (Year 4) -79,600; all of these cash outflows would be at the beginning of the respective years. Alternatively, the firm could lease the equipment for 3 years, with annual lease payments of $29,000 per year, payable at the beginning of each year. The firm is in the 20% tax bracket. If it borrows and purchases, it could obtain a 3-year simple interest loan, to purchase the equipment at a before-tax interest rate of 10%. If there is a positive net advantage to leasing, the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?
When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma. The project involved a production of new type of shipping containers, What is the Present Value of this project?
Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson's current market price is $40.00, what is the stock's expected rate of return (nearest .01 percent)?
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 9%, and all stocks have independent firm-specific components with a standard deviation of 49%. What is the expected return–beta relationship in this economy?
A firm's net income before tax, EBT [NIBT] (on the income statement) is affected by _____. Larry wants to buy a house priced for $325,000. The FHA requires a 2% downpayment and will make a mortgage loan at 3.5% for 30 years [monthly payments]. In ev..
After we form a diversified portfolio, there is still certain amount of risk left in our investment there. Which is this type of risk?
You won the lottery and can receive either (1) $60,000 today, or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today. take option two because you get $70,000 rather than $60,000 regardless of current ..
Suppose that an investor opens an account by investing $1,000. At the beginning of each of the next 4 years, he deposits an addidtional $1,000 each year, and he then liquates the account at the end of the total 5-year period. Suppose that the yearly ..
A stock is trading at $65 per share. The stock is expected to have a year-end dividend of $5 per share (D1 = $5), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 10% (assume the market is in ..
5 years ago, Barton Industries issued 25-year no callable, semi annual bonds with a $1,900 face value and a 10% coupon, semi annual payment ($95 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, wh..
Fly Away, Inc., has balance sheet equity of $5.7 million. At the same time, the income statement shows net income of $843,600. The company paid dividends of $459,762 and has 120,000 shares of stock outstanding. If the benchmark PE ratio is 21, what i..
In capital budgeting, the IRR implicitly assumes reinvestments of interim cash flows at the IRR itself. First, discuss why this assumption is problematic. Then, explain how MIRR address this issue by presenting your own unique example with proper cal..
The possibility that an actual outcome will be better or worse than its expected outcome. The general term that describes the portion of an asset's total expected return that is greater than the return earned on the market risk-free rate. The result ..
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