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Your firm needs a computerized machine tool lathe which costs $59,000 and requires $12,900 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent. If the lathe can be sold for $5,900 at the end of year 3, what is the after-tax salvage value?
Assume large-company stocks returned 12.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent. What was the average nominal risk-free rate of return for those 75 years?
Union Brick Inc. (UBI) has a total market value of $200 million, consisting of 2 million shares of common stock selling for $50 per share and $100 million of 10 percent perpetual bonds currently selling at par. UBI pays out all earnings as dividends,..
In November 2006, Citi groups stock (NYSE:C) was trading at $49.59. Following the credit crisis on 2007-2008 and by at the end of October 2009, Citigroup stock price has plummeted to $4,27 Several banks went under, and the other saw their stock price..
Bank L operates with equity to asset ratio of 6 percent, while Bank S operates with a similar ratio of 10 percent. Calculate the equity multiplier for each bank and the corresponding return on equity if each bank earns 1.5 percent on assets. Suppose,..
Over the past 84 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between r..
Roxanne invested $230,000 in a new business 9 years ago. The business was expected to bring in $2,000 each month for the next 18 years (in excess of all costs). The annual cost of capital (or interest rate) for this type of business was 9% with month..
When a firm holds cash in excess of some necessary minimum, it incurs an opportunity cost. The opportunity cost of excess cash (held in currency or bank deposits) is the interest income that could be earned by the next best use, such as investment in..
Wilbert's, Inc. paid $90,000, in cash, for a piece of equipment three years ago. Last year, the company spent $10,000 to update the equipment with the latest technology. When evaluating the expansion option, what value, if any, should Wilbert's assig..
In each of the following cases, conduct the analysis for Step 1 and Step 2 (page 339 in this chapter) in evaluating a hedge. Specifically assess cash market risk and determine whether the bank should buy or sell financial futures as a hedge. Explain ..
In 2010, stock XYZ pays $0.60 per share quarterly dividend. The dividend was $0.50 per share in 2006. What is the growth rate on the dividend, assuming constant growth? Find the beta for the stock, and the current interest rate on a 6-month Treasury ..
A foundation supports an annual seminar on campus by using the earnings of a $50,000 gift. It is felt that 10% interest will be realized for 10 years, but that plans should be made to anticipate an interest rate of 6% after that time. What uniform an..
A company currently pays a dividend of $4 per share (D0 = $4). It is estimated that the company's dividend will grow at a rate of 21% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 0.9, the ..
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