1.Managers and analysts from all over the firm have evaluated a potential new $10 million investment for...
Question:
1.Managers and analysts from all over the firm have evaluated a potential new $10 million investment for their firm that would last 10 years.The production crew believes the firm will have to immediately invest $900,000 in net working capital for raw materials and inventory, and that associated expenses will increase by $5.30 million per year, starting a year from now.Although sales will vary by year, the finance team notes that annual sales equate to a $7.25 million annuity, starting a year from now.The investment assets will be depreciated to zero over the life of the project, but is expected to have scrap value of $500,000.The firm faces a 30% tax rate and the firm would require a return of 14.3% APR compounded annually on this project.
(A) What is the NPV of the project?
(B) Based on value reached in part (A), should the firm accept or reject the project?(A one word response here will do!)
(C) By what percent would projected sales have to rise or fall to reverse decision reached in part A?
2.An analyst for ZZZ Trust is analyzing the value of ABC stock, which currently does not pay dividends.He believes ABC will start paying a quarterly dividend of $0.75 per share in 2 years (8 quarters from now) and that it will remain constant forever.In addition, he estimates his required return on ABC to be 9.2% APR compounded quarterly.What value would he place on a share of ABC stock?
3.(A) What is the yield to maturity on a corporate bond given the following information:
- bond matures in 20 years
- coupon rate = 8% APR compounded semi-annually, paid semi-annually
- face value = $1000
- bond price = $882.91
(B) In our class, we discussed two types of risks faced by bondholders.What are these two risks, and how could bond investors lower or eliminate each type of risk?
4.Next month, your friend plans to deposit $1,000 into an account expected to earn 12% APR compounded monthly.After the first $1,000 deposit, she will constantly grow the deposit by 0.5% each month.Given the above plan, how much will she have saved in 4 years?
Expert Answer:
1 NPV of the Project A To calculate the NPV we need to calculate the present value of the cash inflo... View the full answer
