1-At this time the Javits & Sons shares traded at $ 30 each. It is anticipated that
pay a $ 3.00 dividend at year end (D1 = $ 3.00) and that the dividend will grow at
a constant rate of 5% annually. What will be the cost of common equity?
2-It is expected that profits, dividends and share price of Carpetto Technologies Incorporated grow at 7% per annum in the future. Common shares are worth $ 23 each, the last dividend was $ 2.00 and the company will pay a dividend of $ 2.14 last year one in progress.
a. What will be the cost of capital using the method of discounted cash flow?
b. If the beta of the company is 1.6, if the risk-free rate is 9% and if the expected return
market is 13%, what will be the cost of capital using the CAPM model?
c. If the bonds produced yields of 12%, what will be applying performance ra
bonus plus risk premium? (Hint: Use the midpoint of the interval
risk premium.)
3-Decision methods
The Project K costs $ 52,125, net inflows expected value amounted to $ 12,000 per year for 8 years and the cost of capital is 12%. (Hint: start building a timeline.)
a. What is your recovery period (rounded to the nearest year)?
b. What is the discounted payback period?
c. What is its net present value? d. What is the internal rate of return
e. What is the modified internal rate of return?
4-capital budgeting methods
The S project costs $ 10,000 and is expected to bring benefits (cash flows) for $ 3,000 a year for 5 years. The Project L costs $ 25,000 and is expected to generate cash flows by $ 7,400 per year for 5 years. Calculate the net present value; internal rate of return, modified internal rate of return and rate of return of the two projects,
assuming a cost of capital of 12%. What should be selected if they are mutually exclusive and if grading methods are applied? And what is actually selected?
5- VPN Analysis and TIR
After discovering a vein of gold in the mountains of Colorado, CTC Mining Corporation
need to decide whether or not exploitation. The most cost effective method is the extraction with sulfuric acid, a process that damages the environment. To start the extraction, the company must invest $ 900,000 in mining equipment and pay $ 165,000 for the installation. The extracted gold will produce an estimated net gain of $ 350,000 per year for 5 years duration of the grain. The cost of capital is 14%. In this problem assume that cash receipts are at the end of the year.
a. What is the net present value (NPV) and internal rate of return (IRR) of
project?
6-Present value of costs
Aubey Coffee Company is evaluating an entire distribution system for plant
calcining, milling and packaging. The two alternatives are 1) a system of belts
conveyor with a high initial cost but low annual operating costs and 2) several forklift that cost less but whose operating costs are much higher. Since the decision to build the plant and the decision will not affect the total project income was taken. The capital cost of the plant is 8% and the expected net costs are included in the table below:
EXPECTEDNET COST
YEARS Conveyors lift ($500 000) ($200 000)
1 (120 000) (160 000)
2 (120 000) (160 000)
3 (120 000) (160 000)
4 (120 000) (160 000)
5 (20000) (160 000)
a. What is the internal rate of return of the alternatives?
b. What is the present value of its costs? Which one should be selected?
7-increase sales
Pierce Furnishing generated $ 2.0 million in sales in 2005 and its total assets at the end of
year amounted to $ 1.5 million. In the same period current liabilities was $ 500,000 consisting of $ 200,000 in notes payable, $ 200,000 in accounts payable and $ 100,000 in deposits. The company estimates that in 2006 the asset will increase 75 cents for every $ 1 increase in sales. The profit margin is 5% to the 60% rate of return. What increase in sales volume can be obtained without being obliged to seek funds from external sources?
Cash $1,080 Accounts receivable 4320
ACCOUNTS RECEIVABLE 6480 RAINFALL 2880
INVENTORY 9000 NOTES PAYABLE 2100
TOTAL ASSETSSURROUNDING 16560 $9,300
FIXEDASSETS 12600 MORTGAGE BONDS 3,500
COMMON SHARES 3,500
RETAINED EARNINGS 12,860
TOTAL LIABILITIES CAPITAL $29,160
TOTAL ASSETS 29160
Stevens Textile : income statement at December 31, 2005
( thousands of dollars )
Sales $ 36,000
Operating costs 32,440
Earnings before interest and taxes $ 3,560
interests 460
Earnings before taxes $ 3,100
Tax (40 % ) 1240
Net income $ 1,860
Dividends ( 45 % ) $ 837
Addition to retained earnings $ 1,023
Suppose that under projected 2006 sales grow 15 % over to 2005. Calculate the additional funds needed. Assume that the company was running at full capacity in 2005, it can not sell any of its assets
fixed and that the required funding is obtained through notes payable. Suppose further that the assets, liabilities and spontaneous increase in operating costs the same percentage as sales. With the percentage of sales method to prepare a balance sheet and overall proforma income statement at December 31, 2006. Calculate interest (cash payments do not accrue interest) with a rate of 10 % on the balance liabilities at the beginning of the year. Use the projected income statement to determine
how much is added to retained earnings.