finance data bank
105. Heer Enterprises needs someone to supply it with
225,000 cartons of machine screws per year to support its manufacturing needs
over the next 7 years, and you've decided to bid on the contract. It will cost
you $1,170,000 to install the equipment necessary to start production; you'll
depreciate this cost straight-line to zero over the project's life. You
estimate that in 7 years, this equipment can be salvaged for $75,000. Your
fixed production costs will be $360,000 per year, and your variable production
costs should be $12.75 per carton. You also need an initial investment in net
working capital of $112,500, all of which will be recovered when the project
ends. Your tax rate is 32 percent and you require a 13 percent return on your
investment. What bid price per carton should you submit?
106. Chapman Machine Shop is considering a 4-year
project to improve its production efficiency. Buying a new machine press for
$576,000 is estimated to result in $192,000 in annual pretax cost savings. The
press falls in the MACRS 5-year class, and it will have a salvage value at the
end of the project of $84,000. The press also requires an initial investment in
spare parts inventory of $24,000, along with an additional $3,600 in inventory
for each succeeding year of the project. The inventory will return to its
original level when the project ends. The shop's tax rate is 35 percent and its
discount rate is 11 percent. Should the firm buy and install the machine press?
Why or why not?
A. no; The net present value is -$7,489.
B. no; The net present value is -$667.
C. yes; The net present value is $211.
D. yes; The net present value is $4,319.
E. yes; The net present value is $8,364.
107. Eads Industrial Systems Company (EISC) is trying
to decide between two different conveyor belt systems. System A costs $427,000,
has a 6-year life, and requires $112,000 in pretax annual operating costs.
System B costs $517,000, has an 8-year life, and requires $79,000 in pretax
annual operating costs. Both systems are to be depreciated straight-line to
zero over their lives and will have a zero salvage value. Whichever system is
chosen, it will not be replaced when it wears out. The tax rate is 33 percent
and the discount rate is 24 percent. Which system should the firm choose and
A. A; The net present value is $211,516.
B. A; The net present value is -$582,720.
C. A; The net present value is -$314,216.
D. B; The net present value is $308,222.
E. B: The net present value is -$625,123.
108. Consider a project to supply 60,800,000 postage
stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel
of land available that cost $760,000 five years ago; if the land were sold
today, it would net you $912,000, aftertax. The land can be sold for $1,500,000
after taxes in 5 years. You will need to install $2,356,000 in new
manufacturing plant and equipment to actually produce the stamps; this plant
and equipment will be depreciated straight-line to zero over the project's
5-year life. The equipment can be sold for $456,000 at the end of the project.
You will also need $469,000 in initial net working capital for the project, and
an additional investment of $38,000 in every year thereafter. All net working
capital will be recovered when the project ends. Your production costs are 0.38
cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate
is 31 percent and your required return on this project is 11 percent. What bid
price per stamp should you submit?
40. Chelsea Fashions is expected to pay an annual
dividend of $0.80 a share next year. The market price of the stock is $22.40
and the growth rate is 5 percent. What is the firm's cost of equity?
A. 7.58 percent
B. 7.91 percent
C. 8.24 percent
D. 8.57 percent
E. 9.00 percent
41. The Shoe Outlet has paid annual dividends of
$0.65, $0.70, $0.72, and $0.75 per share over the last four years,
respectively. The stock is currently selling for $26 a share. What is this
firm's cost of equity?
A. 7.56 percent
B. 7.93 percent
C. 10.38 percent
D. 10.53 percent
E. 11.79 percent
42. Sweet Treats common stock is currently priced at
$19.06 a share. The company just paid $1.15 per share as its annual dividend.
The dividends have been increasing by 2.5 percent annually and are expected to
continue doing the same. What is this firm's cost of equity?
A. 6.03 percent
B. 6.18 percent
C. 8.47 percent
D. 8.68 percent
E. 8.82 percent
43. The common stock of Metal Molds has a negative
growth rate of 1.5 percent and a required return of 18 percent. The current
stock price is $11.40. What was the amount of the last dividend paid?
44. Highway Express has paid annual dividends of
$1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively.
What is the average dividend growth rate?
A. -4.51 percent
B. -3.60 percent
C. 2.28 percent
D. 2.47 percent
E. 4.39 percent
45. Southern Home Cookin' just paid its annual
dividend of $0.65 a share. The stock has a market price of $13 and a beta of
1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk
premium is 6.8 percent. What is the cost of equity?
A. 9.98 percent
B. 10.04 percent
C. 10.12 percent
D. 10.37 percent
E. 10.45 percent
46. National Home Rentals has a beta of 1.38, a stock
price of $19, and recently paid an annual dividend of $0.94 a share. The
dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of
return and a risk premium of 7.5 percent. What is the firm's cost of
A. 7.05 percent
B. 8.67 percent
C. 9.13 percent
D. 10.30 percent
E. 11.56 percent
47. Henessey Markets has a growth rate of 4.8 percent
and is equally as risky as the market. The stock is currently selling for $17 a
share. The overall stock market has a 10.6 percent rate of return and a risk
premium of 8.7 percent. What is the expected rate of return on this
A. 8.7 percent
B. 9.2 percent
C. 10.6 percent
D. 11.3 percent
E. 11.7 percent
48. Tidewater Fishing has a current beta of 1.48. The
market risk premium is 8.9 percent and the risk-free rate of return is 3.2
percent. By how much will the cost of equity increase if the company expands
its operations such that the company beta rises to 1.60?
A. 0.88 percent
B. 1.07 percent
C. 1.50 percent
D. 2.10 percent
E. 2.26 percent
49. Wind Power Systems has 20-year, semi-annual bonds
outstanding with a 5 percent coupon. The face amount of each bond is $1,000.
These bonds are currently selling for 114 percent of face value. What is the
company's pre-tax cost of debt?
A. 3.98 percent
B. 4.42 percent
C. 4.71 percent
D. 5.36 percent
E. 5.55 percent
50. Boulder Furniture has bonds outstanding that
mature in 13 years, have a 6 percent coupon, and pay interest annually. These
bonds have a face value of $1,000 and a current market price of $1,040. What is
the company's aftertax cost of debt if its tax rate is 32 percent?
A. 2.97 percent
B. 3.24 percent
C. 3.78 percent
D. 5.21 percent
E. 5.53 percent
51. Handy Man, Inc. has zero coupon bonds outstanding
that mature in 8 years. The bonds have a face value of $1,000 and a current
market price of $640. What is the company's pre-tax cost of debt?
A. 2.55 percent
B. 5.09 percent
C. 5.66 percent
D. 7.31 percent
E. 7.48 percent
52. Dog Gone Good Engines has a bond issue outstanding
with 17 years to maturity. These bonds have a $1,000 face value, a 9 percent
coupon, and pay interest semi-annually. The bonds are currently quoted at 87
percent of face value. What is the company's pre-tax cost of debt if the tax
rate is 38 percent?
A. 4.10 percent
B. 4.42 percent
C. 6.61 percent
D. 8.90 percent
E. 10.67 percent
53. The Corner Bakery has a bond issue outstanding
that matures in 7 years. The bonds pay interest semi-annually. Currently, the
bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon.
What is the firm's aftertax cost of debt if the tax rate is 30 percent?
A. 4.88 percent
B. 5.36 percent
C. 5.45 percent
D. 6.11 percent
E. 8.74 percent
54. The outstanding bonds of Tech Express are priced
at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay
interest annually. The firm's tax rate is 39 percent. What is the firm's
aftertax cost of debt?
A. 3.01 percent
B. 3.22 percent
C. 3.35 percent
D. 3.77 percent
E. 4.41 percent
55. Simple Foods has a zero coupon bond issue
outstanding that matures in 9 years. The bonds are selling at 42 percent of par
value. What is the company's aftertax cost of debt if the tax rate is 38
A. 5.48 percent
B. 5.73 percent
C. 6.12 percent
D. 7.73 percent
E. 9.88 percent
56. Grill Works and More has 8 percent preferred stock
outstanding that is currently selling for $49 a share. The market rate of
return is 14 percent and the firm's tax rate is 37 percent. What is the firm's
cost of preferred stock?
A. 14.77 percent
B. 15.29 percent
C. 15.67 percent
D. 16.33 percent
E. 16.54 percent
57. Samuelson Plastics has 7.5 percent preferred stock
outstanding. Currently, this stock has a market value per share of $52 and a
book value per share of $38. What is the cost of preferred stock?
A. 7.50 percent
B. 13.88 percent
C. 14.42 percent
D. 19.29 percent
E. 19.74 percent
58. New York Deli's has 7 percent preferred stock
outstanding that sells for $36 a share. This stock was originally issued at $50
per share. What is the cost of preferred stock?
A. 13.68 percent
B. 14.00 percent
C. 14.29 percent
D. 19.44 percent
E. 19.80 percent
59. Nelson's Landscaping has 1,200 bonds outstanding
that are selling for $990 each. The company also has 2,500 shares of preferred
stock at a market price of $28 a share. The common stock is priced at $37 a
share and there are 28,000 shares outstanding. What is the weight of the common
stock as it relates to the firm's weighted average cost of capital?
A. 43.08 percent
B. 45.16 percent
C. 47.11 percent
D. 54.00 percent
E. 55.45 percent
60. Mangrove Fruit Farms has a $200,000 bond issue
outstanding that is selling at 92 percent of face value. The firm also has
1,500 shares of preferred stock and 15,000 shares of common stock outstanding.
The preferred stock has a market price of $35 a share compared to a price of
$24 a share for the common stock. What is the weight of the preferred stock as
it relates to the firm's weighted average cost of capital?
A. 6.75 percent
B. 7.20 percent
C. 7.75 percent
D. 8.30 percent
E. 8.80 percent
61. Electronics Galore has 950,000 shares of common
stock outstanding at a market price of $38 a share. The company also has 40,000
bonds outstanding that are quoted at 106 percent of face value. What weight
should be given to the debt when the firm computes its weighted average cost of
A. 42 percent
B. 46 percent
C. 50 percent
D. 54 percent
E. 58 percent