Hardware Industries is purchasing a new chemical vapor depositor in order to make
silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered
and installed. The machine is expected to work for six years and raise gross profits by
$4,500,000 per year, starting at the end of the first year. Other general expenses
associated with using the machine are estimated at $1 million for each of those years. The
machine will be depreciated over six years using the straight-line method. The marginal
tax rate is 40%. What are the incremental free cash flows associated with the new
machine in year 0 of the project? Assume the machine is purchased in year 0 and starts
depreciating in year 1 of the project.
Give this one a try later!
, =50000000+100000
=5010000
Since it is a cash outflow, it should be expressed as a negative.
IBM expects to pay a dividend of $6.52 next year and you expect these dividends to
grow at 4% a year into indefinite future. The price of IBM is $117 per share. What is your
estimate of the IBM's cost of equity capital?
Give this one a try later!
Cost of equity = (dividend per share/ current market value) + growth rate of
dividend
=((6.52/ 117) + 0.04) * 100
= 9.57%
An auto-parts company is deciding whether to sponsor a racing team for a cost of $1
million. The sponsorship would last for three years and is expected to increase cash
flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the
value of the company if it chooses to go ahead with the sponsorship?
Give this one a try later!
A) NPV = -1,000,000 + 570,000 / (1 + 0.069 ) + 570,000 / (1 + 0.069 )2 + 570,000 /
(1 + 0.069 )3 = $498,597
, Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid
a dividend of $0.63 today and then you sold it for $65. What was your return on the
investment?
Give this one a try later!
Total Return = (selling price - purchase price + dividend received) / purchase
price
= (65 - 60 + 0.63)/ 60
= 0.093833
= 9.38%
A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit
spread for this firm's 5-year debt is 1.2%. New 5-year Treasury notes are being issued at
par with a coupon rate of 5.1%. What should the price of the firm's outstanding 5-year
bonds be if their face value is $1,000?
Give this one a try later!
Yield on bond = Coupon rate of treasure notes + Credit spread
= 5.1% + 1.2%
= 6.3%
Rate = 6.3%/2 = 0.0315
Nper = 5*2 = 10
Pmt = (4.7%/2)*1000 = 23.5
Fv = 1000
Price = $932.28
silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered
and installed. The machine is expected to work for six years and raise gross profits by
$4,500,000 per year, starting at the end of the first year. Other general expenses
associated with using the machine are estimated at $1 million for each of those years. The
machine will be depreciated over six years using the straight-line method. The marginal
tax rate is 40%. What are the incremental free cash flows associated with the new
machine in year 0 of the project? Assume the machine is purchased in year 0 and starts
depreciating in year 1 of the project.
Give this one a try later!
, =50000000+100000
=5010000
Since it is a cash outflow, it should be expressed as a negative.
IBM expects to pay a dividend of $6.52 next year and you expect these dividends to
grow at 4% a year into indefinite future. The price of IBM is $117 per share. What is your
estimate of the IBM's cost of equity capital?
Give this one a try later!
Cost of equity = (dividend per share/ current market value) + growth rate of
dividend
=((6.52/ 117) + 0.04) * 100
= 9.57%
An auto-parts company is deciding whether to sponsor a racing team for a cost of $1
million. The sponsorship would last for three years and is expected to increase cash
flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the
value of the company if it chooses to go ahead with the sponsorship?
Give this one a try later!
A) NPV = -1,000,000 + 570,000 / (1 + 0.069 ) + 570,000 / (1 + 0.069 )2 + 570,000 /
(1 + 0.069 )3 = $498,597
, Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid
a dividend of $0.63 today and then you sold it for $65. What was your return on the
investment?
Give this one a try later!
Total Return = (selling price - purchase price + dividend received) / purchase
price
= (65 - 60 + 0.63)/ 60
= 0.093833
= 9.38%
A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit
spread for this firm's 5-year debt is 1.2%. New 5-year Treasury notes are being issued at
par with a coupon rate of 5.1%. What should the price of the firm's outstanding 5-year
bonds be if their face value is $1,000?
Give this one a try later!
Yield on bond = Coupon rate of treasure notes + Credit spread
= 5.1% + 1.2%
= 6.3%
Rate = 6.3%/2 = 0.0315
Nper = 5*2 = 10
Pmt = (4.7%/2)*1000 = 23.5
Fv = 1000
Price = $932.28
