# Bus Fin 620MT3reviewnokey.doc

## Business Finance 620 with Rives/weinstock at The Ohio State University *

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Bus Fin 620MT3review Your company can do a project with initial cost of $1,200,000. The project’s cost of capital is 10.75%. Annual cash flows for ten years will be $131,000 per year. What is the project’s NPV? 0 $779,664.11 -$420,355.89 -$1,200,000 With the same facts as above, what is the most your company should pay for the project? Nothing. No amount is too small $420,355.89 $779,664.11 $1,200,000 Your company installs a new garbage disposal system that will last forever. The cost of the project is $35,000. Yearly savings are $2775.50. What is the project’s IRR? 2.775% 4.93% 7.93% 10.93% Assume that facts are the same for the project in the above question, but now savings grow at 3% per year. What is the IRR of the project? 2.775% 4.93% 7.93% 10.93% Billow and Spew, Inc., must carry out an environmental compliance project with a cost of capital of 10.42%. The initial cost of the project is $112,500, and the project will cost $9,000 per year for ten years, payable at the end of the year. The project will last for ten years. What is the project’s effective annual cost? $27,640.49 $54,317.24 $90,000.00 $166,317.24 Your company, Cool Computer Programs, Inc., has a new program to sell. It can start the project either today, in one year, or in two years. The project will cost $40,000 if commenced today, and the present value of the cash flows from the project will be $47,000, whenever the project is commenced. The cost of the project will decrease by $3,000 each year. Cost of capital for the project is 9%. When should your company commence the project? The project has a negative NPV, never start it. Start today Start in one year Start in two years. The cost of a building project is $900,000, which can be depreciated straight line over the six year life of the project. The company tax rate is 30%, and the cost of capital is 9%. What is the present value of the depreciation tax shield? $450,000.00 $201,866.34 $148,134.66 $137,614.68 A company with a 10.5% hurdle rate has working capital requirements of 15% of the next year’s sales. The company’s sales in the first year of a five year project are $300,000, and sales will increase by 15% per year for five years. The project will end at the end of five years. The company’s marginal tax rate is 35%. What is the effect on NPV of the working capital requirement? zero -$15,075.98 -$23,193.82 $15,075.98 George Co. has two issues of bonds. Issue A is for 8 million dollars, and sells for par. Investors demand an 8% return on these bonds. Issue B is for a face amount of 6 million dollars. Each of these 10 year maturity, $1,000 bonds has a coupon rate of 9%, and investors demand a 9.3% return. The marginal tax rate for George Co. is 35%. What is the after tax cost of the bonds to George Co.? 5.56% 6.32% 8.43% 9.0% Profitable Ventures, Inc., has the following capital structure. The common stock is valued at $40,300,000. The market return is 13%, beta for the stock is 1.09, and short term treasury bonds are paying interest of 3.2%. One million shares of preferred stock are outstanding, with a market price of $20 per share. Each share pays a yearly dividend of $1.50. The company has issued bonds with a face value of 30 million dollars. Each $1,000 face value bond is selling for $1032.00, and investors require a 7.2% annual return. The marginal tax rate is 30%. What is the WACC? .0558 .0948 .1127 .1388 Imelda’s Shoe Creations, Inc., has decided to create a new shoe, the “slimming sandal”. The life of the project will be 5 years. The initial cost of the project is 1.5 million dollars, which can be depreciated straight line over the life of the project. Yearly fixed costs are $250,000, and variable costs per pair of shoes are 40% of the sale price. Each new beautiful pair of shoes will sell for $50.00. Imelda’s cost of capital on this project is 11.5%, and the marginal tax rate is 35%. How many pairs of sandals must Imelda sell each year to reach NPV break even? 8220 11000 18334 24025

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