FIN3101 Corporate Finance Practice Questions Theme: Capital Cash strategy 1 . Marsh Motors needs to choose one of two fresh machines. Equipment 1 costs $180, 500, has a three or more year existence and EBIT of $108, 750 per year.
Machine two costs $360, 000, contains a life of 6 years and EBIT of $122, 875 per year. Suppose straight range depreciation above the life of the machine. Marsh is a levered firm having a debt value ratio of 0. forty five. The beta of value is 1 ) 125 as the beta of debt is definitely 0. 25. The market risk premium is usually 8 percent and the safe rate is definitely 5%.
The organization tax rate is 20%. a. w. c. 2 . What is the firm’s expense of equity capital? What is the firm’s measured average cost of capital? Which usually machine should Marsh purchase? Advanced Technology is definitely considering investment $38m to formulate a gold mining web page. The average fairness beta of similar businesses in the industry can be 0. 88. The market risk premium can be 7% and the nominal risk free rate is definitely 4%. Pumpiing is anticipated to be 2%. a. w. Suppose there is also a 20% probability of a low output of $2m and an 80% chance of a high end result of $6m in the initially year.
If the output can be low in the first year, there is a 70 percent chance that output will stay at $2m and a 30% possibility that result will stay at $4m annually for the rest of the project’s life. However in the event the output is high in the 1st year, there is also a 80% possibility that it will stay at $6m and a 20% probability that it will stay at $3m per year for the remainder of the project’s life of 10 years. They are real cash runs. Should the organization go ahead while using project? c. 3. The internet site is anticipated to yield $6m in precious metal a year pertaining to 10 years.
These are real cash moves. Suppose we have a 20% probability of no platinum from the web page and a clear site means zero cashflow and a complete loss of the $38m expense. What is the NPV of the project? Will your conclusion in (b) be different in case the company can abandon the mine pertaining to $36m in case of low produce in the initial year? Compute the value of the possibility to get away from. “Aviation Biofuel is taking into consideration setting up shop in Singapore. Their program can be divided into 2 periods. Stage 1: The project requires a test marketing charge of $20m.
This evaluation market is expected to last one year and there is a 60% chance of success. FIN3101 Page1 Stage 2: If the test companies are a success, the firm hopes to invest $100m in a grow. The after-tax cash moves will be $66m per year from year two to season 5. In the event the test marketplace is a failure as well as the firm goes ahead with all the investment, the NPV will probably be -$20m. Suppose a cost of capital of 17%. a. Draw the choice tree just for this project. m. Estimate the NPV of Aviation Biofuel’s plan. some. You are asked to judge the following wood made cabinet developing project to get a corporation.
Develop a table displaying the twelve-monthly cash moves and estimate the NPV of this job at an 8% discount level. All statistics are given in nominal terms. 20X6 Physical Production (cabinets) Labor Input (hours) Wood (physical units) 20X7 20X8 3, 150 3, 750 3, 800 26, 1000 30, 1000 31, 000 550 630 650 The required investment in 12/31/20X5 is $800, 1000. The company faces a 34% tax rate, and uses straight-line depreciation. The salvage worth of the investment which will be received on 12/31/X8 will be one particular fifth in the initial expense.
The price of cupboards on 12/31/X5 will be $250 each and will remain regular in the foreseeable future. Labor costs will be $15 hourly on 12/31/X5 and will maximize at 5% per year. The charge for the wood will probably be $200 every physical unit on 12/31/X5 and will increase at 2% per year. Revenue is received and costs are paid at year’s end (i. e. work with year-end prices in calculating revenues and costs therefore , for example , make use of the 12/31/X6 prices for determining 20X6 earnings and costs). The firm has profitable ongoing operations so that any losses for tax functions from the task can be counter against these kinds of.. Consider a job to supply Honda with 38, 000 a lot of machine anchoring screws annually to get automobile creation. You will need a preliminary $1, 596, 000 purchase in threading equipment to get the project began, the job will last intended for 6 years. The accounting department estimates that annual set costs will be $456, 500 and that changing costs ought to be $220 every ton, accounting will depreciate the initial fixed asset investment straight-line to zero above the 6-year job life.
It also estimates a salvage value of $506, 000 following dismantling costs. The marketing department estimates that the automakers will let the contract in a value of $262 per load. The executive department estimations you will need a basic net working capital investment of $547, 1000. You require a 13 percent return and face a marginal taxes rate of 35 percent on this job. FIN3101 Page2 a. What is the estimated OCF and NPV in this project? n. Suppose you feel that the accounting department’s primary cost and alvage benefit projections will be accurate simply to within 14 percent, the marketing department’s price estimation is appropriate only to inside 9 percent, and the engineering department’s net working capital approximate is appropriate only to inside 4 percent. What is your worst-case and best-case scenario for this project? c. Suppose that you are comfortable about your very own projections, but you are not sure about the Honda’s genuine machine attach requirements. What is the sensitivity of the task OCF to changes in the volume supplied? Think about the sensitivity of NPV to changes in quantity delivered?
Given the sensitivity you calculated, is there some minimum level of the output below which you would not desire to operate? So why? 6. The Cornchopper Business is considering the purchase of a brand new harvester. The break-even purchase price is the value at which the project’s NPV is actually zero. The new harvester is not expected to influence revenues, although pretax functioning expenses will be reduced by simply $13, three hundred per year pertaining to 10 years. This harvester is currently 5 years of age, with a decade of the scheduled life remaining. It was originally purchased pertaining to $48, 300 and continues to be depreciated by the straight-line approach.
The old harvester can be sold for $16, 800 today. The new harvester will be depreciated by the straight-line method more than its 10-year life. The organization tax charge is 32 percent. The firm’s required rate of return is 13 percent. The initial investment, the arises from selling this harvester, and any causing tax results occur immediately. All other cash flows happen at year-end. The market benefit of each harvester at the end of its financial life is no. Determine the break-even purchase price in terms of present value from the harvester. FIN3101 Page3
