Quiz # 2 - Practice Problems ==> MBA FINA 737 1. The ‘XYZ ‘ company will is beginning a new project. The project requires an initial Investment in fixed assets of \$35,000. The assets will have a salvage value of \$5,000 at the end of the 5 year project. The asset will be depreciated, straight line, over that period. The impact of the project will be an increase in revenue of \$30,000 and cost of \$17,000 each year. The working capital of the company will need to be higher than normal by \$1,000 each year of the project.

The tax rate is 34 %. What is the operating cash flow? What is the project’s net present value at a 20% discount rate? 2. Your company has 100,000 shares of common stock outstanding with a market price of \$30 a share. Last month an annual dividend of \$1. 32 per share was paid. The dividend growth rate is 5%. You also have 5,000 bonds outstanding with a face value of \$1,000 per bond. The bond carries an 8% coupon rate annual and will mature in 4. 8 years. The bonds are selling at 99% face value.

The company tax rate is 32%. What is the weighted average cost of capital? 3. Pick between these two alternatives? A. )a machine costing \$52,000 with a life of 4 years, that increases operating cost by \$10,000 per year and B. )a machine costing \$40,000 with a life of 5 years, that increases operating cost by \$9,000. The tax rate is 34%. The depreciation method is straight line. Whichever machine is purchased will be replaced at the end of the useful life. Which one should be purchased and why?

The required rate of return is 16%. 5. What is the total contribution margin and per unit of the following? A project that will create 1000 units of a produce. The cost per Year is \$15,000 of which a third is variable. Depreciation is \$500 per year. There are no taxes and sales will be \$30,000. 6. You have 500 share of stock at a price of \$63. 45 a share with quarterly dividends of \$. 40 per share that have paid out 3 times so far. You sell the stock for \$\$58. 25. What is your total percentage return on investment? . What is the beta of stock B if: portfolio beta is 1. 1 and the portfolio is made up of 30% U. S. treasuries, 30% stock A and 40% in stock B. Stock A has a risk level equivalent to the overall market. 8. Project has cash flows of \$35,400 a year for 4 years. Initial cost of the fixed assets is \$82,000 and will be worthless at the end of the project. Additional net working capital of \$3,000 will be required over the life of the project. What is the NPV at a required rate of return of 12%.