Scenario analysis. Your firm, Agrico Products, is considering a tractor that would have a net cost of $36,000

(12-9) Scenario analysis. Your firm, Agrico Products, is considering a tractor that would have a net cost of $36,000, would increase pre-tax operating cash flows before taking account of depreciation by $12,000 per year, and would be depreciated on a straight-line basis to zero over 5 years at the rate of $7,200 per year, beginning the first year. (Thus annual cash flows would be $12,000, before taxes, plus the tax savings that result from $7,200 of depreciation.) The managers are having a heated debate about whether the tractor would actually last 5 years. The controller insists that she knows of tractors that have lasted only 4 years. The treasurer agrees with the controller, but he argues that most tractors actually do give 5 years of service. The service manager then states that some actually last for as long as 8 years.
Given this discussion, the CFO asks you to prepare a scenario analysis to determine the importance of the tractor’s life on NPV. Use a 40 percent marginal federal-plus-state tax rate, a zero salvage value, and a WACC of 10 percent. Assuming each of the indicated lives has the same probability of occurring (probability = 1/3), what is the tractor’s expected NPV? (Hint: Here straight-line depreciation is based on the MACRS class life of the tractor and is not affected by the actual life. Also, ignore the half-year convention for this problem.)

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.700 million

Question 8. Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.700 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $210,000. The project requires an initial investment in net working capital of $300,000. The project is estimated to generate $2,400,000 in annual sales, with costs of $960,000. The tax rate is 34 percent and the required return on the project is 14 percent. The NPV for this project is $. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) Question 13. Summer Tyme, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.0 million. The fixed asset falls into the three-year MACRS class ( MACRS Table ) and will have a market value of $280,000 after three years. The project requires an initial investment in net working capital of $500,000. The project is estimated to generate $2,850,000 in annual sales, with costs of $1,160,000. The tax rate is 40 percent and the required return on the project is 12 percent. The net cash flow in Year 0 is $; the net cash flow in Year 1 is $; the net cash flow in Year 2 is $; and the net cash flow in Year 3 is $. The NPV for this project is $. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) Question 14. Dog Up! Franks is looking at a new sausage system with an installed cost of $655,200. This cost will be depreciated straight-line to zero over the project’s 6-year life, at the end of which the sausage system can be scrapped for $100,800. The sausage system will save the firm $201,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $47,040. If the tax rate is 34 percent and the discount rate is 10 percent, the NPV of this project is $. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) Question 18. value: 4.76 points Consider an asset that costs $413,600 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for $51,700. If the relevant tax rate is 33 percent, the aftertax cash flow from the sale of this asset is $. (Round your answer to 2 decimal places. (e.g., 32.16)) Question 20. Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $979,200 is estimated to result in $326,400 in annual pretax cost savings. The press falls in the MACRS five-year class ( MACRS Table ), and it will have a salvage value at the end of the project of $142,800. The press also requires an initial investment in spare parts inventory of $40,800, along with an additional $6,120 in inventory for each succeeding year of the project. If the shop’s tax rate is 32 percent and its discount rate is 17 percent, the NPV for the project is $ and Geary buy and install the machine press. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)

Which of the following would least likely be considered as signaling a potential problem regarding the “quality of earnings”

1. Which of the following would least likely be considered as signaling a potential problem regarding the “quality of earnings” for a Frm? a. the Frm has experienced a significant increase in earnings relative to the industry overall b. the Frm’s accounts receivable account is increasing at a rate faster than the Frm’s increase in sales. c. the Frm has announced a delay in their release of Financial statements due to a change in auditors d. the Frm’s accounts receivable account is increasing, but at a rate slower than the Frm’s increase in sales. e. all of the above would be considered signals of potential problems regarding he Frms’ quality of earnings 2. ±he extended Du Pont equation, a. k. a. the 3 components ROE decomposition equation, (i.e.ROE = (profit margin)x(total asset turnover)x(equity mulTplier) is used to a. compute the Frm’s ROE, as the equation states. b. decompose the Frm’s ROE into sub components, for a be²er understanding of the Frm’s Financial health. c. determine if the Frms is liquid d. compute the Frm’s ROA, as the equation states. 3. Bank A charges 16% APR on auto loans with monthly compounding. What is the E³ecTve Annual Interest Rate (EAR)? a. 16%, since EAR = APR for monthly compounding b. 13.3% c. 1.33% d. 17.23% e. 18.12% f. insu´cient information to answer this quesTon 4. ±he capital budgeTng director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce net overtax cash ¶ows of $44,503 per year. If the Frm’s cost of capital is 14 percent, what is the project’s IRR? (Hint: Is the Frm’s cost of capital relevant to an IRR calculation? ) a. 8% b. 14% c. 18% d. 5% e. 12% 5. Which of the following assets’ book values would, in general, most accurately represent the assets’ true market value? a. Specialized inventory that can only be used for specific projects b. Inventory that is widely used in many common manufacturing activities
c. Real estate assets of the Frm d. Equipment assets of the Frm used in producTon acTviTes. 6. ±he total economic (true, i.e. true Fnancial value) value of the Frm is (Please READ ALL alternaTves before answering): a. ²ound on the balance sheet b. Equal to the total market value of the stockholders’ equity c. equal to the total market value of the all of the Frm’s assets d. Equal to the total market value of the owners and creditors’ claim on the Frm, by the balance sheet equaTon( aka accounTng equaTon) e. both c and d are correct 7. Your subscripTon to Jogger’s World is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate at the end of each year or of ge³ng a lifeTme subscripTon to the magazine by paying $100 today. Your cost of capital is 7 percent. How many years would you have to live to make the lifeTme subscripTon the be´er buy? Assume payments for the regular subscripTon are made at the end of each year. (Round up if necessary to obtain a whole number of years.) a. 10 years b. 15 years c. 18 years d. 20 years e. 28 years 8. Managerial stock opTons are an incenTve for managers to act in the best interest of: a. stockholders b. bondholders c. employees d. government leaders e. the public f. banker 9. Suppose you deposit $2000 into an account at the end of each of the next 10 years. If the account earns 12%, how much will be in the account at the end of 30 years? a. 35,097 b. 192,926 c. 338,560 d. 482,665 e. Insuµcient informaTon to compute

Stephanie’s Cafes, inc., has declared a dividend of $1.30 per share for shareholders of record on Tuesday, May 2

Chapter 14
Warm-up exercise questions

E14-1
Stephanie’s Cafes, inc., has declared a dividend of $1.30 per share for shareholders of record on Tuesday, May 2. The firm has 200,000 shares outstanding and will pay the dividend on May24. How much cash will be needed to pay the dividend? When will the stock begin selling ex dividend?

E14- 2
Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments require financing of $950,000 and $1.75 million, respectively. Chancellor uses a target capital structure with 60% debt and 40% equity. Apply the residual theory to determine what dividends, if any, can be paid out and calculate the resulting dividend payout ratio.

E14-3
Ashkenazi Companies has the following stockholders’ equity account:

Common stock (350,000 shares at $3 par)————$1,050,000
Paid-in capital in excess of par ————————–2,500,000
Retaining earnings——————————————-750,000
Total stockholders’ equity————————–$4,300,000

Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend can Ashkenazi pay? If legal capital were more broadly defined to include all paid-in capital, how much of a per-share dividend could Ashkenazi pay?

E14-4
The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as follows:

Year EPS Dividend/ share
2009
2010
2011
2012 $1.75
1.95
2.05
2.25 $0.95
1.20
1.35
1.30

Based on Kopi’s historical dividend payout ratio, discuss whether a constant payout ratio of 60% would benefit shareholders.

E14-5
The current stockholders’ equity account for Hilo Farms is as follows:

Common stock (50,000 shares at $3 par)—————$150,000
Paid-in capital in excess of par —————————-250,000
Retained earnings——————————————–450,000
Total stockholders’ equity—————————–$850,000

Hilo has announced plans to issue an additional 5,000 shares of common stocks as part of its stock dividend plan. The current market price of Hilo’s common stock is $20 per share. Show how the proposed stock dividend would affect the stockholder’s equity account

Below are details of a semiannual bond. Please show work in Excel spreadsheet. Par value = 1000

Below are details of a semiannual bond. Please show work in Excel spreadsheet.
Par value = 1000; Maturity 4 years; Market rate if interest (yield to Maturity) = 11% per annum; Coupon rate = 8% per year paid semiannually.

a. Find the Duration, modified duration, and Convexity of the bond. Explain the meaning and importance of the concept of duration? What is meant by the term convexity with respect to bond prices?
b. If the yield changes by 1 % what will be the change in price and what will be new price?
c. Also calculate the delta and the gamma.
d. Which one is a better measure of predicting price change–duration or convexity– and why?

Brachman Builders is a large international construction firm that wants to raise up to $60 million to finance expansion.

Brachman Builders is a large international construction firm that wants to raise up to $60 million to finance expansion. Brachman desires to maintain a capital structure that is 50% debt and 50% equity. Brachman can finance in the domestic and international markets at the rates listed in the following table. Both debt and equity would have to be sold in multiples of $15 million, and these cost figures show the component costs, each, of debt and equity if raised half by equity and half by debt.

Up to $30 million of new capital

Cost of Domestic Equity 10%
Cost of Domestic Debt 8%
Cost of European Equity 12%
Cost European Debt 6%
$31 million to $60 of new capital
Cost of Domestic Equity 16%
Cost of Domestic Debt 10%
Cost of European Equity14%
Cost European Debt 8%

What is the lowest possible average cost of capital for Brachman if the firm raises $30 million, maintains their desired capital structure and they are in a 30% tax bracket

Jerry Scott has recently accepted a position with a state agency that has a retirement pension plan

Jerry Scott has recently accepted a position with a state agency that has a retirement pension plan that requires joint contributions by the employee and the employer. Jerry is now ten years from the retirement age of 65 and expects to contribute $400 per year to the plan, which will make him eligible for payments of $1,000 per year for the remainder of his life, beginning at the age of 65. Jerry’s retirement plan is optional; therefore, he is considering the alternative to invest annually an amount equal to his $400 per year contribution. If Jerry assumes his investments would earn 8 percent annually, and his life expectancy is 80 years, should he invest in his own plan or should he make contributions to his employer’s fund? Examine both alternatives and make a recommendation. Show all calculations and explain your reasons. State any assumptions you make. Present your work as a 2-page report in a Word document formatted in APA style.

United Technologies Inc. (UT) just constructed a manufacturing plant in China. The construction cost 9 billion Chinese Yuan

1. United Technologies Inc. (UT) just constructed a manufacturing plant in China. The construction cost 9 billion Chinese Yuan. UT intends to leave the plant open for three years. During the three years of operation, Yuan cash flows are expected to be 3 billion Yuan, 3 billion Yuan, and 2 billion Yuan, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, UT expects to sell the plant for 5 billion Yuan. UT has a required rate of return of 17 percent. It currently takes 2.75 Yuan to buy one U.S. dollar, and the Yuan is expected to depreciate by 7 percent per year.

a. Determine the NPV for this project. Should United Technologies build the plant?
b. How would your answer change if the value of the Yuan was expected to remain unchanged from its current value of 2.75 Yuan per U.S. dollar over the course of the three years? Should United Technologies construct the plant then? The NPV would therefore be $¬¬______.
c. Recall that Yuan 5 billion of the cash flow in year 3 represents the salvage value. United Technologies is not completely certain that the salvage value will be this amount and wishes to determine the NPV without this amount in the capital budgeting exercise. The NPV would therefore be $_______.

2. As of today, assume the following information is available:

U.S. Mexico
Real rate of interest required by investors 2% 2%
Nominal interest rate 11% 15%
Spot rate —- $.20
One-year forward rate —- $.19

a. Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.
b. Use the forward rate to forecast the percentage change in the Mexican peso over the next year.

Cost of Capital – Raising Capital Problems 1, 3, 5, 6 1. P14-13 Calculating the WACC [LO3] – Weighted Average Cost of Capital

Cost of Capital – Raising Capital Problems 1, 3, 5, 6 1. P14-13 Calculating the WACC [LO3] – Weighted Average Cost of Capital Filer Manufacturing has 9.6 million shares of common stock outstanding. The current share price is $49, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $76 million, has a 6 percent coupon, and sells for 93 percent of par. The second issue has a face value of $62.4 million, has a 5.99 percent coupon, and sells for 97.4 percent of par. The first issue matures in 9 years, the second in 7 years. The most recent dividend was $2.5 and the dividend growth rate is 4.3 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 31 percent. Required: What is the company’s WACC? (Do not round your intermediate calculations.) 8.49% is the correct answer. I need to know how to calculate it. Please show me using Excel, if possible. 3. P15-3 Rights [LO4] Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $140 to $119 ($140 is the rights-on price; $119 is the ex-rights price,also known as the when-issued price). The company is seeking $13 million in additional funds with a per-share subscription price equal to $70. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.) 433,333 is the correct answer. I need to know how to calculate it. Please show me using Excel, if possible. 5. P15-14 Selling Rights [LO4] Roth Corp. wants to raise $3.9 million via a rights offering. The company currently has 540,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription price of $23 per share and will charge the company a 8 percent spread. If you currently own 5,700 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights? (Do not round your intermediate calculations.) $10,153.07 is the correct answer. I need to know how to calculate it. Please show me using Excel, if possible.
6. P15-8 Price Dilution [LO3] Left Turn, Inc., has 140,000 shares of stock outstanding. Each share is worth $100, so the company’s market value of equity is $14,000,000. Required: (a ) Suppose the firm issues 20,000 new shares at the price of $100, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) 0.25 0.00 -0.25 60.00 40.50 (b ) Suppose the firm issues 20,000 new shares at the price of $88, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) -1.50 57.60 -1.58 -1.42 37.60 (c ) Suppose the firm issues 20,000 new shares at the price of $67, what will the effect be of this offering price on the existing price per share? (Do not round your intermediate calculations.) -4.12 -3.92 -4.33 53.40 33.40

RESEARCH PAPER- INDIA TAX LAWS The Indian constitution has distributed the legislative powers of taxation between the Central and State government in the Schedule VII

RESEARCH PAPER- INDIA TAX LAWS The Indian constitution has distributed the legislative powers of taxation between the Central and State government in the Schedule VII. The distribution is as follows:  List – I areas on which only the parliament is competent to make laws,  List – II areas on which only the state legislature can make laws, and  List – III areas on which both the Parliament and the State Legislature can make laws upon concurrently. Central government levies following taxes as per the Union list:  Taxes on Income other than agricultural income  Custom duty on Imports and exports  Excise duties on tobacco and other goods manufactured or produced in India  Corporation tax  Central Sales Tax on Interstate sales  Taxes on transactions in stock exchanges and future markets  All residuary types of taxes not listed in any of the three lists of Seventh Schedule The state governments on the other hand are empowered to levy following taxes:  Land Revenue  Taxes on agricultural income  Taxes on sales  Taxes on the consumption or sale of electricity  Stamp duty  Toll taxes  Taxes on luxuries, betting and gambling
The major tax which affects Individual tax payer is Income tax which is enacted by the parliament in the form of the Income Tax Act, 1961 which imposes taxes on Income earned by persons under various Heads which may be- Salary, Business and Profession, House Property, Capital Gains and Other Sources. As per the Act a person includes: Individual, Hindu Undivided Family, Association of Persons, Body of Individuals, Company, Firm, Local authority, Artificial Judicial person. Rate of income tax is prescribed by the central government for every financial year in the Finance bill. For the Assessment year 2015-2016 the tax rates for an Individual below 60 years of age are: o Income up to Rs. 250,000- nil o Income between Rs. 250,000 – Rs. 500,000- 10% of income above Rs 250,000 o Income between Rs. 500,000 – Rs. 1,000,000- 20% of income above Rs 500,000 o Income above Rs. 1,000,000- 30% of income above Rs 1,000,000 The tax rates for an Individual above 60 years but below 80 years of age are: o Income up to Rs. 300,000- nil o Income between Rs. 300,000 – Rs. 500,000- 10% of income above Rs 250,000 o Income between Rs. 500,000 – Rs. 1,000,000- 20% of income above Rs 500,000 o Income above Rs. 1,000,000- 30% of income above Rs 1,000,000 The tax rates for an Individual above 80 years of age are: o Income up to Rs. 500,000- nil o Income between Rs. 500,000 – Rs. 1,000,000- 20% of income above Rs 500,000 o Income above Rs. 1,000,000- 30% of income above Rs 1,000,000 There are various deductions available from the total income as listed section 80 of the Act, if any expenditure from the Income is done on –