Question HydroTech Corp stock was $50 per share a year ago when it was purchased. Since then it paid a $4 per share dividend. The stock price is currently $45. If you owned 500 shares of HydroTech what was your percent return? 4. (4 points)PortfolioReturnYear-to-date Company X had earned a -3 percent return. During the same time period Company Y earned 12 percent and Company Z earned 7 percent. If you have a portfolio made up of 50 percent Company X 30 percent Company Y and 20 percent Company Z what is your portfolio return? 5. (8 points) You hold the positions in the table below. COMPANY GoodmonthIcestoneBridgerock PRICE $25.00 $20.00 $40.00 # SHARES 120 150 100 BETA 1.5 2.5 1.0 A. What is the beta of your portfolio? B. If you expect the market to earn 14 percent and the risk-free rate is 4 percent what is the required return of the portfolio? 6. TAB Inc. has a $1000 (face value) 10 year bond issue selling for $1184 that pays an annual coupon of 8.5 percent. What would be TAB’s before-tax component cost of debt? 7. Team Sports has 6 million shares of common stock outstanding 1 million shares of preferred stock outstanding and 200 thousand bonds ($1000 par). If the common shares are selling for $24.50 per share the preferred share are selling for $20 per share and the bonds are selling for 65 percent of par what would be the weight used for equity in the computation of Team’s WACC? 8. Suppose that TipsNToes Inc.’s capital structure features 40 percent equity 60 percent debt and that its before-tax cost of debt is 9 percent while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 25 percent what will be TipsNToes’s WACC? 9. Suppose you sell a fixed asset for $50000 when its book value is $60000. If your company’s marginal tax rate is 40% what will be the effect on cash flows of this sale (i.e. what will be the after-tax cash flow of this sale)? 10. Your company has spent $500000 on research to develop a new computer game. The firm is planning to spend $100000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5000. The machine has an expected life of 3 years a $100000 estimated resale value and falls under the MACRS 5-Year class life. Revenue from the new game is expected to be $500000 per year with costs of $200000 per year. The firm has a tax rate of 35 percent an opportunity cost of capital of 10 percent and it expects net working capital to increase by $100000 at the beginning of the project. What will be the net cash flow for year one of this project? 11. Compute the NPV for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. TIME: 012345 CASH FLOW: -1000 -2000 3000 0 1000 2500 12. Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable payback is 5 years. TIME: 012345 CASH FLOW: – 75 – 75 0 100 75 90 13. Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. TIME: 012345 CASH FLOW: – 75 – 75 0 100 75 90 14. Suppose your firm is considering two mutually exclusive required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years respectively. TIME: 0 1 2 3 Project A CF: $ – 10000 $ 10000 $ 30000 $ 3000 Project B CF: $ – 30000 $ 10000 $ 20000 $ 50000 Use the Profitability Index (PI) decision rule to evaluate these projects; what is the PI for each project and which one(s) should it be accepted or rejected?
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