1. Fiber glass must choose between two kind of facility 1 costs $2. 1 million and it's economic life in seven years. The maintenance cost of facility I are $60,000 per year. Facilities II costs $2.8 million and it lasts 10 years. The annual maintenance cost for facility II are $100,000 per year. Both facilities are fully depreciated by the straight line method. The facilities will have no values after their economic lives. The corporate tax rate is 34 percent. Revenues from the facilities are the same. The company is assumed to earn a sufficient amount of revenues to generate tax shields from depreciation. If the appropriate discount rate is 10 percent, which facility should fiber glasses choose?
2. a) Johnson Point stock has an expected return of 20 percent with a beta of 1.7, while William Tire stock has an expected return of 15percent with a beta of 0.5. Assume the CAPM is true. What is the expected return on the market? What is the risk free rate?
b) What is the risk of a security? Which components does the risk consist of? Why doesn't diversification eliminate all risk?
3. The Holland Company has perpetual EBIT of $4 million per year. The after tax all equity discount rate (r0) is 15 percent. The company's tax rate is 35 percent. The cost debt capital is 10 percent and Holland has $10 million of debt in its capital structure.
What is Holland's value?
What is Holland. cost of equity?
4. Your company currently produces and sells steel-shaft golf clubs. The board of directors wants you to look at introducing a new line of titanium bubble woods with graphite shaft. Which of the following costs are not relevant?
I . Land you already own that will be used for the project and has a market value of $70,000.
II. $300,000 drop in sales of steel-s-shaft clubs if titanium woods with graphite shaft are introduced.
III. $200,000 spirit on Research and development last year on graphite shafts
IV. The annual depreciation expense.
V. Dividend payments,
VI. $1 million salary and medical costs Par production employees on leave