1. Which of the following cash flows Should be treated as incremental cash flow when computing the NPV of an investment? Explain
a. the annual depreciation expense
b. Dividend payments
c. The resale value of plant and equipment at the end of the project's life.
d. Salary and medical costs for production employees on leave.
e. The reduction in the stiles of the company's other products.
f The expenditure on plant and equipment.
h. The cost of research and development undertaken In connection with the product the past three years.
2. A Dutch Petroleum Company is considering going into a new project, which is typical for the firm. A capital tool required for the project costs $900,000. The marketing department predicts that sales will be $100,000 per year for the next two years, after which the market will exist. The tool, a three-year class capital too), will be depreciated down to zero using the straight-line method. Cost of goods sold and operating expenses are predicted to be 25 percent of stiles. In two years the tool can be Sold for $200.000. The company also needs add net working capital of $100,000 immediately. Additional capital will he received in full at the end of the project life. The tax rate is 25 percent. The required rate of return on is percent. Should the company accept the project?
3. a) Securities A,B,C and D have the following characteristics:
|
Security
|
E(R)%
|
Beta
|
|
A
|
9%
|
0.5
|
|
B
|
11%
|
0.7
|
|
C
|
15%
|
1.2
|
|
D
|
21%
|
1.7
|
Are these securities priced in equilibrium? Show calculation.
b) The managers of P and G Company:, believe that by restructuring they can increase the value of the company. In order to increase the value of the company the managers is about to apply 60% debt and 40% equity Strategy in it's capital structure. Modigliani Miller Proposition I and Modigliani Miller Proposition 2 what would you suggest that managers should do?
4. Olbet Inc., it a non-growth company in the 35-percent tax bracket olbet's perpetual EBIT is $1.2 million per annum. The firm's pretax cost of debit is 8 percent and its interest expense per year is $200,000. Company analysts- estimates that the unlevered cost of the olbet's equity is 12 percent. The after tax, all, equity discount rate (r0) is 15 percent
a. What is the value of this firm?
b. According with Modigliani Miller preposition 2 about what is the above calculation imply about the level of debt?