Ex 1
A 4- year project has the following annual sales:
Year 1 2 3 4
Sales ($) 100,000 120,000 150,000 60,000
If NWC amounts to 10% of the current year’s (same year) sales, calculate:
a) NWC in every year
b) Delta NWC or the resulting cash flow in every year (be careful with sign of cash flow)
Ex 2
P&G stock has a Beta of 0.8 and IBM stock has a Beta of 1.4.
a) If you want to create a portfolio (P) by investing in both stocks, what should be the proportion or the weight ?
b) If the expected return for the coming year is 10% for P&G and 15% for IBM, what will be the expected return of your portfolio?
Ex 3
GM stock has a Beta of 1.2 and an expected return of 15%. Ford Stock has a Beta of 1.5 and an expected return of 17%.
a) If the risk-free rate is 5%, which stock would you buy?
b) What would the risk-free rate have to be for the 2 stocks to be correctly priced?
c) Draw the Security Market Line (Graph should show GM, Ford Stocks as well as the Market and the new Risk-free rate found in part b)
Ex 4
Given the following information related to every year of a 4-year project:
Sales volume = 100 units ;
Unit Selling Price = $9,000 ;
Unit variable cost = $5,000 ;
Cash fixed cost = $100,000 ;
Additional information:
Cost of investment (Capital Spending) = $5,000,000; Depreciation rates are 40% in year 1, 30% in year 2 , 20% in year 3 & 10% in year 4.
a) Calculate the net income in year 3 (Tax rate = 20%)
b) Calculate the OCF in year 3
Ex 5
A Co. is looking at a new system with an installed cost (Capital spending) of $312,000 that can save the firm $96,000 per year during 3 years. This investment will be subject to a 3-year straight line depreciation. At the end of this period, the system can be scrapped (sold) for $48,000. Finally, the system requires an initial investment in net working capital of $22,400. If the tax rate is 30 % and the RRR is 13 %:
a) What is the after-tax salvage value of this system at the end of year 3?
b) What is the annual OCF?
c) Using NPV rule, should the Co. install this new system?