Problem 1: Daniels Midland Company is considering purchasing a new farm that it plans to operate for ten years. The farm will need an initial investment of $12.10 million. This investment will comprise $2.30 million for land and $9.80 million for trucks and other equipment. The land, all trucks and all other equipment are anticipated to be sold at the end of 10 years at the price of $5.23 million, $2.29 million above book value. The farm is anticipated to produce revenue of $2.08 million each year and annual cash flow from operations equals $1.97 million. The marginal tax rate is 35 percent, and appropriate discount rate is 9 percent. Compute NPV of this investment.
Problem 2: Home Brew Whiskey management forecasts that when the firm sells each bottle of Snake-Bite for $20, then the demand for product will be 15,000 bottles each year, whereas sales will be 94 percent as high when the price is raised 13 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for year is $100,000. Depreciation and amortization charges are $20,000, and the firm has 30 percent marginal tax rate. Management expects a raised working capital need of $3,000 for year. What will be the effect of price increase on firm’s FCF for the year?
Problem 3: Real Capital Co. has capital structure, based on current market values, that comprises 27 percent debt, 10 percent preferred stock, and 63 percent common stock. When the returns required by investors are 11 percent, 13 percent, and 17 percent for debt, preferred stock, and common stock, correspondingly, what is Capital’s after-tax WACC? Suppose that the firm’s marginal tax rate is 40 percent.