21. Swannee Resorts is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight line method over the project's 3 year life, and would have zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? If you are working this problem by hand rather than by computer, ignore small rounding differences between your answer and the choices given. (Hint: Cash flows are constant in Years 1-3.)
WACC 10%
Net investment cost (depreciable basis) $65,000
Straight line depr'n rate 33.33%
Sales revenues $70,000
Operating costs excl. depr'n $25,000
Tax rate 35%
$22,156.24
$23,791.14
$24,354.87
$25,189.71
$26,599.05
22. Harmon Industries is considering adding a new store. As a final step in reviewing the proposed project, the CFO wants to take into account two real options that are attached to the proposed project.
First, there is a timing option. One year from now, the company will have a much better idea of whether the county will raise or lower its property taxes. The firm might want to wait a year to decide whether it makes sense to proceed with their proposed project because the county taxes could significantly affect the project's cash flows.
Second, there is an abandonment option. After two years, the company will have the option to shut down the store if it is determined that the store is losing money and will continue to lose money.
Which of the following statements is most correct?
In this case, the option to delay the project actually takes value away from the project.
The abandonment option is likely to increase the project's expected cash flows.
The abandonment option is likely to increase the project's risk.
An abandonment and investment timing option can not exist for the same project.
In this case, the option to delay the project is likely to increase the project's risk.
23. Business risk is concerned with the operations of the firm. Which of the following is NOT associated with (or not a part of) business risk?
demand variability
sales price variability
the extent to which operating costs are fixed
changes in required returns due to financing decisions
the ability to change prices as costs change
24. Brandi Co. has an unlevered beta of 1.10. The firm currently has no debt, but is considering changing its capital structure to be 30% debt and 70% equity. If its corporate tax rate is 40%, what is Brandi's levered beta?
1.2549
1.3829
1.5764
1.6235
1.7458
25. Ronaldo Inc. has a capital budget of $1,000,000, but it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts this year's net income to be $600,000. If the company follows a residual dividend policy, what will be its dividend payout ratio?
16.67%
20.00%
25.00%
33.33%
35.00%