Corporate Finance

| January 21, 2016

1. Calculate the PVs of depreciation tax shields in the five-year and seven-year classes shown in Table 6.4. Assume the tax rate is 35% and the discount rate is 10%. Lastly, assume the asset in question costs $1. (Do not round intermediate calculations. Round your answers to 3 decimal places.)

Present Value

Five year

Seven year

2. The following table tracks the main components of working capital over the life of a four-year project.

2010

2011

2012

2013

2014

Accounts receivable

0

150,000

225,000

190,000

0

Inventory

75,000

130,000

130,000

95,000

0

Accounts payable

25,000

50,000

50,000

35,000

0

Calculate net working capital and the cash inflows and outflows due to investment in working capital. (Negative amounts should be indicated by a minus sign. Leave no cells blank – be certain to enter 0 wherever required.)

2010

2011

2012

2013

2014

Working capital

Cash flows

3. Machines A and B are mutually exclusive and are expected to produce the following real cash flows:

Cash Flows ($ thousands)

Machine

C0

C1

C2

C3

A

–100

+110

+121

B

–120

+110

+121

+133

The real opportunity cost of capital is 10%. (Use PV table.)

a.

Calculate the NPV of each machine. (Do not round intermediate calculations. Round your answers to the nearest thousand.)

Machine

NPV

A

$

B

$

b.

Calculate the equivalent annual cash flow from each machine. (Do not round intermediate calculations. Round “PV Factor” to 3 decimal places and final answers to the nearest thousand.)

Machine

Cash flow

A

$

B

$

c.

Which machine should you buy?

Machine A

Machine B

4. A game of chance offers the following odds and payoffs. Each play of the game costs $100, so the net profit per play is the payoff less $100.

Probability

Payoff

Net Profit

0.10

$500

$400

0.50

100

0

0.40

0

–100

a-1.

What is the expected cash payoff?

Expected cash payoff

$

a-2.

What is the expected rate of return?

Expected rate of return

%

b-1.

Calculate the variance of this rate of return. (Ignore the technical point referred to in footnote 16).(Round your answer to the nearest whole number.)

Variance

b-2.

Calculate the standard deviation of this rate of return. (Ignore the technical point referred to in footnote 16). (Round your answer to the nearest whole percent.)

Standard deviation

%

5. Consider the following information:

Stock Return if Market Return Is:

Stock

–10%

+10%

A

0

+20

B

–20

+20

C

–30

0

D

+15

+15

E

+10

–10

What is the beta of each of the stocks? (Leave no cells blank – be certain to enter “0” wherever required. Negative values should be indicated by a minus sign. Round your answers to 1 decimal place.)

Stock

Beta

A

B

C

D

E

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