# Bill Inc. common stock is expected to pay a $2.02 dividend at the end of the year and is in a risk class that requires an 8.5% required return.

1. Bill Inc. common stock is __expected__ to pay a $2.02 dividend at the end of the year and is in a risk class that requires an 8.5% required return. If this dividend is expected to grow forever at a 3.2% rate, what is the estimated value of Bill Inc.’s common stock? _______________

2. Joe Inc.’s preferred stock is expected to pay a $2.52 dividend annually and is expected toforever. Joe Inc. is in a high risk business that requires an 8.2% return. What is the estimated value of Joe Inc.’s preferred stock?_______________

3. You are put in charge of replacing the fleet of sales and executive automobiles for your company. Three types of cars have been identified. The first type would cost less upfront, have higher maintenance cost, and lower salvage values after shorter lives. The second type would cost a little more upfront, have slightly lower maintenance cost, and slightly higher salvage values after slightly longer operating lives. The third type would cost more upfront, have lower maintenance cost, and higher salvage values after longer operating lives. The cash flow estimates for each type is given below:

**Type one: Purchase price per car $26,000; Annual operating expense per car $6,000; Disposition value per car $10,000; Estimated useful life of the car 4 years**

**Type two: Purchase price per car $42,000; Annual operating expense per car $5,600; Disposition value per car $15,500; Estimated useful life of the car 6 years**

**Type three: Purchase price $58,000; Annual operating expense $4,800; Disposition value $18,000; Estimated useful life of the asset 8 years**

All cars can be replaced at the end of their asset lives. Using a 7.0 percent discount rate and the equivalent annuity method, which car is the better investment? Please show the NPV, and Equivalent annuity for each type of car.

NPV Equivalent Annuity

Car Type One ____________________ _____________

Car Type Two ____________________ _____________

Car Type Three ____________________ _____________

Which type of car should be chosen?______________________

4. An asset costs $274,000 and will generate cash benefits of $80,000, $100,000, $75,000, $65,000, $55,000, $50,000 at the end of years 1,2,3, 4, 5, and 6 respectively. Additionally the salvage values are $160,000, $145,000, $85,000, and $45,000 at the end of years 3, 4, 5, and 6 respectively. The required return is 5.75 percent.

Please compute the net present value, and the equivalent annuity and record these below:

**Keep for 6 years ________________ ____________________ **

**Keep for 5 years ________________ ____________________ **

**Keep for 4 years ________________ ____________________ **

**Keep for 3 years ________________ ____________________ **

When is the optimal time to abandon the investment?_____________________

5. You place a commercial building into service on Feb 1st, 2017 costing $43,200,000. What is the depreciation expense allowed by the IRS for this building for tax years 2017? _____________And 2018?______________

6. Joe’s Technology must choose between two repeatable methods of producing a new product. The initial costs and year-end cash benefits are as follows:

Year 0 1 2 3 4 5

Method M -$1,500,000 600,000 750,000 550,000 200,000

Method N -$2,500,000 1,200,000 950,000 700,000 400,000 300,000

Assume all cash flows occur at year-end and the company’s required return is 6.75 percent.

Please compute the net present value ______________ and the equivalent annuity ________________ for Method M

Please compute the net present value ______________ and the equivalent annuity ________________ for Method N

Which production method should be used? _______________

7. The recently enacted tax law allows companies to use immediate write of equipment purchases. Assume that the five years are over and the tax law has reverted to the MACRS system discussed in chapter 8 (which is the way the law is written). So, six years from now. you place the following equipment into service in the following years with the following tax lives:

Year placed Tax life Cost

__Into service __

Computer 2025 3 year $48,000

Car 2026 5 year $65,000

Shelves 2027 7 year $98,000

What is the ** total **depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2028?__________________

What is the ** total** depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2029?__________________

What is the ** total** depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2030?__________________

8. You are opening your own business and estimate the following expenses and revenues:

__Year 1 Year 2 Year 3 __

Revenues $900,000 $1,500,000 $1,700,000

Cost of goods sold $550,000 $800,000 $900,000

Accounts payable as a percentage of cost of goods sold……..11%

Inventory as a percentage of cost of goods sold………………13%

Cash balance as a percentage of revenues…………………….8%

Accounts receivables as a percentage of revenues……………15%

Accrued expenses as a percentage of revenues……………….9%

All balances are needed in the year prior to the generation of the revenue and expense.

**Please calculate the incremental investment in working capital needed for years 0,1,2,3. (you do not need to calculate the cash flow from operations – you do not have enough information – only the incremental investment in working capital – all working capital accounts are liquidated at book value at the end of year 3)**

**Year 0_______________ Year 1_______________ Year 2__________________ and Year 3______________**

9. You are opening your own business and estimate the following expenses and revenues:

Revenues year 1 $282,000 growing at 9% thereafter

Cost of goods sold year 1 $121,000 growing at 12% thereafter

Operating expense year 1 $47,000 growing at 6% thereafter

Taxes all in years 25% per year

Depreciation $25,000 in year 1, $31,000 in year 2, $27,000 in year 3

**No working capital is needed — please predict the after-tax cash flows from operations for the first three years of operations below:**

**Year 1_______________ Year 2__________________ and Year 3______________**

__Please use the following information to answer the remaining problems__:

Able Corporation has Project A with the following cash flows and a 7.8% cost of money: Numbers in parentheses are outflows. Both Year 0 and Year 3 cash flows are outflows.

Year