Problem 1

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.

The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.

What is the required Net Working Capital for all three year for the Sisyphean Corporation's project?

Net Working Capital Forecast

Problem 2

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).

What will be the depreciation tax shield for Shepard Industries project in years 1 and 2? Provide your full computation.

Problem 3

Amoco will pay a dividend of $1.30 per share this year. It is expected that this dividend will grow by 5% each year in the future. What will be the current value of a single share of Amoco's stock if the firm's equity cost of capital is 14%? Provide your computation.

Problem 4

Tanner Products will pay a dividend of $2.40 per share this year. It is expected that this dividend will grow by 3% per year each year in the future. What will be the current value of a single share of stock if the firm's equity cost of capital is 10%?

Optional Information:
Level/Year: 02
Subject: Finance

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