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Problem 1The Sisyphean Corporation is considering investing

  Problem 1   The Sisyphean Corporation is...

 

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

Year

1

2

3

Units

Sales

Cash

Accounts Receivable

Inventory

Accounts Payable

NWC (Cash + Inventory+ AR - AP)

 

 

 

 

 

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).

 

Year

1

2

Revenues

1200

1400

Operating expense

450

525

Depreciation

240

280

Increase in working capital

60

70

Capital expenditures

300

350

Marginal corporate tax rate

30%

30%

 

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%?

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2/5/2010
Neo
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Customer reply replied 7 years ago
Can you please provide computation?
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