Homework 4 finance 4510 due Feb 6, 2019 Problem 1 A brick company with a tax rate of 25% and CCA of 20% is looking to install a new a new piece of equipment that will reduce new inventory needs by $30,000. The equipment cost is $450,000, and it will require $25,000 each of installation and delivery. As well, the government has a special tax credit program on new equipment that will save the company $40,000 on the new equipment. This new machine will increase pre-tax annual cash flows by $100,000 per year. The salvage value for the machine is $60,000 and will be used for 6 years. The cost of debt is 5% and WACC is 9%. Problem 2 Philip's ice cream store is going to purchase a new ice cream machine. The machine was going to cost $75,000, but they can lease the machine instead from Iceco. Iceco's tax rate is 25% and Philip's 35%. Philip can borrow from the bank at 6% and as well make loan payments of $10,000 per year, with the balance due at the end of the equipment's useful life. The equipment is expected to last 8 years. During that period Iceco will service the machine annually and will pay $2000 of this cost. Lease payments are going to be $9,000 a year. The equipment can be sold at the end of 8 years for 10% of its original cost. What should Philip do? CCA rate is 25%. Problem 3 Given the facts below what is the value of these cash flows - Cash flow 4 will be in place forever Wacc 8.00% after tax cash Flows 0 1 2 3 4 -1000 $ 2,000.00 -$ 1,000.00 $ 2,000.00 $ 1,800.00 Problem 4 Tom's Transport company is having some problems. As a result on internet shopping, his company's after tax free cash flows are expected to be quite volatile. In fact although he thinks it will take some time to correct short term problems, leading to nearby losses, he thinks longer term that although he can return to positive cash flows. However in the long term cash flows will decline at a steady rate. He would entertain selling his company shares -- what price can he can get for his common equity - price per share? He has $100 million of debt, $25 million of preferred shares. His cost of debt is 6%, cost of preferred shares is 8% and his WACC is 10%. After tax cash flows are noted below. (hint don’t forget to take off the value of debt and preferred shares to calculate the per share price of common equity) after tax cash Flows 0 1 2 3 4 0 -$ 10,000,000.00 -$ 20,000,000.00 $ 40,000,000.00 $ 38,000,000.00 Problem 5 What are the IRR and MIRR of the following cash flows wacc is 12.00% after tax cash Flows 0 1 2 3 4 -$ 4,000.00 $ 2,000.00 $ 1,000.00 $ 1,000.00 $ 1,800.00 Problem 6 A firm has net income of $2.0 million and shares outstanding of 400,000. It has no debt and no preferred shares, but is considering using both to finance a new project. The current stock price is $30.00 and EPS is $5.00. If the project goes through, it will increase sales by $5.0 million and the pre-tax and pre-interest margin on those new sales is 5%. The company will add $1.0 million of debt at a pre-tax 4% cost of debt and $1,500,000 of pref. shares at a yield of 5%.The company's tax rate is 15%. The balance in financing will be taken care of through common stock. The new equipment will cost $6.0 million. Is this a good idea? With the new project the analysts believe the p/e ratio will increase by 35%. Show your work.