Homework Set # 4 Use the following information for Questions 1 through 3:Assume you are presented with the following mutually exclusive investments whose expected net cashflows are as follows:EXPECTED NET CASH FLOWS:Year Project A Project B0 −$400 −$6501 −528 2102 −219 2103 −150 2104 1,100 2105 820 2106 990 2107 −325 2101. (a) What is each project’s IRR?(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If thecost of capital were 17%, what would be the proper choice?2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7as the end of Project B’s life.)3. What is the crossover rate, and what is its significance? Use the following information for Question 4:The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities fora new manufacturing process:Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains theestimated salvage values. Porter’s cost of capital for an average-risk project is 10%.Net After-Tax Cash FlowsYear P = 0.2 P = 0.6 P = 0.20 −$100,000 −$100,000 −$100,0001 20,000 30,000 40,0002 20,000 30,000 40,0003 20,000 30,000 40,0004 20,000 30,000 40,0005 20,000 30,000 40,0005* 0 20,000 30,0004. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expectedvalues for the net cash flow in each year.) Homework Set #5 Use the following information for Questions 1 and 2:Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings areexpected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This onetimeunusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to itsprevious 8% earnings growth rate. Its target debt ratio is 35%.Calculate Boehm’s total dividends for 2014 under each of the following policies:1. (a) Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate inearnings.(b) It continues the 2013 dividend payout ratio.2. (a) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3million investment is financed with debt).(b) It employs a regular-dividend-plus-extras policy, with the regular dividend being based on thelong-run growth rate and the extra dividend being set according to the residual policy.Use the following information for Questions 3 and 4:Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixedcosts, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and thefirm’s assets (all equity financed) are $5 million. The firm estimates that it can change its productionprocess, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1)reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price onall units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax losscarry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt. 3. What is the incremental profit? To get a rough idea of the project’s profitability, what is theproject’s expected rate of return for the next year (defined as the incremental profit divided by theinvestment)? Should the firm make the investment? Why or why not?4. Would the firm’s break-even point increase or decrease if it made the change?
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