Epiphany Industries is considering a new capital budgeting project that will las
ID: 2777941 • Letter: E
Question
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
2.cThe NPV for Epiphany's Project is closest to:
a. $4,800
b. $39,000
c. $13,300
d. $20,400
Chapter 9
Multiple Choice:
1. Which of the following is NOT a way that a firm can increase its dividend?
a. By increasing its retention rate
b. By decreasing its shares outstanding
c. By increasing its earnings (net income)
d. By increasing its dividend payout rate
2. JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:
a. $25.00
b. $15.00
c. $31.25
d. $27.50
3. Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%.
The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to:
a. $23.15
b. $20.65
c. $21.95
d. $21.90
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
Explanation / Answer
Year
1Year
0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 =EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 Total Cash Flow 43,000 43,000 43,000 Discount rate @12% 0.893 0.797 0.712 PV of Cash Flow 103,279 38,393 34,279 30,607 - capital expenditures -90,000 NPV 13,279 So NPV is closest to $13,300 So answer c. is correct Chpt 9. 1 By increasing retention rate , the retained earning in increased and dividend payout is reduced. Rest of the options increase the dividend amount So, option a. is correct. 2 Say the cost of capital is k so , k = 2.5(1.04)/25 +0.04 ( k= [d0(1+g)/P0] +g =14.4% Now g=8% So Price P= d(1+g)/(k-g) = 1.5(1.08)/(0.144-0.08) =1.62/0.064 =25.31 So price after announcement is $25.31 . It is closest to $25 So option a. is correct 3 Year 1 Year 2 Dividend 1.4 1.5 Share price 25 Total dividend & Price 1.4 26.5 discount rate @10% 0.909 0.826 PV of dividends & price 1.27 21.90 Price that can be paid 23.17 So the price is $23.17 is closest to $23.15 So option a. is correct.Related Questions
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